Fracing faces legal and regulatory challenges in 2014

Wayne D'Angelo
Andrew McNamee
Kelley Drye & Warren
Washington, DC

Last year was an eventful one for hydraulic fracturing. Use of the completion technology helped to dramatically boost US oil and gas production—tight oil production from the Bakken and Eagle Ford formations alone increased by 700,000 b/d during the year, and gas production from the Marcellus shale jumped to 13.5 bcfd.

Alongside this historic production growth came employment growth, a resurgence of domestic energy-dependent and energy-intensive industries, and historic energy-driven declines in the US trade deficit. While domestic development and industrial activity increased dramatically in 2013, the increased use of natural gas helped lower the carbon footprint of the US below standards set by the Kyoto accords that were previously considered unattainable by many.

Notwithstanding these economic and environmental benefits, 2013 was also an eventful year for hydraulic fracturing legislation, regulation, and litigation. The federal government continued to pursue regulation on federal lands and for air emissions, while various environmental groups continued to petition for even more regulation.

Numerous states, like Wyoming, North Dakota, and Alaska, continued to update their hydraulic fracturing regulations while other states, like Illinois, passed sweeping new regulations. State ballot measures restricting the use of the completion technique were passed in several Colorado municipalities (Boulder, Broomfield, Fort Collins, and LaFayette) but were rejected in a pair of Ohio municipalities (Bowling Green and Youngstown). Other municipal preemption actions were litigated in New York, Pennsylvania, West Virginia, and elsewhere. New infrastructure was proposed to bring the rising oil and gas produced from unconventional reservoirs to market, and many of these proposals met challenges from environmental groups. The first applications for LNG export were approved by the Department of Energy, and a discussion of the potential for crude oil exports was started for the first time in decades. Legislation of all kinds was proposed in Congress and in state houses across the country—particularly in California.

Given 2013's widespread and transformative changes, it is difficult to predict precisely what 2014 will bring. It is, however, possible to identify some of the key regulatory and legal issues facing the hydraulic fracturing industry—and the states where those issues principally will play out in 2014.

Municipal preemption

The ability of localities to regulate (and ban) oil and gas development is a hotly debated issue. State regulators generally favor implementation of comprehensive statewide regulations. Industry similarly prefers compliance with a single regulatory structure versus a patchwork of local regulations. Some municipal and environmental groups, however, believe that oil and gas development is inherently dirty and dangerous—particularly when hydraulic fracturing is utilized. As such, these groups are increasingly challenging portions of state oil and gas law that preempt local regulations banning hydrocarbon development. In the final days of 2013, Pennsylvania's highest court sided with a handful of municipalities and struck down portions of the Commonwealth's oil and gas law, Act 13, which preempted municipal regulations from constraining oil and gas development. This decision set the stage in 2014 for a continuing fight in Pennsylvania, and similar preemption debates in other states such as Colorado, Ohio, and New York.

In 2014, we expect the Pennsylvania decision to be cited extensively, though perhaps not always effectively, by preemption litigants in other states. State court decisions may be persuasive but are not legally binding on other states. Further, the Pennsylvania decision was based on particular language in Act 13, the Commonwealth's Constitution, and a nuanced application of the seldom cited "public trust doctrine." Courts looking at the preemption issue in other states will need to examine, and base their decisions on, their own state laws—perhaps with very different results. At the same time, lawmakers in other states that are interested in preserving uniform state oil and gas laws will use the Pennsylvania decision to ensure their preemption language is as strong as possible to avoid a successful municipal challenge.

Chief among the preemption actions to watch in 2014 is the fight between the city of Munroe Falls and the state of Ohio over whether Munroe Falls can ban drilling on private property in city limits. Ohio's oil and gas law has some of the strongest preemption language in the country and has already been upheld by an Ohio appellate court. Munroe Falls' appeal will be heard by the Ohio Supreme Court this spring.

Methane regulation

In November 2013, Colorado Gov. John Hickenlooper's (D) administration proposed the nation's first state regulation of methane emissions from oil and gas operations. Methane, a greenhouse gas, is already controlled federally under the Clean Air Act, and Colorado's proposal to add state regulation of methane emissions is unique.

While some in industry have welcomed the proposed regulations, others have expressed concern about the costs of the detection and control systems, the futility of regulating global climate change on a single-state level, and the need to inflexibly force specific controls on companies that already have financial incentives to capture methane. It remains to be seen whether Colorado will create a regulatory precedent that can be adopted in other states or will overstep the bounds of state regulation. The rulemaking process for this proposal will be among the most closely watched in 2014.

New York ban

New York state's ban on high volume hydraulic fracturing will enter its sixth year in 2014. The New York ban is the most closely watched in the country because of its duration and because, unlike other states with bans, New York is sitting on a great deal of shale gas.

While the long-awaited decision by New York Gov. Andrew Cuomo (D) to either extend or lift the state's de facto moratorium on hydraulic fracturing is supposed to be made in 2014, the same was said in 2013—and 2012. The fate of hydraulic fracturing continues to be postponed until the state health commissioner completes a seemingly boundless review of the potential health implications of hydraulic fracturing.

In November 2013, Gov. Cuomo affirmed that he expected the health study to be completed before his November 2014 gubernatorial election. However, in December 2013, he hedged that he would continue to defer to the health commissioner's deadline. Predicting the fate of hydraulic fracturing in New York is always difficult. In an election year, it is impossible. At best, we can predict that, in 2014, New York will remain a key focal point of the highly visible and increasingly passionate debate over America's domestic energy future.

The authors

Wayne D'Angelo is special counsel in the Energy Practice at Kelley Drye & Warren and Andrew McNamee is a government relations professional at the agency. Kelley Drye's regulatory team helps companies navigate environmental and regulatory pressures faced by the energy industry. The agency's government relations team has experience representing conventional and alternative energy producers, as well as retailers and energy consumers in a variety of industries. The agency has presented a broad range of energy policy matters before Congress and the executive branch for a variety of clients, including large oil and gas companies, a coalition of start-up renewable energy producers, and energy-intensive manufacturers.