California sets new rules for hydraulic fracturing

Robert L. Falk,
Morrison & Foerster LLP

In late September, California Governor Jerry Brown signed SB 4, legislation regulating hydraulic fracturing and acid matrix well stimulation practice within the state. He was aided by State Senator Fran Pavley, author of California's controversial greenhouse gas law. The governor steered the bill through California's legislature this summer, despite criticism from environmental groups and the oil and gas industry alike.

The bill contains extensive notification and disclosure requirements for frac jobs, acidization operations, and for fluids. In addition, the bill also requires oil and gas well operators to obtain and comply with permits for these applications. SB 4 is an alternative to the moratorium that was called for while the State of California awaits the outcome of a required study focusing on the potential environmental and social impacts of hydraulic fracturing.

The bill heavily regulates the procedure, and it is likely that the intent of the law is to ensure that hydraulic fracturing and acidization can be deployed to tap large petroleum reserves trapped in Monterey shale formation providing royalties and tax revenues to the Golden State in the future. California's 1,750 sq. mile Monterey shale formation has been estimated to contain up to 15.4 billion barrels of potentially recoverable oil, which represents two-thirds of the United States' reserves, according to the US Department of Energy.

Previous rules

Hydraulic fracturing has been deployed within the state by which operators provide notice of intent to commence drilling operations to the State Department of Conservation's Division of Oil, Gas, and Geothermal Resources. If no response was provided within 10 working days, the operator could assume approval and begin operations. Companies were not required to provide chemical disclosures for fracing and/or acidization-related fluids were not required, nor were they required to conduct groundwater monitoring. Without affirmative agency approvals, the State's California Environmental Protection Act (CEQA) requirements were often not triggered. Where approvals were required, CEQA was addressed through the application of categorical exceptions for minor alterations of land, negative declarations of impact, or mitigated negative declarations rather than full and potentially litigious environmental impact assessment reports (EIRs).

New Requirements

Under its new law, California will quickly – within approximately a year – develop and implement a fairly comprehensive program to much more closely regulate, permit, and monitor hydraulic fracturing and acidization applications deployed within the State. These regulations will include, among other things:

    • updated well and well casing integrity standards and other requirements to ensure the geologic and hydrologic isolation of the oil and gas formation during and following well stimulation treatments,

    • requirements for full disclosure of the composition and disposition of well stimulation fluids, and

    • requirements for baseline and follow-up water testing when requested by nearby property owners.

Most significantly, beginning in 2015, well operators who wish to perform well stimulation treatments will need to apply for and obtain a permit from the Division of Oil, Gas, and Geothermal Resources prior to commencing fracing or acidization jobs. The permit will specify the following:

    • an authorized time period for stimulating specific wells at specific locations (not to exceed one year);

    • the estimated length, height, and direction of induced well fracture;

    • the chemical compositions of the stimulation fluids to be used in the treatments;

    • a water management plan (including specifying water quantity and source);

    • the location of existing drinking water and other wells that may be impacted and associated groundwater monitoring requirements; and

    • an estimate of waste water and other waste material quantities and associated disposal methods.

The law will also require pre-permit issuance notifications to regional water quality control boards and local government planning entities and the posting of the permit on a website, in addition to mandating its actual provision to owners, tenants, and neighbors of the property at which fracing or acidization will occur. Property owners will further be empowered to demand water quality sampling and testing on their properties at the well operator's expense. Following the completion of the fracing or acidization operation, the well operator will also have to quickly post information on the internet concerning the stimulation fluid's composition (include chemical abstract numbers of its constituents) and disposition, along with the results of its groundwater monitoring and water quality testing program.

Controversial aspects

Two of the most controversial aspects of the new fracing law involve provisions concerning trade secret protection and CEQA. Manufacturers of well stimulation fluids can claim trade secret protections but must nevertheless provide the subject confidential information to the Division of Oil, Gas, and Geothermal Resources, which must disclose it after a receipt of a request if the manufacturer fails to obtain a court order prohibiting its release within 60 days. Even if a court order is issued, the trade secret information can still be shared with other government officials or contractors, health professionals, and toxicologists and epidemiologists employed in the field of public health. Moreover, the identities of the chemical constituents and additives, their concentrations in the stimulation and blowback fluids, and pollution monitoring data all fall outside of the scope of trade secret protection that may even be claimed by the manufacturer in the first instance.

The other highly controversial provision of California's fracing law involves CEQA, a statute that has often been used by environmental, labor, and neighborhood groups to delay development projects they oppose through the use of lengthy and expensive state court proceedings which often cause the project sponsor to give up. More specifically, SB 4 gives the Division of Oil, Gas and Geothermal Resources until July 1, 2015 to complete an EIR on the possible impacts of well stimulation in the State, creating what environmental groups fear is "a window" of opportunity to frac as much as they can without impact analysis, mandatory permits, or an associated potential check through citizens' lawsuits in the interim.

Initially, environmental groups attempted to stall operating companies by adding requirements to the new fracing law making it necessary to develop and obtain certification of an EIR for each well or small set of wells to be completed. Hence, each new well would require environmental impacts to be analyzed separately for each new permit issued and made subject to costly legal challenges and mitigation requirements. Instead, it seems likely that, when "the window" closes and CEQA compliance becomes necessary to proceed with hydraulic fracturing, the EIRs that will be developed will be programmatic and will cover all well stimulation practices that may be considered by the Division of Oil, Gas, and Geothermal Resources in issuing the newly required State permits.

Local or regional governments may attempt to get out ahead of the Division of Oil, Gas, and Geothermal Resources by locally adopting programmatic EIRs for hydraulic fracturing operations when they issue land use approvals for new operations. Kern County, home of approximately 80% of California's drilling operations, recently launched efforts to adopt a programmatic EIR in conjunction with fracking-related amendments of its drilling ordinances.

Looking ahead

Neither environmental groups or the oil and gas industry may be satisfied with California's new fracing bill, but the Golden State will be moving ahead relatively rapidly with regulating hydraulic fracing and acid matrix well stimulation practices. Permits, disclosures, notifications, monitoring, and reporting will all be required, as will some form of environmental impact analysis. The new requirements will allow fracing to continue in California, both in the near term while the new regulatory program is developed, and in the longer term once the law takes effect. Absent federal regulation, which currently appears unlikely, all eyes may again turn to California as the nation's leading laboratory of both innovation and environmental regulation.

Robert Falk is a partner in Morrison & Foerster's Energy and Environment practice group. He previously chaired the American Bar Association's Standing Committee on Environmental Law and is a member of the advisory board of the California Center for Law Energy and the Environment.

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