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    California's next frontier: Development of the Monterey Shale

    Heather Corken, Jason Hutt and Michael Weller
    Bracewell & Giuliani LLP

    Depending on whom you ask, it looks like California is getting closer to tapping the nearly 15 billion barrels of recoverable oil that lies deep in the Monterey Shale. On September 20, 2013, Governor Jerry Brown signed SB 4 into effect, a bill that provides California with its first set of requirements specifically associated with hydraulic fracturing and other well stimulation techniques, such as acidizing.  Less than one month later, the California Department of Conservation (DOC) has released proposed regulations applicable to well stimulation treatments in the state, initiated the State’s environmental review process and set the stage for the release of Emergency Regulations, under which owners and operators will be able to proceed with well stimulation in the interim.

    While both industry and environmental groups may have wanted more from out of SB 4, its passage and swift implementation will provide some certainty now for oil and gas operators looking to develop the Monterey Shale, and avoids a situation like that in New York State, where the future of hydraulic fracturing remains in limbo.  

    Further studies

    SB 4 requires California’s Natural Resources Agency to, by January 1, 2015, complete a comprehensive independent scientific study on well stimulation treatments, including an evaluation of “the hazards and risks that well stimulation treatments pose to natural resources and public, occupational, and environmental health and safety.”  SB 4 requires the study to be truly comprehensive, covering everything from the chemical make-up of the treatment to the way that flowback is treated after stimulation.  Specifically, SB 4 provides that the study should consider well stimulation treatments, additive and water transportation to and from the well site, the mixing and handling of well stimulation treatment fluids and additives at the well site, options for the use of nontoxic additives in treatments, the use or reuse of treated or produced water in well stimulation treatment fluids, and the treatment and disposal of flowback fluids and other materials, if any, generated by the treatment.  The study must also consider “acid matrix treatments” and air emissions, including potential greenhouse gas emissions.

    SB 4 also provides that the DOC’s Division of Oil, Gas and Geothermal Resources (DOGGR) must conduct an Environmental Impact Report (EIR) to provide the public with detailed information regarding “any potential environmental impacts of well stimulation in the state.  The requirement to perform an EIR goes beyond the analysis that is typically required for oil and gas activities in California. The state Senate Rules Committee noted in its analysis of SB 4 that “DOGGR regularly approves oil and gas development proposals under the CEQA categorical exemptions for minor alterations to land or existing facilities, or by way of negative or mitigated negative declarations. As a result, oil and gas permits are rarely reviewed in EIRs that would evaluate the potential risks associated with hydraulic fracturing.”

    On November 15, 2013, DOC published a “Notice of Preparation” of an EIR “to evaluate the impacts of existing and potential future oil and gas wells stimulation treatments” occurring in the state.  DOC has stated that the objectives of the EIR process are to:

    • identify, evaluate and disclose the potential environmental impacts of well stimulation treatments of both conventional and non-conventional oil and gas resources within the State;
    • further the State Legislature’s efforts to ensure that well stimulation practices are conducted in a manner that assures environmental protection, public safety, data collection and reporting, interagency coordination, regulatory oversight and monitoring, and public disclosure; and
    • allow for the safe recovery and production of the State’s oil and gas resources. 

    In December 2013 and January 2014, DOGGR will host several Scoping Meetings to solicit public comment on determining the scope and content of the EIR.  Down the road, the study will result in publication of a Draft EIR and a Final EIR.  Once the Draft EIR is released, there will be a 30-60 day public comment period.   

    Proposed regulations

    Previously, in December 2012, DOGGR released a pre-rulemaking “discussion draft” of regulations applicable to hydraulic fracturing.  The discussion draft did not trigger the formal rulemaking process and simply acted as a means of engaging stakeholders in the process early on.  DOGGR withdrew the discussion draft following the passage of SB 4.

    SB 4 directs DOGGR to develop regulations by January 1, 2015, that include the following components:

    • revisions to the rules and regulations governing construction of wells and well casings to ensure the integrity of wells, well casings, and the geologic and hydrologic isolation of the oil and gas formation during and following well stimulation treatments;
    • full disclosure of the composition and disposition of well stimulation fluids;
    • a provision for the well operator to provide for baseline and follow-up water testing upon request by a nearby property owner; and
    • threshold values for acid matrix stimulation treatments.

    SB 4 also sets forth the need “to promote regulatory transparency and accountability.”  To accomplish this, SB 4 directs DOGGR to enter into formal agreements with other agencies as necessary to clearly delineate “respective authority, responsibility, and notification and reporting requirements associated with well stimulation treatments and well stimulation treatment-related activities, including air and water quality monitoring.”

    As directed by SB 4,  DOC released its proposed regulations on November 15, 2013.  Generally, the DOC proposed “SB 4 Well Stimulation Treatment Regulations” define the types of well stimulation treatments, e.g. “hydraulic fracturing,” and set out various requirements applicable to such treatments.  Some of the requirements covered by the proposed regulations include the need to

    1. obtain a permit prior to the treatment,
    2. provide pre-treatment notice to property owners so that baseline water testing can be conducted,
    3. perform an evaluation of the well integrity prior to treatment and monitoring during treatment,
    4. adhere to standards for storage and handling of well stimulation fluids, (v) perform post-treatment monitoring, and
    5. submit to the Chemical Disclosure Registry information relating to the contents of the treatment.

    The release of the proposed regulations kicks off the beginning of the formal rulemaking process and the 60-day comment period.  DOC has indicated that, in alignment with SB 4, the regulations are scheduled to go in to effect on January 1, 2015.  In the meantime, DOC plans to implement emergency regulations effective January 1, 2014 “to ensure the major requirements of SB 4 are addressed in the interim.”

    In the meantime…

    Unlike New York, California does not expect industry to sit on the sidelines until January 1, 2015 when the final rules are to be promulgated. SB 4 provides that, until the rules are finalized and implemented, DOGGR “shall allow” all well stimulation treatment activities, provided various conditions are met. DOC plans on releasing a “streamlined interim procedure” by December 13, 2013.    

    The interim procedure will take the form of Emergency Regulations, effective January 2014, for a one-year period.   Under the Emergency Regulations, owners and operators will be able to proceed with well stimulation treatments without obtaining a permit, as long as certain conditions are met. Based on DOC’s SB 4 Implementation Plan, the Emergency Regulations will:

    • define well stimulation treatments covered by the interim procedure, including threshold values for acid volume;
    • with assistance from the State Water Board, provide initial guidance for owners and operators on the development of groundwater monitoring plans;
    • specify how operators are to certify compliance with SB 4, including disclosures relating to:
      • the date and location of the well stimulation treatment;
      • the makeup and volume of fluids other than water, by CAS number and trade name;
      • disposition of fluids;
      • tracer use;
      • radioactivity of produced fluids;
      • water use and water management planning compliance;
      • groundwater monitoring compliance;
      • compliance with requirements for neighbor notification and neighbor testing rights; and
      • the posting of chemical information to the Internet.

    Looking forward

    Governor Brown included a signing statement with SB 4 that specifically references permitting under the new law and the need for efficiency in issuing permits.  In that statement, Governor Brown directs the DOC to “develop an efficient permitting program for well stimulation activities that groups permits together based on factors such as known geologic conditions and environmental impacts, while providing for more particularized review in other situations when necessary.” 

    Governor Brown has pledged to work with the state legislature to address certain areas of SB 4 and to develop amendments as needed. While there is still work to be done, the passage of SB 4 signals that California has recognized the tremendous potential of the Monterey Shale and is working toward establishing a regulatory program to facilitate the development of that resource now.  Despite some challenges on the horizon, SB 4 demonstrates California’s commitment to developing the Monterey Shale, which provides the oil and gas industry with some certainty.  The end result could be a boon to a state economy that has had its fair share of rough spots over the last few years.

    About the authors

    Heather CorkenAs a partner in the environmental strategies group at Bracewell & Giuliani LLP, Heather Corken offers clients in-depth environmental regulatory knowledge and experience in energy-related environmental issues. She advises clients on the environmental issues surrounding shale play development, hydraulic fracturing, and the permitting, construction and operation of liquefied natural gas (LNG) import/export facilities in the US.

    Jason HuttJason Hutt is a partner in the firm’s Washington, DC office.  He counsels clients on current and upcoming regulatory developments at the nexus of environmental and energy policy, with focused attention on natural gMichael Welleras development, including hydraulic fracturing.

    Michael Weller is member of the firm's environmental and natural resources practice in Washington DC.

     

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