November 01, 2013

California creates new regulatory regime for “fracking”

Phillip M. Bender

On September 20, 2013, California Governor Jerry Brown (D) signed into law a closely watched measure that creates a new regulatory regime for hydraulic fracturing and other “unconventional” oil and gas drilling techniques in California. The law, Senate Bill 4 (S.B. 4), 2013 Cal. Stats. Ch. 313, establishes a regulatory program administered by the Department of Conservation’s Division of Oil, Gas and Geothermal Resources (DOGGR) for oil and gas well stimulation treatments. These treatments include hydraulic fracturing (commonly called “fracking”) and acid well stimulation. The new program includes a scientific study, the development of regulations, a permitting process, and public notification and disclosure requirements. S.B. 4 takes effect on January 1, 2014.

Until Governor Brown signed S.B. 4 into law, California had no regulatory program that specifically governed fracking or other unconventional drilling techniques. Existing law required DOGGR to supervise the drilling, operation, maintenance, and abandonment of oil and gas wells but did not contain any provisions concerning well stimulation techniques like fracking. Existing law required drillers to file notices of intent and obtain approval from DOGGR before commencing drilling operations but drillers did not have to meet any specific requirements in order to use any well stimulation techniques.

In California, as in other states where deep shale formations have been identified as new potential sources of recoverable oil and natural gas, drillers have used fracking and other well stimulation techniques to explore and develop those sources. Fracking involves the high-pressure injection of liquid, typically water mixed with sand and a combination of chemicals, into an oil- or gas-bearing rock formation to fracture the formation thereby releasing oil or natural gas to flow more freely. After it was developed and successfully applied in the Barnett shale formation in Texas in the 1980s, drillers have used fracking in more and more formations around the country, including the Marcellus formation in Pennsylvania, the Bakken formation in North Dakota, and now the Monterey and Santos formations in California. See Phillip M. Bender, Balancing Energy Needs and Sound Environmental Policy in Developing Natural Gas in the Appalachian Basin, Trends (A.B.A., Chicago, Ill.), Sept./Oct. 2009, at 4. While drillers in the Northeast target natural gas, drillers in California use fracking to target oil-bearing formations.

Public concerns about the use of fracking, particularly the chemicals contained in fracking fluids and wastes, have led many states to consider or develop new regulatory regimes to govern the use of such techniques. In California, substantial public opposition developed in recent years as companies began using fracking to explore the Monterey and Santos formations, even though various other forms of well stimulation have been used routinely for years to renew existing wells. The public debate led to as many as 10 different proposals in the California legislature to regulate fracking, some introduced with oil industry support and others supported by environmental and community organizations, including a proposal for a five-year moratorium on fracking. S.B. 4 is the product of that legislative contest.

In what some have characterized as an odd political wrinkle, Governor Brown noted alongside his signature on S.B. 4: “I am also directing [DOGGR] when implementing the bill to develop an efficient permitting program for well stimulation activities that groups permits together based on factors such as known geologic conditions and environmental impacts, while providing for more particularized review in other situations where necessary.” The governor’s signing statement creates considerable uncertainty about DOGGR’s implementation of the new permit requirement.

The new regulatory regime

S.B. 4 creates a regulatory regime that imposes new obligations on oil and gas drillers and the regulatory agencies that oversee them. Generally, these new requirements fall into three categories: (1) information gathering and scientific study, (2) a new permit requirement, and (3) the development and promulgation of new regulations.

Information gathering and scientific study

S.B. 4 requires the Secretary of the Natural Resources Agency to conduct a scientific study of well stimulation treatments, including fracking and acid well stimulation. The study is to “evaluate the hazards and risks and potential hazards and risks that well stimulation treatments pose to natural resources and public, occupational, and environmental health and safety.”

The study must include an evaluation of “all aspects and effects of well stimulation treatments” and the consideration of “atmospheric emissions, including potential greenhouse gas emissions, the potential degradation of air quality, potential impacts on wildlife, native plants, and habitat, including habitat fragmentation, potential water and surface contamination, potential noise pollution, induced seismicity, and the ultimate disposition, transport, transformation, and toxicology of well stimulation treatments.”

The study must also include a hazard assessment and risk analysis addressing occupational and environmental exposures to well stimulation treatments. The Natural Resources Agency is required to complete the study by January 1, 2015. S.B. 4 also requires the State Oil and Gas Supervisor to prepare an annual report on well stimulation, with the first report due in 2016.

Given the breadth of subjects mandated for study by the legislature, the Natural Resources Agency will be hard pressed to complete the study by the deadline. The U.S. Environmental Protection Agency (EPA), for example, began a study of fracking at Congress’s direction in 2009, issued a progress report in 2012, and does not expect to issue a final report until sometime in 2014. It would be surprising if the Natural Resources Agency could move more quickly than EPA, given the complexity and scope of the required study.

The new permit requirements

S.B. 4 requires companies that use unconventional drilling techniques to obtain a permit before “performing a well stimulation treatment of a well.” Prior to passage of S.B. 4, drilling companies were required to obtain approval from DOGGR after submittal of a notice of intent to commence drilling, but that notice did not have to address the planned use of any unconventional drilling techniques.

The new law also requires companies to provide a copy of the permit to tenants and property owners within 1,500 feet of a wellhead at least 30 days before commencing a drilling involving a well stimulation treatment. It also requires companies to notify DOGGR at least 72 hours before starting a treatment “in order for the division to witness the treatment.”

One of the most notable provisions of S.B. 4 requires companies to publicly disclose detailed information about well stimulation fluids. This “full disclosure” requirement mandates the release of a wide range of information, including the dates of the well stimulation treatment; the names, Chemical Abstract Service (CAS) numbers, suppliers, maximum concentration and description of the intended purpose of every chemical constituent of the well treatment fluids used; the total volume of base fluid used (typically water) and whether it is suitable for irrigation or domestic purposes; the source, composition, and disposition of all water used as base fluid during a treatment and recovered from the well following the treatment (commonly referred to as “flowback”), including a description of any reuse of flowback water; the composition and disposition of all treatment fluids other than water, including wastes; any radiological components injected into the well as part of or in order to evaluate the well stimulation treatment; a description of the recovery method, the recovery rate, the radioactivity of the recovered fluids and disposal information; the location of the portion of the well subject to the treatment; and the extent of fracturing induced by the treatment.

Companies must post this information on a publicly accessible website within 60 days after completion of a treatment.

It remains to be seen whether the information disclosure mandated by S.B. 4 will satisfy those seeking more information about chemicals used in fracking. Still, the detailed information now required for disclosure by S.B. 4 is certain to make for more informed debate about fracking.

The development of new regulations

To some degree, S.B. 4 kicks the regulatory can down the road a bit. Instead of detailing the specifics of, for example, new requirements for well construction methods to protect groundwater from contamination by well stimulation fluids, the legislature required DOGGR to develop and promulgate new regulations by January 1, 2015.

S.B. 4 requires DOGGR to work with the Department of Toxic Substances Control, the State Air Resources Board, the State Water Resources Control Board, the Department of Resources Recycling and Recovery, and any local air districts and regional water quality control boards in areas where well stimulation treatments may occur to develop and adopt new rules. These rules must be “specific to well stimulation, including governing the construction of wells and well casings and full disclosure of the composition and disposition of well stimulation fluids.” These rules must include revisions, if necessary, “to the rules and regulations governing construction of wells and well casings to ensure integrity of wells, well casings, and the geologic and hydrologic isolation of the oil and gas formation during and following well stimulation treatments.”

In addition, S.B. 4 requires the State Water Resources Control Board, which is responsible for groundwater protection in California, to develop a groundwater monitoring model criteria for areas where well stimulation treatments are occurring. These criteria must include how to conduct monitoring of treated wells “in order to protect all waters designated for beneficial uses and prioritize the monitoring of groundwater that is or has the potential to be a source of drinking water.”

What next?

Now that S.B. 4 is law, the question is where the ongoing public debate about fracking in California will go next. The first obvious step is for DOGGR to begin implementing S.B. 4. Given Governor Brown’s ambiguous signing statement, there is some uncertainty as to whether DOGGR will “group” permit applications in the near-term before it promulgates more detailed regulations on the permit process itself. Will DOGGR, for example, group applications for all proposed well stimulation treatments at wellpads that have multiple wells? Will DOGGR coordinate permits for entire wellfields? And under what, if any, circumstances will DOGGR conduct “more particularized reviews” for well stimulation treatments to be used in some locations but not others?

The governor has also indicated an interest in amending S.B. 4, and many opponents of fracking have expressed disappointment with what they perceive as S.B. 4’s inadequacies. Given the complexity of the politics surrounding fracking in California, however, it may be difficult for anyone to put together the votes in the legislature necessary to amend S.B. 4 to address their particular concerns. Instead, it may be easier for the governor and other interested parties to work through DOGGR and other state agencies to refine how S.B. 4 works rather than push amendments through the legislature.

Before S.B. 4 was passed, fracking opponents used a variety of tools to promote their positions. The Center for Biological Diversity, Earthworks, the Environmental Working Group, and the Sierra Club, for example, filed a lawsuit in the Alameda County Superior Court alleging that DOGGR had failed to consider or evaluate the risks of fracking, as required by the California Environmental Quality Act (CEQA), the state equivalent to NEPA (the National Environmental Policy Act).

Now that S.B. 4 is the law, some opponents have indicated a desire to seek local bans on fracking. Given the history of litigation and the questions surrounding S.B. 4’s interaction with CEQA, it would not be surprising if more lawsuits are filed. Finally, it is certain that the continuing public debate on fracking will focus all concerned on the implementation of S.B. 4. S.B. 4 is likely just the first step in the evolution of the regulation of unconventional drilling techniques in California.

Phillip M. Bender

Phillip M. Bender is a partner with the firm of Wrenn Bender McKown & Ring, where he practices environmental law and litigation.