sboxermanFeatured Expert Column – Environmental Law and Policy

by Samuel B. Boxerman, Sidley Austin LLP with Ben Tannen, Sidley Austin LLP

On September 30, 2015, a Wyoming federal judge issued a preliminary injunction prohibiting the U.S. Department of Interior’s Bureau of Land Management (“BLM”) from enforcing its final rule governing hydraulic fracturing on federal and Indian lands pending resolution of the case. Wyoming v. U.S. Dept. of Interior. The decision itself is a major victory for industry, but if adopted elsewhere, the Court’s stated rationale—that the Congress has not authorized federal agencies to regulate hydraulic fracturing unless it involves the use of diesel fuels—could have even more far-reaching benefits for oil and gas development.

BLM’s March 2015 final rule* seeks to go beyond existing state regulation and impose a range of expansive requirements on hydraulic fracturing conducted on federal and tribal lands, including rules governing wellbore integrity, water quality, and public disclosure of compounds used in fracturing fluid. In response, Wyoming and Colorado filed petitions for review, in which North Dakota, Utah, and the Ute Indian Tribe of the Uintah and Ouray Reservation later intervened. Industry groups also filed their own petitions for review, and the two actions were consolidated. Petitioners and Intervenor-Petitioners later filed for a preliminary injunction, seeking to enjoin the final rule.

Applying the familiar four-part test for a preliminary injunction, the court granted the motion, finding the challengers had a strong likelihood of success on the merits. Foremost, the court found Congress has significantly limited the federal government’s authority to regulate hydraulic fracturing. BLM had argued that federal statutes such as the Federal Land Policy and Management Act, the Mineral Leasing Act, and others, had given the agency broad authority to regulate activities conducted on federal lands. That authorization, the government claimed, necessarily encompassed the authority to regulate the use of hydraulic fracturing.

The court rejected that analysis. As the court explained, the Energy Policy Act of 2005 amended the federal Safe Drinking Water Act (“SDWA”) to revise the definition of “underground injection” to exclude hydraulic fracturing that did not use diesel fuels. The SDWA directs the United States Environmental Protection Agency (“EPA”) to issue regulations that set forth minimum requirements for states to prevent “underground injection” which could endanger drinking water. Reasoning that if Congress specifically prohibits regulation of an activity by one agency (EPA), “it cannot reasonably be concluded” that a more general statute permitted regulation of the same activity by a different agency. Rather, the court held that “Congress has directly spoken to the issue and precluded federal agency authority to regulate hydraulic fracturing not involving the use of diesel fuels.”

Second, the court also found the moving parties were likely to prevail on the merits because the rule was arbitrary and capricious due to BLM’s “paucity of evidentiary support” and reliance on vague concepts of “‘public concern’” and “‘potential impacts,’” rather than on documented problems with hydraulic fracturing. The court also looked at specific parts of the rule with which the Industry Petitioners raised concerns, such as the pre-operation disclosure requirements, and suggested that these specific requirements were arbitrary and capricious. Finally, the court found BLM had not consulted fully with the Ute Indian Tribe on the rule, violating the agency’s own procedures.

The court analyzed the other three factors in less detail, finding first that irreparable harm to the State and Indian tribe petitioners existed because the rule interfered “with the States’ sovereign interests in, and public policies related to, hydraulic fracturing” in the absence of Congressional authority, and because the rule also interfered with royalty and tax revenue. Irreparable harm to the industry petitioners existed due to the prospect of increased compliance costs and the disclosure of trade secrets and other confidential information. The court likewise held the balance of equities favored the moving parties; it found the agency could not demonstrate any likely environmental injury from an injunction, while preliminary relief would prevent direct irreparable harm to the moving parties. Finally, the court held an injunction would serve the public interest “by maintaining the status quo and avoiding the implementation of agency action which was likely promulgated in excess of statutory authority.”

With the opinion still fresh, the government has not yet announced how it may respond. However, left unaltered, the court’s rationale may have far-reaching implications for the oil and gas industry. Indeed, if the SDWA is read to effectively prohibit federal agencies from regulating hydraulic fracturing unless diesel fuels are used, then industry will have a potent tool to challenge future regulation of hydraulic fracturing by EPA, BLM, or other federal agencies.

*Oil and Gas; Hydraulic Fracturing on Federal and Indian Lands, 80 Fed. Reg. 16128 (Mar. 26, 2015). The BLM published the initial proposed rule in the Federal Register on May 11, 2012, and issued a supplemental notice of proposed rulemaking on May 24, 2013.