April 13, 2015 at 5:00 am ET
On March 20, 2015, the Bureau of Land Management (BLM) released a 300-plus page final rule on hydraulic fracturing of gas and oil wells on federally-managed lands, which include both federal and American Indian lands.
BLM estimates there are currently 100,000 wells on federally-managed lands, 90% of which use hydraulic fracturing. The final rule seeks to achieve a careful balance between environmental protection on one hand, and industry preferences for limited and cost-effective standards on the other. The new rule improves safety and protection of groundwater by updating requirements for well-bore integrity and wastewater disposal, and it ensures public disclosure. At the same time, the rule seeks to address at least some industry concerns by allowing disclosure through an industry-favored website and trying to minimize duplicative regulations and undue costs by allowing states and tribes to request a variance from the rule where the states or tribes have equal or more protective standards.
It should come as no surprise that BLM, as well as the Obama administration, are seeking to achieve such a careful balance. Hydraulic fracturing of shale and other tight deposits has resulted in an abundance of cheap oil and natural gas, which has given the country an economic boost and allowed the Obama administration to try to move the country away from a heavy reliance on coal for electricity generation. At the same time, public groups, concerned citizens and even some states have expressed significant concerns with the negative impacts of ever-increasing drilling and the potential threats to groundwater and surface water.
It remains to be seen whether BLM has achieved this desired balance. The final rule is clearly more protective than prior iterations. Opposition has been immediate and strong from both sides, and lawsuits were filed the day the rule was released.
Unless it is held up by such suits or for other reasons, the rule is to go into effect 90 days from the date it is published in the Federal Register.
The following are some observations about the salient features of the rule.
1. The Long and Winding Road.
The rule emerged from a 4-year process. It was first proposed in May 2012 and immediately faced a barrage of industry criticism that the proposals were unnecessary and expensive. The proposal was again supplemented in May 2013, this time with significant changes designed to address some industry concerns. The final rule has emerged from an unusually long public review process and detailed stakeholder discussions. 1.5 million comments were submitted. Without a doubt, the rule has been carefully considered by BLM and the Obama Administration.
2. Nothing New Under the Sun.
BLM regulation of oil and gas drilling is not new. Through the Federal Land Policy and Management Act (FLPMA) and other statutes, BLM already implements a fairly detailed program for leasing of public lands for oil and gas drilling as well as more specific requirements for permission, operation and closure of actual wells. These regulations, however, are over 30 years old and were drafted well before the newer combination of hydraulic fracturing and horizontal drilling opened up vast new reservoirs of oil and gas, resulting in deeper and broader wells and well-sites. Through an administration-wide review, it was determined that newer BLM regulations would be necessary to address impacts and concerns arising from these new technologies and uses, as well as the sheer increase in drilling. (It is estimated that drilling and production on federal lands increased by 81% since 2008.)
3. One Small Step.
The regulations only apply to a small portion of land used for hydraulic fracturing, namely lands that are managed by the federal government. These included federally-owned lands, tribal lands, and private lands on which the United States owns the mineral rights. However, only about 8% of current national drilling occurs on federally-managed lands. Hence, the rules do not apply to lands outside federal management, i.e. private or state-owned, where 92% of hydraulic fracturing takes place.
Although BLM’s piece of the drilling pie is relatively limited, drilling is pervasive on federal lands and is growing. BLM leases out 36 million acres of land for oil and gas development in 33 states. BLM estimates there are some 47,000 active oil and gas leases and 95,000 active wells on these lands, with some 3,000 or more being added each year, and the vast majority using hydraulic fracturing techniques. While BLM could have allowed state rules to apply to the federal lands, it determined that only 13 states had comprehensive rules regulating hydraulic fracturing. BLM desired uniformity and a federal baseline. These states also do not have the stewardship responsibilities over the federal lands, nor trust responsibilities over the tribal lands.
4. It’s Not Green Enough
BLM has made environmental protection and safety key features of the rule. It added or augmented a number of measures to protect ground and surface waters, inform its decision regarding the appropriateness of drilling a site, and provide full disclosure to the public about chemicals and risks. These include:
Submission of key data, including cement monitoring reports and proposed remedial actions for faulty cement jobs prior to drilling, rather than afterward.
Requirements to demonstrate well-bore integrity, through cement monitoring, usable water isolation and mechanical integrity testing, for all wells. The regulation does away with the prior concept of “type wells” which allowed blanket approval for certain types of sample wells to expedite approvals and monitoring.
More stringent requirements for trade secret exemptions from disclosure requirements; companies will now have to submit additional information and affidavits to support a trade secret claim, making the process more difficult for operators. BLM has the final say on what must be disclosed.
Higher standards for interim storage of recovered waste fluids (flowback and produced water). Wastewater must now be kept in above-ground storage tanks rather than lined pits. Lined pits are allowed only in specific instance on a case-by-case basis.
Measures to lower risk of cross-well contamination by requiring detailed information on geologic faults and fractures in the area, depths of usable water, volumes of fluid to be used, estimated direction and length of fracture, and location of any pre-existing wells. This information must be sent to BLM for evaluation before drilling is permitted.
5. It’s Too Green
BLM did not ignore industry concerns over disclosure and potentially redundant regulations. BLM ensured that disclosure requirements for base hydraulic fracturing fluids and chemicals added to the fluids is still required only after drilling and may be disclosed through FracFocus. Moreover, BLM retained provisions giving states and tribes the ability to request variances from provisions where they have equal or more protective standards. BLM also sought to further reduce costs and increase efficiencies by providing opportunities to coordinate standards and processes with states and tribes through formal agreements.
6. How much Does It Cost?
BLM estimates that the costs of the rule are relatively low, about $11,400 per operation for an aggregate estimate of $32 million/year. According to BLM, this works out to an average of .13-.21% of the cost of drilling a well. BLM, however, appears to only have considered the incremental costs directly linked to the new federal regulations, while considering many of the provisions as already required under state rules and industry practice, thus presenting no additional costs. Industry is likely to take issue with this and argue that costs, when including compliance with existing federal and state law and industry practice, are far higher.
7. Where Do We Go From Here?
The rule was subject to significant attack well before it was finalized. On the eve of the rule’s release, March 19, 2015, Senate Environment and Public Works Chairman Jim Inhofe (R-OK) proposed legislation to bar BLM from issuing the rule (FRESH Act, S.828). It is not likely any such legislation will become law or survive a Presidential veto, but Congress will continue to push the Obama administration to loosen its regulations.
Two industry trade associations, the Independent Petroleum Association of America and the Western Energy Alliance, also brought a lawsuit in federal district court in Wyoming immediately after the rule was released, followed by a suit on March 26 by the State of Wyoming in the same court. Similar suits will be likely to follow in other district courts, with cases ultimately consolidated in one federal court. It is unclear at this point if any of the parties would be seeking a stay of implementation.
8. Does It Really Matter?
One might truly wonder what all the fuss is about over a rule that impacts only 8% of actual drilling in this country. The real significance of the rule lies in its impact on states, which may feel pressure to meet or exceed BLM standards or seek some uniformity, such as requirements for wastewater storage tanks. BLM has acknowledged the goal of setting a national baseline of best practices.
Further, even though it only affects a limited scope of lands, the rule is the first comprehensive federal regulation of hydraulic fracturing. EPA is poised to propose additional regulations on the development and production of oil and gas, including capturing methane from hydraulically fractured oil wells (it already regulates such releases from natural gas wells). EPA has also been undertaking a comprehensive multi-year study of the impacts of hydraulic fracturing on water resources and is considering regulations on disclosure of toxic chemicals used in hydraulic fracturing.
EPA has yet to build any kind of comprehensive regulation of the hydraulic fracturing process. In this context, the BLM rules may be seen as a potential harbinger for the type of regulations EPA might seek to impose on the broader industry operating on non-federal lands — an attempt to seek a balance with rules to protect groundwater and surface water but implemented in a way that minimizes costs to the industry. Seen in this light, the uproar over the BLM rule makes more sense. And it makes the outcome of BLM’s balancing act all the more important.
Jim Rubin guy is counsel at Denton US LLP.