U.S. Department of the Interior Releases Final Rule Updating Regulations Governing Hydraulic Fracturing Operations on Federal Land

March 24, 2015

The Bureau of Land Management at the Department of the Interior (“BLM”) issued a final rule on March 20, 2015 updating the regulations governing hydraulic fracturing on public lands.[1]  This is the first time that the federal government has issued regulations relating to hydraulic fracturing, commonly referred to as “fracking.”  The previous BLM regulations that address issues relating to hydraulic fracturing are at least 25 years old and, in BLM’s own words, “pre-date the current common use of the practice.”

BLM began working on this final rule in 2010.  In that time, it has published two proposed rules and received more than 1.5 million comments.  During that same time period, the U.S. has been in the midst of an energy renaissance, spurred in large part by a fracking boom that has put the United States on track to become the world’s largest oil and gas producer.

BLM’s final rule on hydraulic fracturing regulations comes at a tumultuous time for both the natural gas industry and the broader energy industry.  Among other things, the Environmental Protection Agency (“EPA”) is currently in the process of finalizing its so-called “Clean Power Plan” that includes, as one of its four “building blocks,” a significant increase in natural gas-fired energy production (in lieu of coal-fired energy production).  The Clean Power Plan is expected to be finalized by mid-2015.  EPA has also recently announced that by mid-summer it will release new regulations relating to methane emissions, a significant source of which comes from fracking and other natural-gas extraction operations.  And, since 2010, EPA has been in the process of conducting a major study of the impacts of the fracking process, which is expected to lead to EPA’s own rules regulating the practice.  EPA’s fracking study has yet to be released, but a draft report is expected this spring.

Impact of the Final Rule

BLM’s final rule covers oil and gas wells drilled on federal lands.  According to BLM’s website, “Federal onshore oil and gas wells accounts for 11 percent of the Nation’s natural gas supply and five percent of its oil.”[2]  Thus, although the majority of oil and gas development remains on state and private lands, drilling on federal public land is not an insignificant portion of the nation’s oil and gas production.

In the release accompanying the final rule, BLM reported that in 2014 alone, drilling on federal lands yielded over 200 million barrels of oil and close to 3 trillion cubic feet of natural gas.  BLM also reported that over 100,000 wells are currently operating on federally managed land and that approximately 3,000 new wells are drilled each year, the majority of which use fracking.

The rule, which is set to take effect 90 days after being published in the Federal Register, requires that operators planning to conduct hydraulic fracturing:

• Submit a Master Hydraulic Fracturing Plan
  
  The new rule allows the submission of a Master Hydraulic Fracturing Plan for a group of wells.  The plan must include details regarding the proposed drilling, including the geology of the well, location of faults and fractures, depths of all usable water, estimated volume of fluid to be used, estimated direction and length of fracture, estimated volume of fluids to be recovered, and proposed disposal method.  The rule also eliminates the old regulation’s use of “type wells,” which permitted an operator to demonstrate compliance using a sample well to demonstrate well integrity, and instead requires that specified best practices be demonstrated for all wells in a Master Hydraulic Fracturing Plan.
• Design and implement a casing and cementing program and monitor cementing operations
  
  The operator is required to cement to the surface or run a cement evaluation log to demonstrate that there is at least 200 feet of adequately bonded cement between the deepest usable water zone and the formation to be fractured.  If inadequate cementing is detected, an operator must take remedial action.  In such an instance, an operator must give notice to BLM within 24 hours, as well as submit a plan for remedial action and verify that the subsequent remedial action was successful.
• Perform a successful Mechanical Integrity Test prior to the fracking operation
  
  Operators must conduct a successful Mechanical Integrity Test (“MIT”) before operations can begin.  The required MIT is a pressure test of the casing through which the fracking will occur.  This requirement is in accordance with guidance from the American Petroleum Institute.
• Monitor annulus pressure during the fracking operation
  
  Operators must monitor the pressure within the annulus and cease fracking operations when pressure within the annulus increases by more than 500 psi.  In such instances, the operators must halt the operation and determine the reasons for the increase.  Operations cannot be recommenced until any required remedial action is completed.
• Manage recovered fluids
  
  The rule requires that fluids recovered during fracking operations be managed in rigid enclosed, covered or netted and screened above-ground storage tanks, with very limited exceptions allowing the use of lined pits.  The storage requirements do not differentiate between produced water and flowback liquid.  The term “flowback liquid” generally refers to fluids recovered immediately after hydraulic fracturing, presumably containing a high concentration of the fluids injected during the process.  “Produced water” on the other hand is generally considered to be water originating from the hydrocarbon zone that is produced together with oil and gas.  The storage requirements do not differentiate between the two and both are treated as recovered fluids subject to storage restrictions.  The rule allows tanks to be vented, unless law requires vapor recovery or a closed-loop system for the particular surface estate involved.
• Disclose Chemicals Used in the Fracking Process
  
  The rule also requires extensive disclosures concerning the chemicals used in the fracking process.  Once fracking operations are complete, an operator must disclose the chemicals used through FracFocus.org, an online database managed by the Ground Water Protection Council and by the Interstate Oil and Gas Compact Commission that is used by at least 16 states to track chemicals used in fracking operations.  The rule allows limited exceptions for material demonstrated to constitute trade secrets. To protect the information, an operator must submit affidavits signed by a corporate officer or the equivalent responsible official explaining that the information is protected from disclosure by law, such as the Federal Trade Secrets Act, 18 U.S.C. § 1905.  BLM retains authority to question the validity of the trade secret claim and may require the operator to provide the information to BLM to review internally in order to determine if it should be released.  If BLM determines that the information should be released, it will grant the operator advance notice in order to allow the operator to seek an order preventing public disclosure.  The rule notes that BLM will look to relevant federal judicial opinions to inform its decisions on what constitutes a trade secret.

Costs of Implementing Final Rule Changes

BLM’s release claims that the economic impact of the final rule will not exceed $100 million to the economy, that the rule will impact between 2800 and 3800 operations annually and that compliance could cost $11,400 annually per operation for a rough annual industry-wide compliance cost of between $32 and $45 million.[3]  On the other hand, commenters estimated that the annual industry-wide compliance cost could be anywhere from $0 to more than $2.7 billion.[4]  Indeed, many commenters used the same annual compliance estimate of $345 million.[5]  Thus, regardless of which estimates are used–whether BLM’s or those of commentators–the increased costs created by the final rule will be significant.  These are costs that will be borne by only a small segment of the industry–those drilling on Federal and Indian lands.  But as oil and gas wells on Federal and Indian lands represent only approximately ten percent of oil and gas wells nationally, the imposition of similar regulations at a national level could represent a very significant annual cost impact, potentially as high as $27 billion.

Insight Into Possible Action by EPA and States

Although the new BLM rule applies only to a small percentage of hydraulic fracturing operations, it provides some insight into what EPA may do when it issues its long-awaited fracking report.  EPA’s final report is due to be released in 2016, with a draft study reportedly set to be issued this spring.  Depending on its findings, EPA’s study could have significant ramifications for the oil and gas industry.  In 2005, the Energy Policy Act exempted fracking from the Safe Drinking Water Act, but if EPA’s study finds that fracking has adverse consequences on public water, the study could pave the way for regulations affecting wells on private and state lands which are in line with the BLM rule issued on Friday.

Indeed, as noted above, EPA is also in the process of finalizing its Clean Power Plan.  BLM’s new rule, combined with any future EPA fracking rule and EPA’s announced Methane Emission rule could each combine to create significant additional costs to the Clean Power Plan.  Such costs may spur stakeholders to lobby EPA to revisit the Clean Power Plan to ensure that any additional regulations imposed do not overburden the energy industry by making the production and use of natural gas prohibitive

The new BLM rule may also prompt states to place additional restrictions or regulatory obligations on fracking operators beyond those already in place.  In a statement released on March 20th, Department of Interior Secretary Sally Jewell urged states to continue to regulate the practice, noting that creating rules at the state level “must now be taken up in statehouses and boardrooms across the country.”

   [1]   The complete final rule release is available at: https://s3.amazonaws.com/public-inspection.federalregister.gov/2015-06658.pdf.

   [2]   http://www.blm.gov/wo/st/en/prog/energy/oil_and_gas.html.

   [3]   Final Rule at 278.

   [4]   Final Rule at 243.

   [5]   Id.

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have about these developments.  To learn more about the firm’s Environmental Litigation and Mass Tort Group, Energy and Infrastructure Group or Energy, Regulation and Litigation Group, please contact the Gibson Dunn lawyer with whom you usually work, or the authors of this alert:   

Jeffrey D. Dintzer – Los Angeles (213-229-7860, [email protected])
Claudia M. Barrett – Washington, D.C. (202-887-3642, [email protected])
Jason J. Fleischer – Washington, D.C. (202-887-3737, [email protected])

Please also feel free to contact the following practice group leaders:

Environmental Litigation and Mass Tort Group:
Patrick W. Dennis – Los Angeles (213-229-7568, [email protected])
Peter E. Seley – Washington, D.C. (202-887-3689, [email protected])

Energy, Regulation and Litigation Group:
William S. Scherman – Washington, D.C. (202-887-3510, [email protected])

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