Drilling through the bureaucracy: disclosing the rules for fracturing

Liberty Oilfield Services rigged-up to frac

Ben Pfefferle III, Tom Stilwell, Cassie Dallas, Jason Yearout, Baker Hostetler

Mimicking the path of the gold rush that traversed the nation in the 1850s, shale gas exploration and production has surged in the past four years from Pennsylvania to California and from Texas to North Dakota. Reactions to the proliferation of drilling activity have varied across the social and political spectrum, but water quickly became the most important fluid in the debate. Feeling pressure to keep abreast of the pace of this development, many states moved quickly to adopt new regulations that increased the amount of oversight, visibility, and transparency for wells utilizing completion or stimulation methods employing hydraulic fracturing.

A patchwork quilt of new provisions has emerged with similar, but not matching, requirements from state to state. These new statutes and regulations can require provision of pre-drilling notice to neighboring landowners, public disclosure of the components of certain drilling fluids, pre-drilling baseline water testing, or post-drilling cleanup activities – depending on where you intend to operate. Shale gas developers can no longer safely assume that practices complying in one state will comply in the next. Indeed, what is required at one well may be different than what is required a few miles away across the state line.

A spectrum approach with visible trends exists

Without history and experience to use as a guide, legislators enacted varying regulations for notice of hydraulic fracturing activities and disclosure of the fluids being used in the completion operations. These regulations continue to evolve, becoming more nuanced as states gain experience and familiarity with hydraulic fracturing techniques.

Some states have banned the use of hydraulic fracturing

Not every state welcomes or allows hydraulic fracturing. In almost every state where regulations for hydraulic fracturing are considered, provisions to enact a complete moratorium on the practice are debated. As recently at late June 2012, bills had been introduced in California, Ohio, and Illinois that, if passed, would stop the practices in those states.

Most states that have considered moratoriums do so in order to allow the legislature or state agencies to study the issue and develop regulations. For instance, Maryland currently has in place a moratorium on the use of hydraulic fracturing as a means to explore for natural gas within its boundaries. But the governor and state regulators have been careful to characterize the moratorium as a "pause" pending further study and review.

Maryland's environmental agency is developing regulations to govern hydraulic fracturing, and tentatively should be publishing those regulations in 2013. Similarly, New York issued a moratorium on hydraulic fracturing in 2010 until it could study the practice's impact, given the geology and water tables in the areas of the state overlying the Marcellus shale. This moratorium on hydraulic fracturing showed signs of being lifted in late June 2012, making the state one to watch closely in the future.

Vermont appears to be the only state with an enduring position to ban the practice altogether. The ban will have little impact on shale exploration, though, as Vermont does not appear to possess significant access to natural gas formations. As a result, the ban has been characterized as largely symbolic of Vermont's particular political preferences.

Early adopter states paved the road for more comprehensive regulations

In 2010, states began adopting regulations requiring the disclosure of chemical additives used in hydraulic fracturing processes. States that were early adopters of regulations containing disclosure and notice provisions include Wyoming (October 2010), Arkansas (Jan. 2011), Michigan (June 2011), Montana (August 2011), Louisiana (Oct. 2011), and West Virginia (Dec. 2011).

Characteristically, these states adopted regulations requiring the operators of wells to identify the chemicals and additives used in hydraulic fracturing fluid during the completion process. In some cases, providing a MSDS sheet for the particular fluids or the contractor job logs (Wyoming, Montana) is sufficient. In a few states, the regulatory agencies require a preliminary list of potential chemicals and concentrations, as well as a supplemental or follow-up disclosure reflecting the concentrations and names of the chemicals actually used at the well (Wyoming, Michigan). The post-stimulation reporting period in these states varies widely, from including the information in the well completion reports required by the state (Louisiana) to a yearly master submission by the operator for all of its wells in the state (Michigan).

Several, but not all, of these states have allowed operators to withhold proprietary information (Wyoming, Arkansas, Louisiana). In some instances the operator must demonstrate that the information qualifies as a trade secret under federal law (Arkansas), the state's Uniform Trade Secrets Act (Montana), or the Freedom of Information Act (Michigan). Often the designation of chemical formulations as confidential, proprietary, or trade secret allows the operator to name the chemical family without disclosing the exact chemicals utilized (Arkansas, Michigan, Louisiana).

Finally, many of these early adoption states have allowed the operator to satisfy its disclosure requirements in whole or in part by posting the chemical constituents used in its hydraulic fracturing operations to the Interstate Oil and Gas Compact Commission/Groundwater Protection Council's website and database known as FracFocus (www.fracfocus.org) (e.g., Montana). The organization designed the website with the intent of providing education about, and transparency into, hydraulic fracturing operations.

Recent legislation continues to evolve

In the last eight months, eight more states have enacted legislation or adopted regulations designed to require the disclosure of chemical mixes being used in the hydraulic fracturing process, including: Texas (Jan. 2012), New Mexico (Feb. 2012), Colorado (April 2012), Pennsylvania (April 2012), North Dakota (April 2012), Ohio (June 2012), Oklahoma (March 2012- effective in 2013/2014), and Indiana (June 2012). These states "learned" from the trends and issues encountered by some of the early adopter states. As a group, these states adopted more comprehensive regulations and expanded the scope of the disclosure requirements.

The timing of the disclosure of chemicals and additives mixed with water continues to vary. Some states require disclosures within 60 days of concluding hydraulic fracturing operations (Colorado, Pennsylvania, Oklahoma). Others require the information to be included with the well completion report(s) filed with the state's regulatory agency (Texas, New Mexico). Nonetheless, the disclosures required by these states typically include more comprehensive information than first sought by early adopter states.

Data to be disclosed now includes:

  • the source of water or base fluids used;
  • total volume of fluids used;
  • all additives by trade name, supplier, and descriptions of their use, function, or purpose;
  • all chemical ingredients used in the hydraulic fracturing process;
  • actual or maximum concentrations used;
  • and Chemical Abstract Service (CAS) numbers for each chemical ingredient (e.g., Texas).

Additionally, many of these states also impose disclosure requirements on vendors and service providers and require coordinated reporting and disclosures between operators and service providers. Jurisdictions with this requirement generally absolve the operator from any liability for inaccurate disclosures if the source of the misinformation originated with a vendor or service provider (Texas, Colorado, Pennsylvania, Oklahoma). However, many states require operators to update any disclosure upon learning that information in the initial disclosure was inaccurate (Oklahoma).

State requirements as to handling claims of proprietary or trade secret information vary widely. Some of these recent adopters rely on their own state law for the definition of a trade secret, and by doing so either limit the ability to claim a trade secret, or specifically define the exceptions to a claim of trade secret, or both (Texas).

Two of the most recent states to adopt chemical disclosure requirements (Ohio and Oklahoma) allow parties to claim trade secret protection for a specific chemical's identity, but not its chemical family, at the time of disclosure. In contrast, New Mexico continues to allow the operator to decide as to the proprietary nature of the chemical formulations used. And outliers such as West Virginia offer no trade secret protections at all.

While several states continue to allow the use of the FracFocus website registry (Texas, Colorado, Pennsylvania, North Dakota, Oklahoma), some have noted the inability to conduct searches across the database, and have provided that alternate sites may be developed by the state agencies themselves to replace the use of FracFocus (Colorado, Pennsylvania).

These "states to watch" will develop their regulations in the next 18 months

Several states and federal agencies (such as the US Bureau of Land Management) are still considering the formulation of their disclosure and notice regulations. The next states to watch as they develop their regulations include California, Idaho, Illinois, Nebraska, North Carolina, and South Carolina.

As previously noted, New York has suddenly re-entered the discussion given the likely end to its statewide moratorium on hydraulic fracturing, as a well completion method. In late June 2012, New York's Department of Environmental Conservation (DEC) announced plans to release an update to its report on the study of hydraulic fracturing practices, and DEC indicated that while the report would recommend a continued ban on hydraulic fracturing and surface drilling around the New York and Syracuse watersheds, it would support exploration using hydraulic fracturing techniques on private lands. DEC also announced that it would be publishing regulations to govern hydraulic fracturing processes in New York.

On the heels of this announcement, sources indicated that the state would start issuing permits consistent with the report in areas where local ordinances had not been enacted to prohibit hydraulic fracturing. For these reasons we expect that the current prohibition on hydraulic fracturing in New York could likely be at an end, and that New York will join the ranks of states considering how it plans to regulate the practice.

Looking forward, here's what you can reasonably expect

Pre-notification states probably will not expand

Beyond the initial drilling permit, very few states require operators to provide any notice that hydraulic fracturing is about to commence. Instead, the chemical disclosure obligations accompanying hydraulic fracturing typically arise after the completion of the well. Bucking this trend, Colorado requires 48-hours notice of the commencement of hydraulic fracturing activities. Interestingly, while other states have relied on Colorado's chemical disclosure requirements as a model, states have not copied Colorado's approach here.

Recently, California's legislature drafted a bill designed to require advance notice of the commencement of hydraulic fracturing. Supporters of the bill (SB 1054) touted the legislation as a "tell-your-neighbors" policy, while opponents accused the bill of attempting to slow down oil and gas production in the state. The bill was narrowly rejected in early June 2012, but California's agencies are in the process of developing regulations for hydraulic fracturing in the state. Given the defeat of bill, the regulations are not expected to contain such a notice provision, but the close voting indicates that California may consider more regimented requirements than previously seen in other states.

Trade secret protections afforded chemical additives will continue to refine

States have refined their approaches to the handling of chemical information (particularly proprietary fluid formulations) warranting trade secret protections. Many citizens and environmental groups complain that trade secret protections are simply a means to hide damaging chemical information from public view. In fact, the chief drivers for trade secret protection are far more benign: preventing reverse engineering of the chemical composition of proprietary fracturing fluid formulations, and maintaining the integrity of many distribution agreements that require confidentiality. Indeed, fluid formulations often are tailored to the specific location, depth, and geologic formation in which they are to be used, making their compositions a valuable asset to chemical formulators.

Recognizing the economic import of these interests, the vast majority of states include balanced trade secret protections in their hydraulic fracturing rules. The clear trend, though, is in favor of providing substantial trade secret protections for chemical substances that are to be disclosed to state agencies. States such as Ohio, Colorado, Oklahoma, and Indiana exemplify this trend.

The publication of disclosed chemical information may change

As noted earlier, once chemical information is disclosed, states differ as to how best to manage that data. Initially, key states such as North Dakota and Texas required parties to disclose chemical information solely on the FracFocus website. FracFocus is a new database, though, and is still evolving. Of note, the site has some technical limitations, especially as to its search capabilities.

Perhaps recognizing these limitations, many states (such as Colorado, Montana, Ohio, and Oklahoma) allow entities to disclose their chemical information either on FracFocus or a state-administered website. Wyoming, Arkansas, and West Virginia require disclosure solely to the state. Meanwhile, Pennsylvania has chosen to re-evaluate FracFocus's viability by the end of 2012, planning to post disclosed information to its own website if FracFocus is not sufficiently searchable or sortable. While the trend has been in favor of flexibility and privatization, the pendulum may swing back in favor of state-centralized data management if FracFocus does not meet states' needs or if another entity develops a better database.

You are only responsible to disclose what you know

Finally, early adopter states such as Wyoming did not consider whether disclosing entities would be responsible for any errors or omissions in chemical information provided to them by upstream suppliers. Now, many states (including key players such as Texas, Pennsylvania, and Colorado) absolve the disclosing entity for errors or omissions resulting from inaccurate information supplied by vendors / contractors.

The federal cavalry is probably not coming

Given the differences in regulatory approaches among the states, some have advocated for a uniform set of federal rules that would provide clarity and consistency to these issues. The US Department of the Interior's Bureau of Land Management recently proposed federal rules that would govern hydraulic fracturing on federal / public lands, and that, at least as to chemical disclosure requirements, comports with the approaches of many states.

The prospects of federal legislation superseding state rules appear remote, as bills have been proposed in Congress since 2008 but have gained little traction. This is likely because the desires for uniformity and federal oversight are outweighed by state interests in a more localized approach that addresses their individual policy, political, economic, geologic, and natural resource needs. As a result, operators should invest the effort to understand the applicable state chemical disclosure requirements before starting operations in a new state.

About the authors

Ben Pfefferle III is the national chair of Baker Hostetler's Environmental and Energy Practice team. His practice includes energy extraction, refining and production; environmental compliance; hazardous and toxic waste issues; Superfund litigation and private cost recovery; environmental permitting; and redevelopment, acquisition and divestiture of environmentally impaired commercial and industrial property. As a member of the firm's Utica and Marcellus Shale Plays team, he is at the forefront of the natural gas and oil industry in Ohio, Pennsylvania, West Virginia, and New York.

As a partner in Baker Hostetler's Environmental and Energy Practice team, Tom Stilwell focuses his practice on commercial litigation with an emphasis on energy-related matters. Stilwell's energy practice includes representation of companies in the oil and gas industry who are engaged in exploration and development, transportation of liquids and gases and provision of drilling and equipment services.

As an associate in Baker Hostetler's Environmental and Energy Practice team, Cassie Dallas assists clients in a variety of litigation matters in state and federal court, including commercial litigation, oil and gas litigation, personal injury defense, admiralty litigation, and collection matters.

An associate in Baker Hostetler's Environmental and Energy Practice team, Jason Yearout practices primarily in the areas of environmental law and litigation. He counsels clients in a broad spectrum of industries on federal and state environmental permitting and management requirements. He is a primary contributor to Baker Hostetler's Utica Marcellus Shale Monitor, providing commentary on the latest legal news and information regarding the Utica and Marcellus shale plays.

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