John D. Furlow
Mayer Brown LLP
Since 2010, more than 20 states have adopted new laws or regulations specific to hydraulic fracturing, a technology that, along with horizontal drilling, has given exploration and production companies the ability to more economically tap into the US's vast unconventional hydrocarbon formations.
This article addresses the draft regulations and interim emergency regulations recently published by California's Division of Oil, Gas, and Geothermal Resources (DOGGR) to implement California Senate Bill 4, legislation designed to bring additional regulation and oversight to oil and gas operations involving "well stimulation treatments," such as hydraulic fracturing.
Less than 2 months after Gov. Jerry Brown signed SB 4 into law on Sept. 20, 2013, the DOGGR announced an aggressive implementation plan for the new law. On Nov. 15, 2013, the DOGGR published draft regulations for public comment. Then, on Dec. 11, 2013, the DOGGR published emergency regulations for the interim period. The emergency interim regulations took effect on Jan. 1, 2014, and will run until final rules are adopted.
The DOGGR's Nov. 15, 2013 notice began the formal rulemaking process and marked the beginning of a 60-day public comment period. Comments are due to the Department of Conservation by Jan. 14, 2014. The DOGGR also plans to hold five public hearings in different parts of the state.
Senate Bill 4 requires the adoption of finalized rules by Jan. 1, 2015, and the DOGGR anticipates the rulemaking process will take 1 year to complete.
Expanding on SB 4
While the proposed regulations generally track the requirements of SB 4, they do expand the regulatory requirements in a few notable areas. The proposed regulations add a new article, "Art. 4. Well Stimulation Treatments," to Subchapter 2 of Chap. 4 of Division 2, Title 14, California Code of Regulations. The proposed regulations also add a new Sec. 1751 to Art. 1, and a new Sec. 1761 to Art. 2 in the same subchapter of Chap. 4.
The unique notice requirements in SB 4 are extended in the proposed regulations. SB 4 requires the operator to provide notice to the DOGGR at least 72 hr prior to the actual start of a well stimulation treatment. The proposed regulations expand on this requirement by requiring the operator to provide DOGGR with notice confirming that the treatment is proceeding 3 hr in advance of the treatment.
Senate Bill 4 requires the operator to provide a copy of the approved well stimulation treatment permit to specified tenants and property owners at least 30 days prior to commencing the treatment. The proposed regulations clarify that a "tenant" is "a person or entity possessing the right to occupy a legally recognized parcel, or portion thereof, by way of a valid written agreement." The proposed regulations also require the operator to hire an independent third party to deliver this notice. In turn, the third party must then provide the DOGGR with information about to whom and how the notice was provided. These details surrounding this process were not included in SB 4.
The proposed regulations governing the application for a permit to perform a well stimulation treatment are consistent with SB 4. They do, however, require disclosure of a few additional items, such as an evaluation of the cement job and a radius analysis.
The proposed regulations governing public chemical disclosure are also generally consistent with the requirements in SB 4, with one notable exception: namely the requirement in §1789 that the operator disclose whether an earthquake of magnitude 2.0 or greater has occurred in the area of the well stimulation treatment radius analysis since the treatment was performed. If adopted, this would make California's disclosure rules unique among the approximately 20 states that have adopted disclosure regulations to date.
The proposed regulations require a few things that SB 4 did not. These include: specific, largely technical requirements for the evaluation of the cement job and pressure testing prior to the well stimulation treatment; monitoring during treatment operations; monitoring after treatment operations; when a treatment must be terminated; when a well must be shut in; and the storage and handling of well stimulation fluids.
Defining well stimulation
As one might expect, the proposed regulations provide a more narrow, specific, and technical definition of "well stimulation treatment" than SB 4. The proposed regulations replace "any" with "a" in the following sentence: "any treatment of a well designed to enhance oil and gas production or recovery by increasing the permeability of the formation." The definition in the proposed regulations also adds another qualifying sentence that is not included in SB 4, that a "[w]ell stimulation is a short term and non-continual process for the purposes of opening and stimulating channels for the flow of hydrocarbons." In addition to the activities expressly exempted in SB 4, the definition in the proposed regulations adds that "the removal of scale or precipitate from the perforations, casing, or tubing; or a treatment that does not penetrate into the formation more than 36 inches from the wellbore" do not constitute well stimulation treatments. The proposed regulations impose a temporal limit as well, providing that a well stimulation treatment "commences when well stimulation fluid is pumped into the well, and ends when the well stimulation treatment equipment is disconnected from the well."
Moreover, the proposed regulations distinguish between well stimulation treatments and "underground injection projects" (defined as "sustained or continual injection into one or more wells over an extended period in order to add fluid to a zone for the purpose of enhanced oil recovery, disposal, or storage"). The proposed regulations also state that Article 4 does not apply to acid stimulations treatments that use an acid concentration of 7% or less, a distinction not made in SB 4.
All together, these provisions bring an essential clarity to the regulations that will make their implementation and enforcement consistent with intent of SB 4.
The proposed regulations significantly expand the requirements that the DOGGR originally outlined in its prerulemaking regulations published earlier in 2013 but never adopted. For example, the proposed regulations have a broader application than the DOGGR's prerulemaking regulations, as the new proposed regulations apply to "well stimulation treatments" while the prerulemaking regulations, if they had been adopted, would have only applied to hydraulic fracturing treatments, a narrower subset of that category. Following SB 4, the proposed regulations also include significantly more regulatory requirements than the prerulemaking requirements, such as the notice that must be provided to landowners and tenants.
While the proposed regulations incorporate many of the regulatory concepts included in the prerulemaking regulations, the two sets of regulations look very different. The proposed regulations incorporate a lot of the text included in SB 4. The proposed regulations do, however, incorporate some of the language used in the prerulemaking regulations in key areas, including the requirements for casing, cementing, radius analysis, pressure testing, zonal isolation, storage and handling of fluids well monitoring, and well testing.
Overall, the DOGGR's proposed regulations closely follow SB 4, although they do incorporate some of the language and many of the concepts used in the DOGGR's prerulemaking regulations.
Interim rules in effect
Following the publication of the notice of rulemaking for these regulations contemplated by SB 4, the DOGGR published a notice of proposed emergency rulemaking on Dec. 11, 2013, accompanied by the text of proposed interim regulations. The comment period was short, ending 5 days after publication. Moreover, the DOGGR is not required to respond to comments.
The DOGGR notice says interim regulations are required because of its finding that emergency regulations are "necessary for the immediate preservation of the public peace, health and safety, or general welfare." The finding of an emergency is based on an express grant of authority in California Public Resources Code Section 3161(b)(6) that refers to emergency authority during the period prior to the adoption of regulations, as well as the practical issues of implementing the other provisions of SB 4 that will be in effect commencing in 2014.
SB 4 does not impose a moratorium on well stimulation during this interim period but instead requires issuance of a permit by the DOGGR based on certification by the applicant of certain matters. This self-certification and permit process requires a set of definitions and standards that are established by the interim regulations.
In addition, the interim regulations provide detailed guidance concerning the notices to the DOGGR and notices to neighbors, as well as interim model groundwater monitoring criteria.
In summary, the interim regulations, which took effect on Jan. 1, 2014, are intended by the DOGGR to implement the "interim grace period from Senate Bill 4's permitting requirement" during 2014. The stated goal is to provide certainty and clarity for industry in order to permit hydraulic fracturing and other well stimulation to take place based on the self-certification process while SB 4 is more fully implemented.
Kevin Shaw is a partner at the global legal services firm Mayer Brown, with a focus on natural resources and energy law.
John D. Furlow is an associate in Mayer Brown's Global Energy and Corporate & Securities practices.