Environmental groups lose court challenge over fracking water use

The British Columbia Supreme Court has dismissed a legal challenge to decisions of the B.C. Oil and Gas Commission (OGC) to grant successive, short-term approvals to EnCana Corporation to withdraw fresh water from B.C.'s lakes, rivers and streams for use in hydraulic fracturing operations. Under B.C.'s Water Act, all surface water is owned by the government and diversions are only allowed pursuant to a two year approval or a long-term license. A two year approval application is subject to less regulatory scrutiny than a long-term license application, and does not require the same public notice requirements.

The OGC granted various two year approvals to EnCana. The Western Canada Wilderness Committee and the Sierra Club filed a petition in the Supreme Court seeking to vacate the OGC's decisions to issue successive, two year approvals for water withdrawals from the same source. The petitioners claimed that although no one approval was for more than two years, multiple approvals were granted back to back over multiple years to EnCana for the same purpose and for diversions at the same locations, thereby effectively violating the two year term limit. The petitioners said that the OGC should have required EnCana to apply for long-term licenses instead of successive two year approvals.
The Court found that the Water Act did not prohibit the OGC's practice and deference should be given to the OGC in how it manages the issuance of approvals and licenses. The Court dismissed the claim.

This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713 651 3662) and Alan Harvie (alan.harvie@nortonrosefulbright.com or +1 403.267.9411)from Norton Rose Fulbright's Energy Practice Group.

The New York Court of Appeals rules on local ban on fracking

The New York Court of Appeals recently denied an energy company’s motion for rehearing in Matter of Wallach v. Dryden. Matter of Wallach was a consolidated appeal in which the court heard challenges to local fracking bans enacted in the Towns of Dryden and Middlefield. The parties challenging the bans argued that the local laws were preempted by state law.

The court held that the Oil, Gas and Solution Mining Law (OGSML) did not preempt local bans on hydraulic fracturing. The court reasoned that the towns had authority to enact the zoning laws banning fracking under the doctrine of home rule. In the court’s view, the OGSML only regulated oil and gas operations. Although the local laws would impact hydraulic fracturing, the court concluded that the ordinances were focused primarily on zoning and, thus, not preempted.

In its motion, the energy company relied on several cases in Colorado holding that state law preempted similar local fracking bans. A court in West Virginia has also found that state law precludes a city from prohibiting hydraulic fracturing. The energy company’s position was that the precedential value of Matter of Wallach is limited. The parties challenging the ban in Middlefield did not file a motion for rehearing.

This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713 651 3662) and Johnjerica Hodge (johnjerica.hodge@nortonrosefulbright.com or 713 651 5698) from Norton Rose Fulbright's Energy Practice Group.

Proposed class action filed in Illinois state court challenging denial of fracking permits

Amy Pollard and a number of mineral rights owners have filed a proposed class action against the state of Illinois in the Circuit Court for the Second Judicial Circuit of Illinois. Plaintiffs allege that Illinois’s refusal to grant fracking permits violates their rights under the Fifth Amendment of the United States Constitution as well as their rights under the Illinois constitution. Specifically, Plaintiffs argue that the state’s conduct constitutes an unconstitutional taking without just compensation.

Although Illinois law permits fracking, the state has failed to issue regulations governing fracking permits. Oil and gas operators have therefore been unable to obtain drilling permits. Plaintiffs allege that their mineral rights are worthless without a permit because they cannot receive any royalties until drilling commences. In the complaint, Plaintiffs state that mineral rights owners have already leased thousands of acres to oil and gas operators.

Plaintiffs request attorney fees and at least $50,000 in damages for each member of the class. The class is limited to owners of mineral rights in the New Albany Shale formation in Wayne County. Plaintiffs estimate that the class could ultimately include more than one thousand mineral rights owners.

Pennsylvania bill requiring monthly reporting of natural gas production heads to the Governor

On October 15, 2014, Pennsylvania legislators approved a bill that would require monthly reports of natural gas production from wells in unconventional formations. Operators of such wells are currently required to report natural gas production to the Pennsylvania Department of Environmental Protection on a semi-annual basis.

The legislative impetus to approve the bill may be connected to recent royalty complaints. In particular, one operator has come under increased scrutiny from the Governor, who recently called on the state’s attorney general to investigate allegations of royalty underpayment. Complainants have also filed suit against the operator regarding those allegations.

However, the monthly-reporting bill has another logical basis: landowners are paid royalties on a monthly basis, so monthly production reports could help serve as a way for those landowners to verify that their royalty payments match the actual production of natural gas. Thus, even for operators, the bill may have some benefits if it increases landowner confidence that the operators are properly compensating them for the use of their land and mineral resources.

Do UK regulatory changes signal large-scale shale gas exploitation?

The 14th onshore licensing round closes on October 28, 2014 for both conventional and ‘unconventional’ oil and gas exploration, including shale gas. The UK Department of Energy and Climate Change (DECC) expects about 50-150 unconventional licences to be awarded in the round.

There is general consensus across industry and Government that a more streamlined regulatory regime and improved land access rights would facilitate shale gas projects. DECC has recently considered proposed changes regarding land access and sub-surface rights to reduce barriers to shale gas development in the UK.

Petroleum Exploration and Development Licences (PEDLs) allow companies to pursue a range of activities involving energy reserves, including unconventional gas, subject to necessary drilling/development consents and planning permission. Some companies drilling mainly for conventional oil and gas are now drilling deeper than they might have to investigate the shale potential in their licenced areas (“coring” is foreseen in these cases but no fracking is currently involved).

Changes in planning permissions

Proposals for shale gas exploration or extraction (like all other reserves) are subject to approval by the Minerals Planning Authority (MPA) for the area where the reserve is located. Since January 2014, the requirement to notify individual owners and tenants of land where only underground operations will take place has been removed; only those where aboveground work is planned must be served notice.

In addition, although “material considerations” may be allowed in planning permission decisions, the Supreme Court held that issues such as loss of property value, loss of view and opposition to the principle of development are not “material” considerations. The MPA local planning authorities also have greater freedom to act on oil and gas extraction projects than they normally would because the Government excluded these projects from the aegis of the National Planning Policy Framework, the major infrastructure planning regime in the UK.

Proposed land access reforms

In the 2010 landmark Bocardo case[1], the Supreme Court found that an oil and gas company had committed trespass by drilling and installing pipelines under the landowner’s land, even though the deepest well was 2,800 ft below the surface.

The case confirmed that any activity on or under a landowner’s land, even deep underground, will constitute trespass. Under the current regime, coming to an agreement for access with multiple landowners or pursuing so-called ancillary rights under statutory law, can cause long delays. The Government’s proposed changes include:
  • granting automatic underground access rights to shale gas operators for horizontal drilling at least 300m below the surface;
  • a voluntary community payment of £20,000 for each unique horizontal well that extends more than 200m laterally (for projects benefitting the community);
  • public notification of drilling proposals and details of the voluntary payment.
The proposal does not apply to any work above 300m depth; therefore, access for the drilling pad itself will be subject to negotiation with the landowner or the ancillary rights regime.

Still it appears that legislation will be put before Parliament to implement a more streamlined system and rights of access. With the exploration licenses expected in the current licensing round, the outlook is positive for greater shale gas exploration and production in the UK.

[1] Bocardo SA v Star Energy [2010] UKSC 35

This post was written by Lucy Bruce Jones (lucy.brucejones@nortonrosefulbright.com or +44 20 7444 5159) from Norton Rose Fulbright's Energy Practice Group.

Revisions to proposed fracking regulations in California

California recently circulated its third version of S.B. 4., a bill passed last year that sets forth rules regarding well stimulation operations. The California Department of Conservation’s Division of Oil, Gas and Geothermal Resources received over 100,000 comments from the public regarding the first version of S.B. 4. The second version of the bill also received a significant number of comments.

The third version of the bill features several changes from the previous versions. For example, the threshold for reporting seismic activity occurring near wells has been increased to require a magnitude of at least 2.7. In addition, whereas well operators initially had to apply for a water permit before applying for a fracking permit, operators may now apply for both permits simultaneously. The twenty-day deadline for requesting water quality testing has also been amended to permit residents to request testing irrespective of whether twenty days have passed since the resident received notification that well stimulation would occur. If the twenty-day period has passed, however, the resident would be responsible for paying for the testing.

Multiple groups have expressed displeasure with the bill. Some environmentalist groups have argued that the state should not permit fracking. Even members of the oil and gas industry have noted that aspects of the bill are problematic. The public has fifteen days to submit any comments on the bill.

Read S.B. 4.

This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713 651 3662) and Johnjerica Hodge (johnjerica.hodge@nortonrosefulbright.com or 713 651 5698) from Norton Rose Fulbright's Energy Practice Group.

DOJ and Pipeline Operator spar over the proper way to calculate a Clean Water Act penalty

On October 8, 2014, the U.S. Department of Justice (the “DOJ”) filed a motion regarding the proper way to calculate a Clean Water Act (“CWA”) penalty.  The dispute turns on whether the penalty for a prohibited discharge of oil should be based simply on the amount of oil discharged or instead on the amount of discharged oil that makes its way into a navigable body of water.  In its motion, the DOJ argues that the plain language of the CWA calls for penalties based on the amount of oil “discharged” without any requirement that the oil reach a navigable body of water.  The pipeline operator has previously argued in court filings that such a measure improperly extends the CWA beyond its terms and would represent a Congressional overstep of the Federal government’s Commerce Clause authority.

While at its heart the dispute is a matter of statutory interpretation and constitutional law, its result may well have major impacts on the rest of the litigation.  If the court determines that the DOJ’s reading of the CWA is correct, proving the amount of oil discharged may not be too complicated.  The DOJ could prove the amount by, for example, showing the volume of oil pumped into the pipeline and the volume of oil that reached its intended destination, with the difference approximating the amount of oil discharged.  However, if the court follows the pipeline operator’s reading of the CWA, the DOJ will likely be presented with significant evidentiary challenges, because once the oil was discharged, it likely dispersed in complex, difficult-to-track ways.

The dispute is currently before the U.S. District Court for the Eastern District of Arkansas.

This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713 651 3662) and Jim Hartle (jim.hartle@nortonrosefulbright.com or 713 651 5695) from Norton Rose Fulbright's Energy Practice Group.