Since 2009, there has been an all-out regulatory assault on the coal industry by the Obama administration. It behooves the natural gas industry to head off a similar fate.
Deidre G. Duncan and Karen C. Bennett, Hunton & Williams LLP, Washington, DC
As part of its "Beyond Coal" campaign, the Sierra Club vowed not to let any new coal-fired power plant go unopposed—"to fight all permits, on all fronts." This campaign, combined with the US Environmental Protection Agency's aggressive regulatory assault on coal, has had a devastating effect on the industry.
Not surprisingly, Sierra Club's "Beyond Coal" campaign has morphed into a "Beyond Gas" initiative, raising questions whether the natural gas industry is poised to face similar devastating consequences. While the US has plenty of natural gas, the regulatory environment can have a tremendous impact on the ability to convert fossil fuel resources into energy. The coal industry has experienced this impact at full force—the percentage of coal-generated electricity has dropped from 48% in 2008 to 35% thus far in 2012. This article examines the regulatory tactics employed against the coal industry and provides examples of how natural gas could face similar threats.
On Jan. 21, 2009, immediately after President Obama's inauguration, EPA dispatched letters to the US Army Corps of Engineers objecting to the issuance of coal-related Clean Water Act (CWA) Section 404 permits. Over the next year, the administration announced that the coal industry would be an "enforcement target." During the next several months, the administration took bold steps toward expanding EPA's role in all aspects of permitting surface coal mines, particularly in eastern Appalachia.
The administration moved to empower EPA to alter existing energy regulatory policies. First, the administration issued a Memorandum of Agreement signed by EPA, the Corps, Department of Interior, and the Fish and Wildlife Service. The hallmark of the MOA was the creation of new permit "coordination" procedures that would govern the review and issuance of the many permits necessary to mine coal. Specifically, it focused on CWA Section 402 and 404 permits, as well as permits issued by states with approved Surface Mining Reclamation and Control Act (SMCRA) permitting programs. The effect of the MOA was to increase EPA's role in all of these programs in an effort to leverage federal oversight of coal mining.
In announcing new mining guidance, including strict new water quality limits, EPA Administrator Lisa Jackson stated that "we are right now developing the science that will support these new policies" and "few if any valley fills will meet these new standards." EPA used these newly manufactured studies and water quality limits to hold hundreds of permits hostage—a situation that continues today.
While energy executives kept a watchful eye on these developments, he coal industry viewed these policies as a crescendo to attacks by agencies and third parties that had been building against the industry for some time.
Programmatic reviews and building a 'scientific' record
In the early 1990s, agencies began employing one of their greatest regulatory weapons—the "study." A prime illustration of this is the 1998 MOA between the state of West Virginia and EPA, the Office of Surface Mining (OSM), the Corps, and the FWS to produce a Programmatic Environmental Impact Statement (PEIS). The PEIS stemmed from a settlement agreement to resolve longstanding controversies over how surface coal mining should be regulated under the CWA and SMCRA, and it focused on mining practices used in steep-sloped terrain in the Appalachian coal states commonly known as "mountaintop mining." The final PEIS was more than 5,000 pages, cost millions of dollars, and took more than five years to complete.
Notwithstanding industry participation throughout the entire process, there was simply no means for preventing agency bias. As a result, the final document became a repository of studies and information that a subsequent administration and citizens' groups would use to suggest environmental impacts from mining are significant.
These studies are used not only to amass new data but also to justify changes in existing rules and policies. For example, when EPA decided it wanted to do away with general CWA Section 402 permits for mining operations, it conducted a study on various state NPDES programs, ultimately concluding that state programs are less than adequate and stricter federal EPA oversight is warranted. Similarly, when EPA wanted to stop issuing CWA Section 402 and 404 permits for coal mining, it conducted another study to reach the conclusion that increased conductivity from coal mines is harmful to aquatic life.
EPA justified its objections to state and federal CWA Section 402 and 404 permits by developing a benchmark limitation of 300-500 microSiemens per centimeter for conductivity. This benchmark was effective immediately, without any public notice and comment.
Subsequently, EPA convened a panel of the Science Advisory Board to review the report. Unfortunately, EPA's close management of the panel prevented any consideration of whether the methodology used to develop the benchmark is scientifically sound and appropriate for regulatory use. Consistent with many SAB reports, the final report was received with a mix of support and concern. Fortunately for the coal industry, the panel report was critical enough to cause EPA to restrict its application of the benchmark only to regions of the country where the data was validated and only in certain types of streams. These limitations have prompted EPA to return to the drawing board.
Likely the most controversial "study" to date that EPA has initiated in the mining context is the watershed assessment for Alaska's Bristol Bay. Responding to environmentalist pressure to veto a large-scale mining project not yet proposed, EPA commenced a study entitled, "An Assessment of Potential Mining Impacts on Salmon Ecosystems of Bristol Bay, Alaska" using a "hypothetical" large-scale mine to assess potential risks, including cumulative impacts of multiple mines on the Bristol Bay area.
The state of Alaska has expressed concerns with the assessment and requested that EPA cease its work, stating the effort reaches well beyond any process or authority contemplated by the CWA and questioning the vastness of its scope, which covers 15 million acres of largely state-owned land and conflicts with state and federal laws governing the use of Alaska's natural resources. But the study continues, with EPA asserting the assessment will provide important data that will help inform future decision-making with respect to Bristol Bay. Environmental groups are now calling on EPA to initiate a similar study of the Great Lakes Region.
Examination of the administration's recent actions with regard to natural gas suggests some striking similarities in approach. On April 13, 2012, President Obama issued an Executive Order—Supporting Safe and Responsible Development of Unconventional Domestic Natural Gas Resources. Under the familiar theme of "coordination," the President announced that the federal government would be taking a more prominent role in regulating natural gas activities. The Order established an interagency working group to facilitate the administration's policy goals. Not unlike the coal mining MOA, the new coordination procedures appear destined to cause unwarranted delay and uncertainty.
In fact, the public learned in April that EPA Region 6 Administrator Al Armendariz had told his staff that he would "make an example of the oil and gas industry" as the Romans did when conquering a village. EPA then went on to target the natural gas industry by suggesting that hydraulic fracturing had polluted drinking water in places like Parker County, Tex.; Pavillion, Wyo.; and Dimock, Pa. EPA later dropped these cases. Armendariz has since joined the Sierra Club.
As with coal, EPA has targeted the Corps' CWA Section 404 permitting program as a means of increasing its role in regulating drilling wells by requiring that operators obtain Section 404 permits for construction of hydraulic fracturing and other natural gas drilling sites. EPA has issued a number of compliance orders under CWA Section 309(a) to drilling operators, requiring them to cease and desist all discharges without a permit to US waters and to mitigate the site to pre-disturbed conditions. Failure to comply may result in further EPA enforcement action, including civil penalties up to $37,500 per day and criminal charges and fines up to $50,000 per day.
In 2010, eerily similar to the mining scenario, EPA's Office of Research and Development (ORD) announced the initiation of a study of the potential environmental and human health implications of hydraulic fracturing, with special emphasis on the relationship between hydraulic fracturing and drinking water resources. This "life-cycle fracking study" includes within its scope the full cycle of water in hydraulic fracturing. The report also includes case studies from around the country and environmental justice assessments of whether fracking occurs more often in areas home to predominantly low-income, minority, young, or elderly populations.
A first progress report is planned for late 2012 with a final draft report expected to be released for public comment and peer review in 2014. To avoid what happened in the coal mining context, this study must be monitored and reviewed to ensure that it does not become the basis for adverse action against the entire unconventional gas industry.
Another obstacle the natural gas industry faces is New York's environmental impact statement on hydraulic fracturing. In September 2011, the New York State Department of Environmental Conservation released a revised draft Supplemental Generic Environmental Impact Statement (dSGEIS) on "Well Permit Issuance for Horizontal Drilling and High-Volume Hydraulic Fracturing to Develop the Marcellus Shale and Other Low-Permeability Gas Reservoirs." New York is in the process of finalizing the SGEIS and preparing final regulations, scheduled to be released later this year. This study could serve as a template for similar efforts by other states, as well as for the federal "life-cycle-fracking study."
Reinventing regulatory standards
Once data has been amassed, agency policies and rules can be changed to reinvent regulatory standards. For instance, on April 1, 2010, EPA and the Corps issued guidance creating new procedures and substantive requirements for reviewing mining-related CWA Section 402 and 404 permits, as well as permits issued under state SMCRA programs.
The guidance took effect immediately, without public notice or comment period and its new substantive requirements had not been peer reviewed in any meaningful way. Specifically, the guidance created an alternate CWA permitting pathway for surface coal mining projects in Appalachia, and established a de facto water quality standard for specific conductivity by instructing EPA regional employees to insist on the inclusion of permit limits designed to ensure conductivity remains below a specific level.
EPA also created a presumption that reasonable potential existed such that general NPDES permits would be per se inadequate to protect water quality. In addition, the guidance established that any coal project involving more than one valley fill or more than one mile of stream loss is likely to result in significant environmental impacts and require an environmental impact statement under the National Environmental Policy Act (NEPA). EPA issued its final guidance on July 21, 2011.
The National Mining Association, along with Kentucky and West Virginia, brought a legal challenge alleging—as a matter of both procedure and substance—that EPA had exceeded its authority under the CWA and SMCRA in adopting its new permit review process and forcing states to adhere to a new de facto numeric water quality standard for conductivity.
On July 31, 2012, Judge Reggie Walton of the US District Court for the District of Columbia found the guidance unlawful under the CWA, the SMCRA, and the Administrative Procedures Act (APA).
In a sign that water-quality concerns have shifted to the gas industry, the Bureau of Land Management (BLM) recently proposed rules to regulate hydraulic fracturing activities on public and Indian land. The new requirements would include obtaining BLM approval of proposed fracking activities; performance of mechanical integrity tests before fracking is conducted at a well; conditions on handling of flowback during production and on disposal methods for flowback and other recovered fluids; extensive reporting of the results of fracking activity within 30 days of completion of a well; and the required disclosure of information on each fracking fluid by additive trade name and purpose, the Chemical Abstracts Service Registry Number (CASRN), and the percent mass of each ingredient contained in the fluid. In evaluating responses to these proposals, it is imperative that the natural gas industry keep coal's recent experience in mind.
General permits, regulatory review
Another tactic that was deployed against coal, which the natural gas industry now faces, is to reduce the usefulness of general or streamlined permits under the CWA (Nationwide Permits, NWPs). Eliminating the general permit means that individual permits, complete with full-blown NEPA analysis, will be required in every case. This approach has proven inefficient for both the Corps and the permittee, but is desirable from the standpoint of permit objectors because it opens the door to opportunities for delay and legal challenge.
In June 2010, the Corps suspended the use of NWP 21 in the Appalachian coal region. The NWP was eventually reinstated but with significantly lowered threshold limitations, essentially rendering it meaningless. The push to eliminate NWP 21 nationwide was driven in large part by environmental groups through consistent lawsuits challenging the legitimacy of the Corps impact analysis and methods for quantifying and guaranteeing mitigation success. In the end, it appears the Corps grew weary of defending these general permits.
Taking their cue from prior legal action against NWP 21, in June 2012, the Sierra Club and others filed suit in the US District Court for the Western District of Oklahoma challenging the Corps issuance of NWP 12 and the Corps' reliance on NWP 12 to authorize the Keystone Pipeline Gulf Coast Project. The plaintiffs allege that the Corps violated the CWA, APA, and NEPA by reissuing NWP 12 and seek a declaration that NWP 12 is null and void throughout the nation.
In addition, plaintiffs are requesting that the court vacate any Corps authorization of the Keystone Pipeline Gulf Coast Project under NWP 12 and issue preliminary and permanent injunctions against any Keystone activities undertaken in reliance on NWP 12. This case may have significant implications for pipeline infrastructure that will be critical to unlocking natural gas reserves.
Once the regulatory policies for the natural gas industry become final, the environment will be ripe for third-party lawsuits. For example, in Appalachia, based on EPA's new "science," conductivity limits in CWA permits have been set so low as to be unachievable for coal mining operations. As a result, citizens' groups have piled on lawsuits claiming high penalties and seeking requirements for expensive treatment technologies.
Thus far, citizen suits in the natural gas arena have played out primarily as toxic tort claims for alleged health and property damage caused by hydraulic fracturing. In these suits, Lone Pine case management orders can often be used to increase judicial efficiency and prevent the waste of legal fees by culling non-meritorious claims.
What are the lessons learned? Natural gas companies must carefully participate in these programmatic agency studies; they cannot leave it to industry trade associations or other agencies to ensure that the science and facts are correct. Failure to actively manage such analysis will only lead to problems in the future. Indeed, once the "science" is established, it is almost impossible to challenge. OGFJ
About the authors
Deidre Duncan is a partner at Hunton & Williams. A former assistant general counsel for the US Army, she advises clients on various environmental laws.
Karen Bennett is of counsel to Hunton & Williams. She previously served as the VP for environmental affairs at the National Mining Association.