Back to Shale Gas

June 5, 2013 –The House Committee on Commerce and Job Creation  approved a new version  of Senate Bill 76  (the 2013  bill on  shale gas production and offshore energy development); you can find the House bill draft here.  This post focuses on the shale gas provisions; a separate post will talk about changes dealing with offshore energy development.

The biggest change affecting shale gas development is that the House joins the Senate in backing away from  the current law (adopted just last year) that delays permitting of  hydraulic fracturing and horizontal drilling until the General Assembly acts to remove a moratorium on those activities. Like the Senate bill, the House bill draft allows the Department of Environment and Natural Resources (DENR)   to start issuing permits for hydraulic fracturing on March 1 2015. The difference is that the House  version  would require another action by the General Assembly to make those permits effective.   It isn’t clear what benefit comes from issuing permits but  requiring legislative action to make the permits effective – except that it may provide employment for  lots of lawyers. The problems:

— Rules for horizontal drilling and hydraulic fracturing may not be in effect by March 1 2015 and nothing in the bill  requires  all of the rules to be in effect before DENR starts issuing permits. (Note:The final Senate version of the bill allowed DENR to delay  issuance of permits  until all rules were in effect, but without further action by the General Assembly.)  Even if the Mining and Energy Commission (MEC) adopts all of the rules for shale gas development by October 1 2014 (as required under the 2012 legislation),   state law requires several more steps before the rules can go into effect.  First, rules   have to be approved by the Rules Review Commission (RRC); even if a rule receives RRC approval, any legislator  can  introduce a bill to disapprove a controversial rule.  Those steps could delay rules for many months after adoption by the MEC. The worst case (in terms of timing) —  rules that do  not get  Rules Review Commission  approval by the end of  December 2014   may not go into effect until  the  summer of 2016.    The bill needs to clearly explain  whether permits will be issued even  if all of the rules are not actually in effect on March 1 2015.  If that is not the intent, the bill should give DENR authority to deny permits or defer permit decisions until the rules go into effect.

— If the General Assembly intends for DENR to start issuing permits under rules that have been adopted but are not yet in effect, what does the permit holder have?  Will the permit holder be able to claim a legal right to operate under the permit  — even if the permit was issued under rules that never go into effect as originally adopted? The new bill  draft doesn’t say what happens if the legislature changes some of the rules for shale gas development after the permit has been issued but before the permit goes into effect.

— State law only allows 60 days to file a permit  appeal with the Office of Administrative Hearings and the clock begins to run as soon as DENR provides notice of the permit decision. Permits can be appealed by third parties  such as neighbors, local governments, and environmental organizations. Permit applicants sometimes  appeal  permit conditions. Does the clock on an appeal start when DENR issues the permit or when the General Assembly makes the permit effective?

Issuance of permits without all of the hydraulic fracturing rules actually  in effect  creates a significant risk of  confusion, uncertainty and legal conflict.  That  is probably  not the desired result. If the General Assembly intends to go down the road of permitting hydraulic fracturing without  final rules in effect, the bill needs to  resolve  the questions that follow from that decision.

Other changes made  in the House draft:

The House bill draft removes Senate language that would have allowed underground injection of wastewater from hydraulic fracturing operations.

The bill restores the registration requirement for “landmen”  (people who handle real estate transactions related to oil and gas drilling sites). The Senate bill proposed to drop the registration requirement  enacted in  2012.

The bill makes several changes and clarifications to bonding requirements.

The bill also adds still more studies to the three already required under the 2012 legislation – including a study on the appropriate amount of severance tax  for shale gas extraction and a study on creation of a restitution fund to cover damage to property owners  as a result of fraud or misrepresentation.

The bill  makes minor changes to the Mining and Energy Commission appointment statute. It eliminates the seat for the Assistant Secretary for Energy in Commerce —  most likely in anticipation of the energy program  moving  to DENR as proposed by Gov. McCrory.  The bill would also add a seat for a  landowner in the Triassic Basin (to be appointed by the Governor)  and eliminate language requiring that the  Commission for Public Health member who serves on the MEC must have  knowledge of waste management.

Both the Governor’s Office and DENR  indicated  support for  the House version of Senate Bill 76. The bill next goes to the House Environment Committee.

Note: The original post has been  modified to make it clear that the version of Senate Bill 76 adopted by the Senate allowed DENR to delay issuance of permits for hydraulic fracturing and horizontal drilling until all rules were in effect.