Outside Publication

Federal Regulation of Fracking: A Changing Landscape, The Legal Intelligencer

July 31, 2012

Reprinted with permission from the "July 31, 2012 edition of the "The Legal Intelligencer"© 2012 ALM media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 or reprints@alm.com or visit www.almreprints.com.

The rapid development of shale gas, due principally to the expansion of hydraulic fracturing, has brought many new regions of the United States into the natural gas supply mix. Regions that have not witnessed significant oil and gas development for decades, such as Pennsylvania's Marcellus Shale area, are now experiencing significant development pressure. Even states with a history of oil and gas development, such as Wyoming and Colorado, have experienced significant expansion pressures in new locales where shale gas is now technically and economically accessible.

The sudden discovery of oil and natural gas reserves drove many states and local municipalities to implement new regulations, or modify existing ones, associated with hydraulic fracturing operations. These regulations vary across the country, sometimes quite dramatically, in order to account for, among other things, geological differences in shale plays and public sentiment to the practice.

An amendment to the federal Safe Drinking Water Act (SDWA), made by the Energy Policy Act of 2005, exempts hydraulic fracturing activities associated with the underground injection of fluids or propping agents, except for activities involving "diesel fuels," from federal well permitting requirements. On May 10, the U.S. Environmental Protection Agency issued draft permitting guidance on diesel fuel use as part of the fracturing fluid. While this guidance is noteworthy, industry practice is shifting away from using diesel fuel as an additive in hydraulic fracturing operations, and the guidance may be less important in the future.

Initially, this change to the SDWA brought a brief hiatus to the legal and political debate over whether the federal government should regulate fracking, leaving regulation of fracking operations to the states.

The hiatus is over. Since 2009, Democratic members of Congress have sought legislation to repeal the SDWA fracking exemption and launched a committee investigation into the use of chemicals by various fracking service companies. Several federal-level studies have also been conducted, such as a recent study by the U.S. Department of Energy Secretary of Energy Advisory Board shale gas production subcommittee. Others are under way, such as the EPA's study of fracking's potential impact on water quality and public health. But studies and stalled legislation appear to be just a precursor for more federal regulation. The EPA recently issued the first air regulations for fracking operations, the U.S. Department of Interior's Bureau of Land Management (BLM) issued a proposed rule to regulate fracking on public lands, and the U.S. Department of Justice and the EPA have stepped up enforcement activities. As a result, activities previously regulated exclusively at the state and local levels are or will be regulated by the federal government.

The EPA's Ongoing Study

In 2010, Congress directed the EPA to perform a study to evaluate the relationship, if any, between fracking and drinking water quality. From its inception, the development of the EPA study has been clouded in controversy, primarily regarding its scope. The industry argues the study is too broad in scope, while environmental groups believe it should be more expansive. The study may help make or defeat arguments to remove the SDWA exemption or it may lead the EPA to look for other bases to regulate fracking practices, despite assertions from the EPA that it does not expect to address the regulatory framework as part of its study.

After nearly two years of meetings and the issuance of lengthy draft and final study plans, the EPA study is now under way. The EPA is currently in the process of conducting the first phase of the study, which primarily involves analysis of existing data, such as well construction practices, the use of chemicals in fracking activities and standard operating procedures. This phase will also involve "retrospective" case studies (i.e., previously reported instances of drinking water contamination) to determine whether or not the reported impacts are because of fracking activities.

The second phase of the EPA study will involve, among other things, conducting "prospective" case studies to assess planned fracking sites. The EPA plans to work with the industry to conduct a study of the fracking sites - before, during and after water extraction, drilling, injection and production. Several of the retrospective and prospective study sites are located in Pennsylvania.

Based on a February 2012 EPA status report, the agency plans to complete the retrospective studies using a four-tiered approach. It has completed Tier 1, which involves "verifying the potential issues," and is now working on Tier 2 to "determine an approach for a detailed investigation." These efforts will be followed by a detailed investigation (Tier 3) and an assessment of the sources of any environmental impacts (Tier 4). At this point, it is unclear what the EPA will do if it identifies drinking water contamination that it links to well development. The EPA plans to release its first report by the end of 2012, with its second report expected in 2014. The second report will focus primarily on the case study results, although portions of the retrospective case studies may be included in the 2012 report.

The EPA's New Air Regulations

On April 17, the EPA issued a final rule regulating the emission of volatile organic compounds (VOC) and certain other pollutants emitted by fracking and equipment used in the upstream and midstream sectors of the oil and gas industry. The rule marks the first time the EPA will regulate air emissions from fracking operations by mandating significant reductions in VOC emissions through the use of "green completions," devices that capture methane and other air emissions that would otherwise escape during well completions. This is the most controversial requirement in the rule. The rule applies to gas wells that are hydraulically fractured or will be refractured after Jan. 1, 2015. Responding to comments on the rule, the EPA noted that it intends "to continue to evaluate the appropriateness of regulating methane with an eye toward taking additional steps if appropriate." Thus, the rule may portend further greenhouse gas regulation of the upstream and midstream oil and gas industry.

The BLM's Proposed Rule

On May 11, the BLM issued proposed rules affecting fracking operations on federal public lands and American Indian lands held in trust by the United States. The rules would require public disclosure of the chemicals used in fracking operations, impose new requirements for well-bore integrity and establish that oil and gas operators have a plan for handling flowback fluids. The BLM extended the comment period by 60 days to Sept. 10 because of a deluge of public requests for an extension.

Just as with the new EPA air regulations, the BLM's proposed rules are the subject of much debate. There is considerable deliberation over both the anticipated cost of the rules and the extent to which they already overlap with existing state regulations. Currently, at least 11 states, including Pennsylvania, have some form of chemical disclosure requirement in place. There is a great deal of variability among the state regulations, including the amount of disclosure required, trade secret protections, whether disclosure is public and the timing of the disclosure. Industry and state officials voiced concern that the rule would create more paperwork and impose unnecessary burdens, while offering little to no benefit because states already sufficiently regulate fracking. Many states also believe that the rule-making is premature, as the EPA has yet to complete its study.

EPA Enforcement Activities

In addition to federal agency efforts to regulate fracking operations, the EPA and the DOJ are increasingly pursuing enforcement against oil and gas companies that violate the provisions of various environmental statues, such as the Clean Water Act. The DOJ recently filed criminal charges against seven companies in North Dakota for alleged violations under the Migratory Bird Treaty Act concerning, among other species, waterfowls, gadwalls and pintails. In addition, on May 16, the EPA and QEP Field Services entered into a proposed settlement in Utah federal district court requiring the company to comply with informal policy measures mandating that oil and gas operations "aggregate" their facilities to determine whether they are subject to strict major source permit requirements under the Clean Air Act.

Ronald J. Tenpas is a partner at Morgan, Lewis & Bockius and co-chairs the environmental and climate change practices. He is active in the white-collar, government relations and congressional investigations practices. He is resident in the firm's Washington, D.C., office.

Charles B. "Chip" Moldenhauer was an associate in the firm's energy practice and assisted with the representation of electric utilities and other nuclear industry clients on a variety of regulatory and litigation matters before the Nuclear Regulatory Commission, other agencies and the federal courts. He was resident in the firm's Washington, D.C., office.