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.