Tag Archives: Drilling Waste

2014 Shale Gas Legislation

Note: The original  post has been updated to reflect the fact that a new bill draft presented in committee today added a section authorizing the issuance of permits for hydraulic fracturing effective July 1, 2015. 

May 20, 2014: In what has become an annual rite of spring, the N.C. Senate has introduced another bill on oil and gas exploration and development. Some highlights of Senate Bill 786 (Energy Modernization Act):

Fracking Rules. The bill extends the deadline for  adopting rules on hydraulic fracturing from October 1, 2014 to January 1, 2015. The extension gives the Mining and Energy Commission   (MEC) more  time to  consider public comment on draft rules and finalize the standards.  The bill  also  exempts the fracking rules from Administrative Procedure Act provisions that would otherwise prevent the rules from going into effect until mid-June 2016. The changes would allow  the rules to become effective in 2015 (assuming the legislature approves the rules) .

Allow Issuance of Permits for Hydraulic Fracturing Beginning July 1, 2015. A new version of the bill presented in committee today added a section authorizing the Dept. of Environment and Natural Resources to begin issuing permits for natural gas production using horizontal drilling and hydraulic fracturing on July 1, 2015.  Shale gas legislation enacted in previous legislative sessions had prohibited issuance of permits until the state had rules in place to regulate hydraulic fracturing. This provision authorizes DENR to begin issuing permits on a date certain without regard to the status of the proposed rules.

Trade Secrets. The Senate wades back into the controversial issue of  “trade secrets”.  In 2013, oil and gas industry giant Halliburton lobbied both the Mining and Energy Commission (MEC) and the legislature to allow the industry to withhold  “trade secret” information about chemicals used in hydraulic fracturing  from state regulators unless needed to respond to an emergency.  Earlier posts describe the previous (failed) attempts to legislatively resolve the tension between protecting trade secrets and making timely information available to doctors and first responders in an emergency.

Senate Bill 786  would require oil and gas companies to disclose  all of the chemicals used in hydraulic fracturing fluid to DENR, but protect  trade secret information from public disclosure.  The trade secret information would be maintained  by the State Geologist (a position in DENR) and protected from public disclosure under confidentiality provisions in the N.C. Public Records Act.  The bill would allow the State Geologist to provide the information to emergency  or medical personnel  if  needed to respond to an emergency. Up to this point, the bill follows a  common approach to balancing protection of trade secret information  with  emergency response needs.

The new controversy concerns penalties in the bill for unauthorized disclosure of  oil and gas industry trade secrets. First, the bill allows the owner of  the trade secret to require a doctor or fire chief receiving the information for emergency response purposes  to enter into a confidentiality agreement that may set out remedies  for breach of the agreement including “stipulation of a reasonable pre-estimate of likely damages”.  Without any further explanation of how the stipulation would be used, it  sounds  like a stipulated penalty that could make it unnecessary for the company  to establish  actual economic damages in court.

The bill also makes unauthorized disclosure of an oil and gas industry trade secret  by any person  a Class I felony if the person knew  the information was a trade secret. (Class I felonies carry a presumptive sentence of 4-6 months — but you may be eligible for community service or supervised probation.)  By contrast,  current state law protecting trade secrets does not impose a  criminal penalty for  unauthorized disclosure, unauthorized acquisition or even unauthorized use of trade secret information.  G.S. 66-154  provides civil remedies and allows recovery only of “actual damages…measured by the economic loss or the  unjust enrichment caused by misappropriation of a trade secret”.  Aside from  questions about the  reasonableness of the penalties proposed in Senate Bill 786,  it is clear that the bill creates  much more severe penalties for disclosure of  oil and gas industry trade secrets  than state law imposes for  unauthorized disclosure or use of  other types of trade secrets.

Well Drilling Fees.  The bill reduces the well drilling fee from $3,000 per well to $3,000 for the first well and $1500 for additional wells on the same well pad.

Notice of Oil and Gas Activity. Section 11  of Senate Bill 786 adds a new requirement that the company holding lease rights for oil and gas must provide 30 days notice to the owner of the surface property  before starting exploration, development and production activity.

Pre-Drill Water Testing/Presumption of Liability for Contamination. Section 12  of the bill would  amend the law requiring pre-drilling tests of water supply sources located within  5,000 feet of the  proposed wellhead by limiting the testing to water supplies within a  one-half mile (2,640-foot) radius  around the proposed wellhead.  A corresponding change to G.S. 113-421 would reduce  the area  where  a presumption of oil/gas operator liability for water supply contamination would apply — from  the current 5,000 feet to the same 1/2 mile radius around the wellhead. 

Restrictions on Local Ordinances Prohibiting Oil and Gas Activity.  Section 13  of the bill repeals any past local acts  or resolutions of the General Assembly prohibiting well siting, horizontal drilling or hydraulic fracturing  in specific localities. The bill then preempts local ordinances that have the effect of prohibiting oil and gas exploration and production,  horizontal drilling and hydraulic fracturing. An  oil/gas operator  could challenge a local ordinance as preempted under the law by filing a petition with the Mining and Energy Commission.   The bill creates a presumption that general  development  conditions in local zoning and land use ordinances   (such as buffers, setbacks and stormwater requirements) will continue to be valid unless the MEC  finds otherwise. To preempt a local ordinance, the MEC  would have to find that: 1. The ordinance would prohibit oil and gas activities; 2. The oil/gas operator has received all  necessary state and federal approvals (unless the only reason for denial was inconsistency with the local ordinance); 3. Local residents and elected officials had an adequate opportunity to participate in the permitting process; and 4. The oil and gas activities will not pose  “an unreasonable health or environmental risk” to the surrounding locality,  the operator will take reasonable measures to reduce foreseeable risks, and the operator will comply with local ordinances to the maximum extent feasible. This section of the bill seems to be modeled on a similar preemption  law concerning  the  siting of hazardous waste facilities.

Ban on subsurface Injection of drilling wastes.   The N.C. Senate has previously proposed to amend an existing state law prohibiting underground injection of waste to allow subsurface disposal of oil and gas drilling waste.  The earlier proposals ran into strong opposition from members of the Mining and Energy Commission as well as the public. In Section 14, Senate Bill 786 abandons the effort to authorize subsurface disposal of drilling waste and instead reinforces the existing prohibition on underground injection of waste found in G.S. 143-214.2.

Compliance review for oil and gas permit applicants. Section 14 also creates an environmental compliance review  for oil and gas permit applicants. The compliance review will cover at least the previous five years.  For business entities, the compliance review  will extend to any parent company, subsidiary, or other affiliated entity; a partner, officer, director, member or managing director; and any other person with a direct or indirect interest in the company (other than a minority shareholder in a publicly traded corporation).  The bill allows DENR to deny an oil and gas  permit based on a past history of significant or repeated violation of statutes, rules, orders or permit conditions.

Trespass.  The bill protects workers collecting seismic or other geophysical data from trespass claims as long as they do not physically enter private land without consent. Seismic surveys  use  sound waves to  characterize subsurface geology and identify potential oil and gas reserves. The survey team generates  sound waves  on one side of the  target area  (by setting off small explosive charges or using trucks specially outfitted to create vibrations); geophones record the waves on the other side of the target. The intent of the bill is to prevent trespass claims based on movement of  the seismic waves under surface properties  the workers do not physically enter. The  company conducting the  seismic testing  would still be liable for any physical or property damage caused  to the surface property.

Severance Tax. Section 16 of the bill creates a new severance tax for oil and gas.  Others with expertise in severance  taxes  and oil/gas industry revenues will have to provide the in-depth analysis. One quick observation:  The bill  appears to prohibit cities and counties from imposing any taxes on the oil and gas industry other than property taxes.

Miscellaneous. In a provision unrelated to oil and gas, the bill caps city and county property tax revenue at an 8% increase over revenue received the previous year.

The bill requires  a number of new studies, including a  feasibility study for  a liquified natural gas export terminal on the N.C. coast.

Mineral Rights May Include Authority to Build Waste Disposal Pits On Site

September 30, 2013.  The federal appeals court for the Fourth Circuit  issued a decision on September 4, 2013 concluding that West Virginia common law gives  the owner of mineral rights authority  to build pits for disposal of drilling waste without  permission from the  property owner.  The decision in  Whiteman v. Chesapeake Appalachia, L.L.C., 2013 U.S. App. LEXIS 18359, 43 ELR 20205, 2013 WL 4734969 (4th Cir. W. Va. 2013), may have implications  beyond West Virginia since the Fourth Circuit Court of Appeals also decides cases from North Carolina and other mid-Atlantic states.

The Facts. Chesapeake Appalachia,  L.L.C. owns the  mineral rights under 101 acres of farmland owned by the Whitemans.  Ownership of the property comes through two deeds.  When Mr. Ellis O. Miller  sold the  property that is now the Whiteman farm,  each deed  retained  “the oil and gas within and underlying the above-described parcels as well as all of the coal not heretofore conveyed, and all other minerals within and underlying the above described property, with the necessary rights and privileges appertaining thereto.”  The deeds did not mention retaining any uses of the surface property.  Chesapeake Appalachia  ultimately acquired the mineral rights  retained by  Mr. Miller.

Chesapeake has three natural gas wells on  10 acres of the Whiteman property.  When Chesapeake applied for  state drilling permits, the company  indicated that drilling waste (including drill water, flow back, and formation cuttings) would be disposed of by land application.  After drilling on the Whiteman property, Chesapeake   put  the drill cuttings into open pits located near the wellheads. At the end of the drilling process, Chesapeake removed the plastic liners from the waste pits, mixed the drilling waste with clean dirt and compacted and covered the pits.

The Whiteman Lawsuit.  The Whitemans sued  to force Chesapeake to remove the waste pits, arguing that Chesapeake’s  ownership of the mineral rights did not give the company authority to put waste disposal pits on the property.   Although the Whitemans admitted that the pits had not caused a significant financial hardship, the family  had  concerns about possible future liability associated with the waste.  The lawsuit originally included a number of  claims under West Virginia common law; the only claim that survived to reach the Fourth Circuit Court of Appeals  alleged that Chesapeake trespassed by building the waste pits without the Whitemans’ permission.

The Legal Issue.  Common law trespass means entering  another person’s property without lawful authority. Leaving a structure  (such as a waste pit) on the property without lawful authority would be considered a continuing trespass. Under West Virginia common law, the owner of mineral rights only enters the  property unlawfully if,  under a  “reasonable necessity” standard, the mineral  owner  goes beyond the mineral rights that have been granted and intrudes on the rights of the surface owner.  So the Fourth Circuit Court of Appeals described the legal issue  in the Whiteman case  as:  “whether Chesapeake’s permanent disposal of drill waste upon the Whitemans’ surface property is “reasonably necessary” for the extraction of minerals.” If creation of the waste disposal pits was reasonably necessary for extraction of the natural gas, Chesapeake did not need the  Whitemans’ permission.

The Decision. The Whitemans argued that building a waste pit  on site was not reasonably necessary to extract  natural   gas because Chesapeake had other waste disposal alternatives.  The  Fourth Circuit admits that Chesapeake could have used a  “closed loop” waste system and offsite disposal of the solid waste instead of open pit disposal. (A closed loop system keeps all liquid drilling waste in pipes or tanks to avoid contact with the ground.)   Although the technique was relatively new when the Whiteman wells were drilled in 2007 and 2009,  Chesapeake had begun using closed loop  systems  in Texas and Oklahoma as early as 2004-2005.  But the  Fourth Circuit  concluded that open pit waste disposal could still be “reasonably necessary” to extract natural gas on the Whiteman property for two reasons: 1.  open pit waste disposal  was  the most common waste disposal technique used in West Virginia at the time Chesapeake drilled the Whiteman wells;  and 2.  state environmental standards allowed use of open pit disposal.  (This part of the court’s analysis led to the kind of statement only a lawyer could love —  “reasonably necessary” does not mean “necessary”.) As a result, the court concluded that Chesapeake’s ownership of  the mineral rights gave the company  authority to dispose of drilling waste on the Whiteman property even though the original reservation of  mineral rights made no mention of that use of the surface property.

The Whiteman decision has to be troubling for surface owners.  Many  cases have  recognized that ownership of mineral rights includes authority to access the property to extract the minerals (by putting in roads, for example).  The Whiteman decision suggests that ownership of mineral rights also gives a drilling company authority  to use the surface property for any number of  auxiliary processes associated with oil and gas extraction. Such an expansive interpretation of mineral rights  virtually eliminates the surface owner’s power to negotiate with the drilling company over  surface impacts.

Another concern is that the  Fourth Circuit  decision relied on  common use of  open waste pits in West Virginia  and  consistency with state environmental standards  to  recognize a  right to  build waste pits  without the surface owner’s  permission. The court does not make a particularly strong case for allowing a drilling operator to impose a use on the surface owner simply because the practice is common and has not yet been prohibited by the state. Given the pressures on  environmental programs — particularly in states that rely on revenue from oil and gas–  state acquiescence  in a practice should not be sufficient  reason to force it on the  surface owner.

Implications for North Carolina. North Carolina common law on trespass  is very similar to West Virginia  law, but North Carolina has  few  court decisions on the scope of mineral rights. (With no oil, gas and coal mining to speak of, there have been  few controversies between surface owners and the owners of mineral estates.)  But in 2012, the North Carolina General Assembly  provided some additional protection to surface owners by statute. G.S. 113-423.1  requires an oil or gas operator  to accommodate the surface owner by minimizing intrusion  on  and damage to the surface.  That  means “selecting alternative locations for wells, roads, pipelines, or production facilities, or employing alternative means of operation that prevent, reduce, or mitigate the impacts of the oil and gas operations on the surface, where such alternatives are technologically sound, economically practicable, and reasonably available to the operator.”

But the  N.C. law goes on to say that it should not be interpreted  to “prevent an operator from entering upon and using that amount of the surface as is reasonable and necessary to explore for, develop, and produce oil and gas…” [Emphasis added].  We now know what the Fourth Circuit Court of Appeals believes “reasonably necessary” means in the context of a drilling operator’s construction of a waste disposal pit on a West Virginia drilling site. The question is  whether  the first half of the new North Carolina law  –requiring  minimization of  surface impacts — may lead to a different decision about what  will  be considered  “reasonable and necessary” here.

Odds and Ends on Energy

April 6, 2013

Wind Energy

Offshore: Last fall, the federal Bureau of Ocean Energy Management (BOEM) finished  a  renewable energy lease plan for the waters of the Atlantic Ocean off the  North Carolina coast. BOEM  asked companies interested in  developing  wind energy in the designated lease areas to submit a proposal by March 7, 2013. Five companies sent in wind energy development proposals (Virginia Electric and Power Company, EDF Renewable Energy, Fisherman’s Energy LLC, Green Sail Energy LLC, and Outer Banks Ocean Energy LLC.) Find complete information on the proposals  here .  The BOEM website provides more information  on the   renewable energy lease plan  for  waters off the North Carolina coast.

Onshore (and near shore): Bills have been introduced in the N.C.  General Assembly  to create a state permitting process for wind energy facilities. Senate Bill 491  (= H 484)  creates a new state permit to be issued by  the Department of Environment and Natural Resources (DENR).   The permit review would look at both environmental impacts and  impacts on military operations.  Last year, two land-based wind  projects proposed for sites near the North Carolina coast (one in  Beaufort County and  the other in Pasquotank and Perquimans  counties)  raised concern at Seymour Johnson Air Force Base near Goldsboro.  (There are more onshore wind energy projects  proposed for  the coastal counties, but  not as far along in the planning/site approval process.)

The  military has two concerns about the siting of wind turbines:  radar interference caused by  movement of the blades  and  risk of  collision between low-flying military aircraft and wind turbines that may be more than  500 feet tall. North Carolina’s  coastal counties have a large amount of  military special use airspace, including training routes  that have “floors” as low as 200 feet.  Wind energy development could be a real  economic boost to  interior and largely rural areas of the coastal counties. The trick will be to make wind energy development compatible with military operations that  contribute significantly to the broader state economy and have an important role in national defense. The Department of Defense has a clearinghouse for review of development projects that may affect military operations.   The new state wind permit would provide a  way to consider military concerns in state decision-making.

Note: State jurisdiction only extends three miles from shore in the Atlantic Ocean, so most offshore wind projects  only require  federal permits.  North Carolina can influence federal permitting and lease decisions  for   offshore energy development  (whether wind turbines or oil and gas production) through the state’s coastal management program.

Study Links Underground Disposal of Wastewater and 2011 Oklahoma Earthquake

This  New York Times article provides a good overview of a recent study (published in the journal Geology) concluding that underground disposal of wastewater from oil production caused a 2011 Oklahoma earthquake that measured 5.7 on the Richter scale, destroyed a number of homes and injured two people. The Oklahoma Geological Survey reached a different conclusion.

Could Fracking and Renewable Energy Make a Happy  Marriage?

Kevin Drum,  writing  for Mother Jones, has an interesting blogpost on  fracking and renewable energy.

Update on Injection of Drilling Waste in North Carolina

On Thursday, the Senate Commerce Committee approved a new version of Senate Bill 76 (the Domestic Energy Jobs Act) after adopting several amendments.  One amendment  somewhat narrowed  language in Section 4 of the bill that would for the first time allow underground disposal of waste in North Carolina.  The official amendment text is not yet  on the General Assembly website, but as it was read in committee  the amendment would allow  injection of  hydraulic fracturing fluid “and water produced from subsurface extraction” of natural gas resources.   The new phrase refers to water  that flows back out of the well after fracturing and continues to be produced (in smaller amounts) as long as the well  produces gas. It is a mixture of hydraulic fracturing fluid and groundwater; the quality of the water depends on the makeup of the fracturing fluid and groundwater conditions.

Underground  disposal of  flowback water from a natural gas well requires a federal Underground Injection Control (UIC)  permit under the Safe Drinking Water Act.  (Injection of  fluid to fracture an oil or gas well is exempt from UIC permitting.)  Like many other states,  North Carolina has  received a delegation of authority  from EPA to issue injection well  permits.  Under N.C. G.S. 87-88(j), injection must be approved by the state’s Environmental Management Commission (EMC), which also has the authority to  adopt rules for well construction and injection.   Since state law   prohibits underground injection of  waste, the EMC has not adopted  standards for waste disposal wells.

To  keep  the delegated injection well permitting program,  North Carolina will have to assure EPA  that the change in state law will not allow contamination of underground drinking water supplies.  States that  permit  injection of flowback water from oil and gas operations (or other types of waste)  usually adopt some version of the  federal rule language  that prohibits injection into an underground source of drinking water if  it  could cause a violation of  federal drinking water standards or  health  problems. Those states  also  adopt specific rules on  location, construction and use of waste injection wells to make sure the general standard can be met.  For one example, see the  Texas rules for underground injection of water from drilling operations.

Questions that arose in committee discussion (with my additional comment in italics below):

Does the law require the water from a drilling operation to be reinjected on the same site?  Response  in committee – No.

     SmithEnvironment: Water from a drilling operation would not be injected into  an area that could produce gas; injection wells either go into an area off-site that doesn’t have a gas resource or  in some cases an old gas well that is no longer producing will  be converted to a disposal well.

Would the language allow injection of water from drilling operations in other states?  Response in committee — That is not the intent, but the language may need to be clarified.

Can the Mining and Energy Commission adopt rules on injection of water from drilling operations? Response in committee — Yes,  the Mining and Energy Commission has the authority to adopt rules.

     SmithEnvironment:   Under the state’s federally delegated injection well permitting program, the Environmental Management Commission  adopts rules for injection wells and also has permitting responsibility.  That hasn’t changed. The 2012 hydraulic fracturing legislation  gave the Mining and Energy Commission authority to regulate  production wells, but not waste disposal wells (which were still prohibited).


Underground Injection of Wastewater from Natural Gas Operations

Senate Bill 76 changes key provisions of  hydraulic fracturing legislation adopted by the N.C.  General Assembly just eight months ago.  Section 1 of the bill has already attracted attention because  it would allow  the Department of Environment and Natural Resources and the Mining and Energy Commission to begin issuing permits for hydraulic fracturing on March 1 2015 without any further action by the General Assembly – whether adequate fracking rules are in effect or not.

Section 4 of the bill has gotten less attention, but it  may  make  the most significant change in state environmental law.   N.C. law  has long prohibited underground injection of waste because of the risk of  contaminating drinking water supplies. (See  N.C.G.S. 143-214.2) The General Assembly amended the law  in 2012 to make it clear that fluids could be injected  to produce gas by hydraulic fracturing, but kept the prohibition on  injection of  waste.  As amended  by Session Law 2012-143, the law allows injection of  “hydraulic fracturing fluid for the exploration or development of natural gas resources”. Senate Bill 76  proposes to change the law again — this time in a way that appears to allow  underground disposal of wastewater from drilling operations. The  proposed language would allow injection of any “fluid associated with the exploration, production or development of natural gas resources”.

Since the Senate Bill 76 language does not put any limitations on injection of drilling  fluids (including drilling waste), it appears to be inconsistent with  federal Safe Drinking Water Act requirements.  U.S. Environmental Protection Agency rules under the Safe Drinking Water Act allow waste injection wells to be permitted only  where injection  can be done without contaminating groundwater that is suitable for drinking water supply.

Underground injection of drilling waste is a common practice in some oil and gas states, but DENR’s 2012  hydraulic fracturing study recommended against allowing underground injection of drilling waste in North Carolina.  Section 4 of the N.C. Oil and Gas Study talks about the conditions that could make underground injection of waste more risky here than in other gas producing states.  Among the reasons — North Carolina geology makes  it  more  difficult to insure that  waste injected into the  fractured bedrock of the shale region will not move into underground drinking water supplies.