More Oil and Gas Regulation Headed for Colorado Ballots?

Come November, Colorado voters may decide whether oil and gas development should be subjected to more stringent regulation. Three ballot initiatives proposed by Boulder-based Coloradans Resisting Extreme Energy Development have survived legal challenges and are now headed for signature collection. Supporters have until August 8 to collect the necessary signatures to get these measures on the November ballot. Opponents, like Protecting Colorado’s Environment, Economy, and Energy Independence (PCEEEI), argue that passage of any of these measures could cripple Colorado’s oil and gas industry.

Proposed Initiative 63 (Right to Healthy Environment) creates a fundamental “right to a healthy environment” under the Colorado Constitution. It also specifies that local regulations that are more protective of a “healthy environment” will not be preempted by state law. Finally, the proposal creates a private right of action allowing any “aggrieved” party to sue for injunctive or declaratory relief, as well as punitive damages in some instances.

See text of the proposal here:
http://www.sos.state.co.us/pubs/elections/Initiatives/titleBoard/filings/2015-2016/63Final.pdf

Proposed Initiative 75 (Local Government Control of Oil and Gas Development) declares that “[o]il and gas development, including the use of hydraulic fracturing, has detrimental impacts on public health, safety, general welfare, and the environment.” It transfers the regulatory authority over oil and gas operations from the state to local governments, and specifically recognizes local authority to ban oil and gas development entirely.

See text of the proposal here:
http://www.sos.state.co.us/pubs/elections/Initiatives/titleBoard/filings/2015-2016/75Final.pdf

Proposed Initiative 78 (Mandatory Setback from Oil and Gas Development) increases minimum setbacks for new facilities (or for re-entry to a previously plugged and abandoned well) to 2,500 feet from schools, homes, hospitals, and “areas of special concern.” Current regulations require 500 foot setbacks from homes and 1,000 foot setbacks from “high occupancy buildings,” such as schools and hospitals. The proposal also authorizes local governments to require even greater setbacks.

PCEEEI estimates that this measure could eliminate “at least 87 percent of all new production in Weld County alone.” Governor Hickenlooper also weighed in on the matter, stating that the increased setbacks “would in many cases, invalidate people’s opportunity to extract natural resources that they own.”

See text of the proposal here:
http://www.sos.state.co.us/pubs/elections/Initiatives/titleBoard/filings/2015-2016/78Final.pdf

For more on the citizen initiative process, see:
http://www.wsmtlaw.com/cms-assets/documents/191009-726917.gpsolo-article-novdec-2014.pdf

Does any of this sound familiar? In 2014, two oil and gas related initiatives – one requiring 2,000 foot setbacks and one authorizing increased local regulation of oil and gas development –garnered the requisite signatures and headed for the ballots. At the eleventh hour Governor Hickenlooper and Democratic Rep. Polis announced a compromise which kept these (and two industry-backed initiatives) off the ballots in exchange for the creation of a task force charged with addressing citizens’ concerns about hydraulic fracturing. If Initiatives 63, 75, and 78 move forward, we may be headed for a repeat of this drama in the fall.

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Proposed BLM Venting and Flaring Rule

On February 8, 2016, the BLM published its long awaited proposed rule to control venting, flaring and leaks of natural gas from oil and gas operations on onshore Federal and Indian lands. 81 Fed. Reg. 6616. The primary purposes of the rule are to: (1) update regulatory requirements in light of newer technology; (2) increase royalties payable to the government and Indian Tribes by capturing more gas; and (3) address concerns about climate change by reducing the amount of methane released to the atmosphere. The rule would supersede requirements dating back to 1979 – Notice to Lessees and Operators of Onshore Federal and Indian Oil and Gas Leases (NTL-4A), 44 Fed. Reg. 76600 (Dec. 27, 1979).

BLM studied Colorado’s Air Quality Control Commission Regulations and consulted with State regulators, referring to Colorado more than 40 times in the description of the proposed rule. Because Colorado has already adopted aggressive regulations to control methane emissions, the effect of the proposed rule would not be as great in Colorado as in other states. The proposed rule would more significantly affect operators in states such as North Dakota, South Dakota and New Mexico, where over 90 percent of routine flaring of associated gas from development oil wells occurs.

Waste Minimization Plan
A novel feature of the proposed rule that would complicate the drilling of development oil wells is a waste minimization plan that operators must submit with each Application for Permit to Drill (APD). The waste minimization plan must provide a strategy explaining how the operator will capture associated gas upon the start of oil production and include the following information:

The pipeline infrastructure location and capacity in the area of the well or wells; the anticipated timing, quantity, and production decline curve of oil and gas production from the well or wells; a gas pipeline system location map showing the operator’s wells, gas pipelines, gas processing plant(s), and proposed routes for connection to the pipeline; certification that the operator has provided one or more midstream processing companies with information about the operator’s production plans, including the anticipated completion dates and gas production rates of the proposed well or wells; the volume and percentage of produced gas the operator is currently flaring or venting from wells in the same field and any wells within a 20-mile radius of that field; and an evaluation of opportunities for alternative on-site capture approaches, if pipeline transport is unavailable.

Failure to submit a complete and adequate plan would be grounds for denying the APD.

Royalties
Although the proposed rule would not itself raise royalty rates above the current maximum of 12.5 percent, it would give BLM the flexibility to ask for a higher percentage on new leases. Recent BLM data “showed that the royalty rates charged on private and State lands range from 12.5 to 25 percent, and that the average rate assessed exceeds 16.67 percent.” Royalty rates on existing BLM leases would not be affected, but BLM is clearly paving the way to increase royalty rates on certain leases in the future.

BLM would also impose royalties on more flared gas. In addition to royalties that are due on any “avoidably lost” oil or gas, operators would also owe royalties on any gas vented or flared above a certain threshold. No more than 1,800 Mcf per month per well, averaged over all of the producing wells on a lease, could be vented or flared from development oil wells. This limit would be phased in over three years, starting with 7,200 Mcf in the first year. In the second year the limit would be 3,600 Mcf and then drop to 1,800 Mcf in the third and subsequent years.

BLM estimates that engineering compliance and other costs to industry from the proposed rule would be in the range of $117 to 161 million per year. These costs would be partially offset, however, by revenue from the sale of natural gas that would otherwise have been lost. It remains to be seen how much of a disincentive the new rule will be for drilling on public lands. Will the royalties from newly captured gas be more than the revenues lost due to operators deciding to drill elsewhere because of the new rule?

Comments on the proposed rule must be received by April 8, 2016.
The text of the proposed rule may be found at: https://www.gpo.gov/fdsys/pkg/FR-2016-02-08/pdf/FR-2016-02-08.pdf

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Western Energy Alliance and IPAA Move to Enjoin New BLM Fracking Rule

BLM’s new fracking rule is scheduled to take effect on June 24, 2015, but the Western Energy Alliance and Independent Petroleum Association of America moved for a preliminary injunction on May 15 to keep that from happening. They allege irreparable harm because the new rule lacks the factual, scientific, or engineering bases to sustain it. “BLM has neither substantiated the existence of problem this rule is meant to address, identified the gap in existing regulations the final rule will fill, or described the objectives the final rule will achieve.” Motion for Preliminary Injunction at 24.

And BLM’s new rule will cost a lot. BLM concedes that the additional cost will be at least $11,400 per well drilled on federal lands, but the Alliance and IPAA assert that the real extra costs per well, depending on particular circumstances, could be:
• $74,400 for using tanks instead of pits for storage of recovered fluids.
• $75,000 to $100,000 for extra mechanical integrity tests.
• More than $100,000 for obtaining more data on total dissolved solids (TDS), or $8,000 to $12,000 per well if sampling is done only on representative wells.
• $111,200 to run a cement evaluation log (this is BLM’s own estimate, but BLM states it will rarely be an additional burden required by the new rule).

Motion at 36, 38, 41, 48. Despite these significant economic burdens, "BLM has no evidence that its costly proposed rule will be any more effective in practice than existing state regulations protecting water and other environmental values.” Motion at 26.

In addition to the additional costs, the new rule would also cause its own negative environmental impacts by requiring greater use of the surface for water tanks. For example, a 150,000-barrel hydraulic fracturing operation may require approximately 2 acres of surface for a single pit, but 325 tanks used to hold the same water would take up almost 5 acres. Motion at 43.

The Alliance and IPAA conclude by arguing that implementation of the new rule should at least be delayed because their members would suffer irreparable harm and there is no urgent reason for the rule to take effect next month. BLM began work on the final rule in November 2010 and “has not identified a single groundwater contamination incident resulting from site preparation, drilling, well construction, completion, hydraulic fracturing stimulation, or production operations that the agency contends its final rules would have prevented.” Motion at 52. What is the rush?

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EPA Proposes Rule to Prohibit What Is Not Being Done

On April 7, 2015, EPA proposed a new rule to prohibit the discharge of wastewater pollutants associated with unconventional oil and gas (“UOG”) extraction to publicly owned treatment works (“POTWs”). Given that EPA is not aware that any UOG wastewater is currently being sent to any POTW, the rule is not expected to have much impact.
The deadline for comments on the proposed rule is June 8, 2015.
Link to EPA Fact Sheet:  http://water.epa.gov/scitech/wastetech/guide/oilandgas/upload/oilandgas-proposed-factsheet.pdf

The text of the rule in the Federal Register may be found at: http://www.gpo.gov/fdsys/pkg/FR-2015-04-07/pdf/2015-07819.pdf

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New BLM Fracking Rule

On March 20, 2015, after considering more than 1.5 million comments, the BLM released its much anticipated fracking rule for oil and gas wells on Federal and Indian lands.

More than 90 percent of all wells, including those on Federal and Indian property, are hydraulically fractured by injecting water, sand and chemicals under high pressure to stimulate the flow of oil and gas. Due to increased public concern over fracking, the rule imposes new requirements for assurance of wellbore integrity, management of flowback fluids, and disclosure of chemicals. The rule requires:

• Before fracking, operators have to perform a successful mechanical integrity test showing that the well can withstand at least the maximum anticipated pressure for 30 minutes with no more than a 10 percent loss of pressure.
• All flowback fluids from fracking must be stored in above-ground tanks. A lined pit may be used instead only if a tank would be infeasible and numerous conditions are met, including being at least 300’ from any stream and 50’ from any usable groundwater.
• Chemicals used in fracking have to be disclosed publicly within 30 days of the last stage of fracking for each well. This information must be certified and submitted “through FracFocus or another BLM-designated database, or in a Subsequent Report Sundry Notice.”

The rule allows operators to request a variance from particular requirements if “the proposed alternative meets or exceeds the objectives of the regulation for which the variance is being requested,” but the “decision whether to grant or deny the variance request is entirely within the BLM’s discretion” and may be rescinded or modified at any time. Various states, including Colorado, Wyoming and North Dakota, are considering whether they might be able to opt out of at least parts of the new rule because their own standards are so strict. BLM Director Neil Kornze told a House Natural Resources subcommittee on March 24 that he is looking at whether variances are warranted for Wyoming and other states and would like to reach those determinations before the 90-day effective date of the rule.
The same day that the BLM initially released the new rule, March 20, 2015, the Western Energy Alliance and Independent Petroleum Association of America filed suit in Federal court in Wyoming to challenge the rule for being unnecessary, overly burdensome and duplicative of environmental regulations and paperwork already required by state regulatory agencies.

The final rule was published in the Federal Register on March 26, 2015. 80 Fed. Reg. 16128. Unless legal challenges are successful, the new fracking rule will take effect on June 24, 2015.

Link to BLM announcement of fracking rule:  http://www.blm.gov/wo/st/en/info/newsroom/2015/march/nr_03_20_2015.html

The text of the rule in the Federal Register may be found at: http://www.gpo.gov/fdsys/pkg/FR-2015-03-26/pdf/2015-06658.pdf

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