In an Order issued March 13, 2013, U.S. District Judge Paul Grewal in San Jose ruled that the Interior Department’s Bureau of Land Management (BLM) violated the National Environmental Policy Act (NEPA) by failing to conduct an environmental impact study and to consider the impacts of hydraulic fracturing (or “fracking”) before granting new oil and gas leases in the Monterey Shale. The Court refrained from determining the appropriate remedy, however, instead ordering BLM and the Plaintiffs — the Center for Biological Diversity (CBD) and Sierra Club — to propose a remedy to the Court. By Order issued April 12, 2013, Court set a deadline of May 15 for the parties to submit the proposed remedy.
Background: Fracking in the Absence of a Regulatory Framework
Development companies in California have been using fracking techniques for decades throughout the State in order to enhance production from traditional oil and gas wells. Recent advances in fracking technology and horizontal drilling techniques, however, could facilitate new oil production from the Monterey Shale Formation, a largely untapped resource that could hold 15 billion barrels of oil. Given the potential for a dramatic increase in the use of fracking in the State, the BLM and California state agencies have only recently commenced efforts to draft new regulations related to the practice.
Three overlapping forces will likely shape California’s fracking landscape in coming years: agency rule-making, State legislation, and citizen-suit litigation. The California Division of Oil, Gas and Geothermal Resources (DOGGR) has begun the process of developing fracking regulations by issuing a “discussion draft” of proposed regulations and holding workshops throughout the State to collect initial comments from stakeholders and the public.1 Meanwhile, in the California legislature, at least seven bills have been introduced in the current session alone regarding fracking, although none has yet to reach a floor vote.
As these administrative and legislative efforts proceed, the CBD has led a litigation campaign to halt fracking throughout the State. In addition to the suit against BLM in federal court, CBD is pursuing two cases in State courts — one alleging that DOGGR’s underground injection control (UIC) program obligates the agency to regulate fracking, and the other alleging that DOGGR has violated the California Environmental Quality Act (CEQA) by failing to issue new environmental impact reports for each new fracking project.
BLM’s Actions Found to be Arbitrary and Capricious
In 2006, BLM’s Hollister Field Office had developed a Resource Management Plan for development of oil and gas resources in the area, a process which involved preparation of an Environmental Impact Statement (EIS) pursuant to NEPA’s requirements. Based on analysis of past oil and gas activities in the area, BLM projected that no more than 15 wells would be drilled in the area within the next two decades.
Five years later, in response to industry demand, BLM announced a proposed lease sale for roughly 2,700 acres of land in the Monterey Shale Formation spanning portions of Monterey and Fresno counties. It issued an Environmental Assessment (EA) for the planned lease sale, in which it projected that only one exploratory well would likely be drilled in the area, based on the conclusions from the 2006 study. The EA concluded that fracking was “not relevant to the analysis of impacts... because the reasonable foreseeable development scenario anticipates very little (if any) disturbance to the human environment” caused by it. Instead, BLM reserved its analysis of the impacts of fracking wells in the Monterey Shale until applications for a permit to drill were submitted for the leased lands. Following receipt of comments, BLM issued a Finding of No Significant Impact (FONSI), indicating the agency’s conclusion that a full EIS would not be required. CBD and Sierra Club filed suit shortly thereafter.
Upon considering CBD’s and Sierra Club’s challenge to the EA, the Court concluded that BLM’s failure to fully study the effects of fracking in an EIS was arbitrary and capricious. The Court determined with regard to use of fracking and the number of wells expected to be drilled on leased land that it was not reasonable for BLM to rely only on projections based on historical data. Recent developments in fracking technology and industry maturity suggest that its use will only increase in the State. According to the Court, the fact that the impacts of fracking are so uncertain is precisely why BLM needed to take the requisite “hard look” at the possibility of fracking on the leased lands in an EIS; such uncertainty was not a reason to disregard possible impacts entirely. The Court found that at the very least, the effects from fracking “are likely to be highly controversial,” and therefore may necessitate preparation of an EIS pursuant to regulatory standards.2
The Court further concluded that the nature of some of the leases at issue is such that BLM cannot merely postpone the environmental analysis until such time as the lessees apply for drilling permits. These leases contained certain No Surface Occupancy (NSO) provisions that effectively prevent BLM from prohibiting drilling on the leased land in the future. The Court found that, at most, BLM could set further mitigation or restrictions on drilling, but not prevent it entirely. Accordingly, BLM had made an “irretrievable commitment of resources” in granting the leases, and was therefore obligated by NEPA to fully consider potential significant effects on the environment, including those caused by fracking activities.
Impact on the Monterey Leases
Although Judge Grewal found that BLM’s actions in granting the leases violated the law, his March 31 order did not specify the appropriate remedy because the matter was not briefed before him. After noting that “[p]ossible avenues of relief include enjoining further surface-disturbing activity pending EIS analysis, or invalidating the improperly-granted leases,” Judge Grewal directed the parties to meet and confer and “submit an appropriate judgment” by April 15. On April 12, the Court granted the parties an additional month to file a joint proposed judgment that addresses remedy issues in the case. Until that time, the fate of the underlying leases at issues remains up in the air.
An Indicator of Things to Come in California
Due to the dramatic increase in public attention being given to fracking throughout the nation, the outcome of CBD v. BLM almost certainly portends a future in which both State and Federal agencies will take a harder look at fracking and its possible impacts on the environment. How such efforts will interact with other legislative and regulatory regimes remains highly uncertain.
Contacts
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Gannon-Ella1 Updates regarding DOGGR’s regulatory process can be found at: http://www.conservation.ca.gov/dog/Pages/Index.aspx.
2 See 40 C.F.R. § 1508.27(4).
This article was originally published by Bingham McCutchen LLP.