March 01, 2014

State policy and technological innovation in hydraulic fracturing water management

Carlos R. Romo and Molly Cagle

Between Hollywood and the headlines, most Americans are now familiar with the shale gas revolution that has emerged in the United States over the last decade. Certainly environmental lawyers are particularly aware of legislative and regulatory initiatives targeting unconventional drilling. From local zoning ordinances and state drilling rules to new federal Clean Air Act requirements implemented by the U.S. Environmental Protection Agency (EPA), companies developing shale gas face a meteor shower of local, state, and federal environmental regulations. However, water management associated with hydraulic fracturing is emerging as a new significant issue to monitor.

The hydraulic fracturing process used in shale gas production is relatively water-intensive. Over 99.5 percent of the fluid that is injected in these oil and gas production operations is water. Significant portions of this fluid, in addition to water produced along with oil and gas from the formation, return to the surface. As a result, water management has always been, and will continue to be, a key business and environmental concern for shale gas producers and operators. Drought and increasing competition for water have only heightened the need for effective water management strategies.

A new legal trend is regulation of water associated with hydraulic fracturing. In particular, some states are beginning to actively encourage recycling technologies and reuse of water in shale gas production through regulatory incentives. Many of these developments are backed by a diverse group of stakeholders, including venture capitalists investing in emerging water technologies, oil and gas operators, and environmental groups. But even as states appear to be encouraging technological innovation in the management of water used in hydraulic fracturing through creative and flexible efforts, these policies could be threatened by future federal regulation.

Traditional federal and state regulation

Water supply and oil and gas regulation are traditionally seen as state law issues. Thus, requirements related to securing water supplies for oil and gas operations are generally within the traditional scope of state regulatory authority. Not surprisingly, states manage water resources used with oil and gas in a variety of ways. Texas, which has a long history of oil and gas development, encourages use of groundwater in oil and gas exploration by exempting withdrawals used with drilling rigs from groundwater permitting requirements generally applicable to other users. In some states such as Colorado, supreme court decisions govern how water use in oil and gas should be treated within the state water law framework.

States have taken the lead in regulation of water reuse with hydraulic fracturing in part due to current aspects of federal environmental laws. First, management of water produced in oil and gas waste is generally exempt from federal regulation as a hazardous waste under the Resource Conservation and Recovery Act (RCRA). RCRA was designed to closely track hazardous wastes from the moment they are generated to the time they are disposed (so called “cradle to grave” regulation). Yet, because EPA concluded oil and gas wastes would not pose the same harms as hazardous wastes and would be generally managed appropriately, oil and gas wastes were specifically exempted in amendments to RCRA in 1988. Lawyers familiar with RCRA will recognize that an exemption from these arcane regulations is essential to help manage oil and gas wastes; without the exemption, many entities would simply be unable to recycle water that is deemed hazardous simply because it contains petroleum constituents. Nevertheless, EPA is currently considering a petition to remove this exemption.

Another key aspect of federal law that has encouraged state policies to address water use is the federal National Pollutant Discharge Elimination System (NPDES) permitting scheme. Currently, EPA effectively has a “zero discharge” requirement for water discharges from oil and gas operations east of the 98th meridian. West of the 98th meridian, some states in water-scarce areas are able to take advantage of an NPDES exemption for treated oil and gas water that meets requirements for reuse with livestock or irrigation. While the east-west divide has generally been workable, EPA is currently reviewing “effluent limitation guidelines” applicable to NPDES permits for the shale oil and gas sector as a whole and geographic preferences could be eliminated. EPA has initiated the first stages of a federal rulemaking, and a final rulemaking will be closely monitored by industry and states.

State policies to encourage water reuse

With this background in mind, it is not surprising that state permitting authorities are taking the lead in regulating water management issues associated with hydraulic fracturing. The regulatory frameworks adopted by Texas and Pennsylvania demonstrate that there is no one-size-fits-all approach to effectively managing complex water issues unique to each state.

Texas, one of the leading producers of oil and gas resulting from hydraulic fracturing operations, only recently updated its rules to both address well integrity associated with hydraulic fracturing and encourage reuse of water. Texas had previously adopted a suite of regulations in 2006 requiring permits for recycling facilities. A few entities developed and submitted application materials related to the siting of treatment facilities, volumes of produced water treated, and rigorous monitoring protocols. Similar permitting requirements applied to both stationary recycling facilities and mobile treatment facilities, and the Texas Railroad Commission (the state agency responsible for regulating oil and gas activities in Texas) encouraged “pilot” projects to test the viability of early water recycling technologies. However, in 2013, after Texas experienced one of its worst droughts of record, the Railroad Commission adopted new rules to further encourage reuse and recycling of water used in hydraulic fracturing by streamlining the requirements applicable to recycling activities conducted “on-lease.” Now, companies are exempt from more rigorous permitting requirements if they treat produced and flowback water for reuse with new hydraulic fracturing activities. Texas’ early adoption of recycling rules and regulatory adaptability have already encouraged a variety of new technologies such as reverse osmosis to be deployed in Texas, and these technologies are likely to be adopted in other regions.

Pennsylvania had different motivations driving its push to encourage recycling water used with hydraulic fracturing in the Marcellus Shale. In April 2011, in response to complaints that oil and gas operators were sending water to public drinking water treatment plants, the state Department of Environmental Protection (PADEP) called for oil and gas drillers to voluntary stop sending water to these treatment facilities. But unlike in Texas, which has close to 12,000 injection wells used to dispose of oil and gas drilling fluids, Pennsylvania has only a handful of injection wells for disposal of produced water. Thus, in July 2011 PADEP issued new permits and management practices to encourage the reuse of treated produced water by exempting wastewaters processed under these permits from general waste regulations. The Pennsylvania legislature went one step further and required “water management plans” if oil and gas operators did not recycle produced water for further use in hydraulic fracturing operations. These permits and incentives appear to be working. By some accounts, oil and gas operators now recycle more than 90 percent of produced water associated with hydraulic fracturing in Pennsylvania.

Despite clear benefits from the recycling of water used in hydraulic fracturing, some states have been slow to adopt clear policies to encourage the practice. For example, New Mexico and North Dakota, which have significant drilling activities, have taken a more ad hoc, case-by-case approach to the reuse of water in hydraulic fracturing operations. Those states may require more complex permits with public hearings, and other onerous water management requirements may be required for every application to treat water at particular wells. While case-by-case flexibility could be potentially beneficial to some companies, it also causes significant regulatory uncertainty and may add costs to the deployment of emerging technologies if more onerous ad-hoc proceedings are required. One agency staff person’s method of evaluating applications may be discontinued if they move on, or operators may be treated differently even if they are using similar recycling technologies. North Dakota is currently considering adopting rules for recycling facilities that may address some of these issues, and to the extent states do address water recycling with hydraulic fracturing, they should follow the lead of Texas and Pennsylvania and streamline requirements to encourage reuse.

Federal water regulation, if any, should encourage proactive state policies

Encouraging good water management practices is critical for continued oil and gas development with hydraulic fracturing, and it is imperative that state oil and gas and water regulators examine ways to incentivize companies to improve their water processes. This issue is only growing in importance with current drought conditions across the country and in oil and gas producing areas. Proactive state policies encouraging water reuse with hydraulic fracturing operations have already dramatically decreased the need for freshwater resources for oil and gas development and encouraged new water treatment technologies and business innovations.

Federal regulation of water used with hydraulic fracturing has the potential to displace many state initiatives. For example, the removal of the exemption of oil and gas wastes from regulation as hazardous waste by EPA could have irreversible effects on the current efforts to reuse water derived from hydraulic fracturing operations. It is also unclear what effects EPA’s effluent limitation guidelines for the shale oil and gas sector could have on industry. A worst-case scenario would be the adoption of a one-size-fits-all federal regulatory approach that impairs the ability of states to pursue policies that are appropriate for their own natural resource priorities and challenges. But EPA’s regulations could also support state efforts and further encourage water treatment in this sector. The trend to watch over the next few years will be how federal regulation influences state policies and technological innovation. Hopefully federal regulators will see the progress that some states are already making.

Carlos R. Romo and Molly Cagle

Carlos R. Romo and Molly Cagle practice natural resources law in Baker Botts L.L.P’s Austin, Texas, office.