sboxermanFeatured Expert Column – Environmental Law and Policy

by Samuel B. Boxerman, Sidley Austin LLP, with Katharine Newman, Sidley Austin LLP

On March 20, 2015, the Department of the Interior’s Bureau of Land Management (BLM) released a final rule regulating hydraulic fracturing on federal land managed by BLM and the U.S. Forest Service, as well as on Native American tribal lands. The rule is the first from the federal government to specifically address hydraulic fracturing on federal lands.

For BLM, the final rule completes a process the agency began in 2010 to update well-drilling regulations in response to technological advances in high volume hydraulic fracturing and horizontal drilling that now dominate domestic oil and gas operations. BLM reports that there are over 100,000 oil and gas wells under federal management and that at least ninety percent of these wells use hydraulic fracturing technology. The new rule will not, however, govern wells on private and state land that are regulated by state agencies and account for the vast majority of oil and gas development in the United States.

Below are five key highlights related to the final rule:

1. Relationship to existing State and Tribal rules. BLM manages land in thirty-two states, thirteen of which have rules that already expressly address hydraulic fracturing. Significantly, in those states, the rule provides that if a State or Tribe can show its regulations are as or more stringent than the BLM rule, those state or tribal rules will remain enforceable. Industry representatives have expressed concern over the uncertainty presented by this approach until BLM makes the necessary determination regarding which rules govern.

2. Chemical Disclosure through FracFocus. Following the approach of many states, the BLM rule seeks to increase transparency by requiring companies to disclose chemicals used in hydraulic fracturing fluids to “FracFocus” within 30 days of completion of drilling. FracFocus is an existing public database managed by the Ground Water Protection Council and the Interstate Oil and Gas Compact Commission. Sixteen states currently require drillers to disclose fracturing chemicals through the FracFocus website. During the comment period, environmental groups had sought disclosure of fracturing chemicals directly to BLM, not FracFocus, and requested pre-drilling disclosure. BLM defended its decision, however, noting that FracFocus is a cost-effective and efficient way to require disclosure without delaying drilling operations. The agency also highlighted improvements to the FracFocus website including increased searching capability. Chemical disclosure will be subject to limited trade secret protections, similar to many states’ laws.

3. Secure Wastewater Storage Requirements. The new rule contains strict, new hydraulic fracturing fluid storage regulations. Under the new regulations, companies must use above-ground, enclosed or covered tanks to securely hold wastewater prior to permanent disposal, with only limited exceptions that must be approved on a case-by-case basis. These requirements are more stringent than several states where companies are permitted to use open pits dug into the ground near well sites. Many companies are already voluntarily using above-ground tanks, but the agency reasoned the secure storage requirements will ensure a consistent level of protection against spills and potential groundwater contamination near hydraulic fracturing operations.

4. Well-Integrity Safeguards. The final rule requires best practice performance standards for well-integrity testing, including cement return and pressure testing prior to drilling, as well as cement evaluation and remediation plans for surface casing that does not meet standards. The rule also eliminates the use of sample “type wells” for well-integrity demonstrations, instead requiring best practices for all wells. BLM made this change to respond to concerns that type well testing does not account for the geological conditions and drilling procedures that can vary dramatically between wells, even within the same drilling operation.

5. Well Operation Cost Increase. BLM analyzed the costs and benefits of the new rule in an accompanying Regulatory Impact Analysis. BLM estimates that on average, compliance with the new requirements will cost $11,400 per well. This is the equivalent of approximately $32 million per year, industry-wide, but, according to the RIA, represents only a fraction of the total cost of drilling a well. BLM also asserts that because many of the requirements reflect current industry guidance and practice, the cost may be overestimated. Conversely, industry groups have disputed these figures. One 2013 study by Advanced Resources International considered the range of uncertainties associated with the cost to comply with the then proposed rule and estimated that the rule could cost industry as much as $2.7 billion per year.

Within hours of the rule’s release, two industry groups, the Independent Petroleum Association of America and Western Energy Alliance immediately filed suit in the U.S. District Court in Wyoming. The lawsuit seeks to block the rule as an arbitrary and unnecessary rulemaking that duplicates state law requirements and will impose significant costs on oil and gas operators. Other groups have criticized the rule for its potential impact on energy production and growth in the United States, pointing out that development on federal land has declined substantially since 2009. Reaction from environmental groups has been mixed. Some have supported the rule, particularly the integrity testing and wastewater requirements, as an improvement over the current federal regulatory landscape. Others groups have criticized BLM’s action as a federal endorsement of hydraulic fracturing, instead of ending the practice altogether. More legal challenges are likely to follow.

The rule will become effective June 24, 90 days after today’s publication in the Federal Register.