Fracing Focus Shifts To Water

Within the past two years, hydraulic fracturing and its alleged impact on groundwater quality have received increasing scrutiny from landowners, the media, Congress, and state and federal regulatory agencies. While critics initially focused on the chemical content of fracing fluids and the impact of those chemicals on water quality, severe droughts in the southwestern U.S.—and water shortages in other parts of the country—have compelled critics to expand their focus to the large quantities of water used during fracing.

Fracing fluids are generally comprised of 85% to 99.5% water, according to the U.S. Department of Energy. In areas such as the Barnett shale, the Texas Water Development board has reported that three to four million gallons of water are needed to fracture a single well. In response, oil and gas lessees should include lease provisions accounting for water quality and quantity issues.

Since August 2009, approximately 40 lawsuits complaining of alleged groundwater contamination have been filed by landowners in Arkansas, Colorado, Louisiana, New York, Pennsylvania, Texas and West Virginia against oil and gas operators, owners, and drilling companies. Initially, all the plaintiffs in these suits were either individual landowners who leased oil and gas rights to defendants, or individual landowners who reside near fracing operations.

More recently, however, a number of plaintiffs have sought class certification. Further, the Environmental Protection Agency (EPA) and state and local governments have initiated enforcement actions. In some cases, defendants are defending against private landowner suits and government suits simultaneously.

Notably, most of these cases are still in the early stages of litigation, and we have not located any judgment to date against a well operator, drilling contractor or service company for contamination resulting from fracing. The claims in these cases are generally negligence, nuisance, strict liability, and trespass, with complaints focusing on groundwater contamination. A number of cases also focus on permit restrictions.

Recent developments

In addition to congressional directives and proposed regulations by the EPA, more than 30 states have enacted or proposed rules that affect fracing activities. (This count incorporates general regulations that expressly include fracing, as well as specific fracing regulations.) Nine of those states have established or proposed new regulations since June 2011: Michigan, Montana, Louisiana, New York, North Dakota, Idaho, New Mexico and, most recently, Texas and Colorado. Michigan, Montana and Louisiana issued their regulations, effective during the summer and fall of 2011, joining Arkansas, Wyoming, and Pennsylvania as states that specifically address fracing.

The new regulations require specific disclosures by operators, and outline requirements for construction, operation and continued monitoring of fractured wells. Regulations in New York and North Dakota are currently open for public comment. Here’s a quick summary.

Michigan. New regulations became effective in June 2011. Under the regulations, both the amount of water used and the chemicals added to the water are monitored. As to the latter, well completions for high-volume fracing must include a Material Safety Data Sheet and the volume used for all additives. High-volume fracing is defined as an operation that is intended to use more than 100,000 gallons of fracing fluid.

For monitoring water usage, additional regulations apply to wells with large-volume water withdrawals (a cumulative total over 100,000 gallons per day). For such wells, permit applications must include a water-withdrawal evaluation; the proposed total volume of water needed; the number of water-withdrawal wells, their locations, depth, and proposed pumping rate and frequency; any freshwater wells within 1,320 feet; and the location and dimensions of proposed freshwater pits.

A monitor well must be installed if there is a freshwater well within 1,320 feet. It must be monitored daily during water withdrawal and weekly thereafter. During the withdrawal process, injection pressures must be recorded. Upon well completion, records and charts showing fracturing volume, rates, and pressures and the total volume of flowback water must be included in the record of well completion.

Current wells, in the Antrim shale, are shallow and typically use only 50,000 gallons of water in the fracing process. The regulations were implemented in anticipation of oil and gas development of the Utica shale, a deeper formation that would require much larger volumes of water.

Montana. New regulations became effective in August 2011. Operators must include the volumes and types of materials to be used in applications for permits. Principle components or chemicals must be identified by trade name or generic name. When completing a well, fracturing operators must disclose the amount and types of chemicals used, including the additive types and chemical ingredient names. Operators can qualify for trade-secret exemptions, which still requires disclosure of the quantity of the chemical to be used. Applications for permits must include the processes to be used and the maximum anticipated treating pressure.

The regulations also lay out specific structural and operational requirements. Wells undergoing fracturing must also have a pressure relief valve and a remotely controlled shut-in device. Before stimulation, these wells must undergo a casing-pressure test. During the casing test, the maximum anticipated pressure must be applied for 30 minutes without the well losing more than 10% of the pressure.

Additionally, during operations, the annular space must be monitored. Upon well completion, operators must describe the interval or formation treated and the amounts of maximum pressure during treatment.

Louisiana. Under the new regulations, effective October 21, 2011, upon well completion operators must disclose the types and volumes of the fracing fluid, a list of additives including trade names and suppliers, CAS numbers for hazardous chemicals, and maximum ingredient concentrations. The rule provides for trade-secret protection; only the chemical family must be disclosed.

New York. In September 2011, New York released proposed regulations outlining permit and operations requirements for fracing using more than 300,000 gallons of water cumulatively. Operators must follow requirements, in addition to the application process for a normal drilling permit, as well as comply with State Pollutant Discharge Elimination System (SPDES) and Stormwater Pollutant Prevention (SWPP) plans.

To obtain a permit for fracing, operators must provide the minimum and estimated maximum depths; the proposed volume of water and source of the water; distances from certain types of water supplies; identities of nearby abandoned wells; the engines and fuel to be used and air-emission-control measures; and information on blowout-preventer measures. The regulations also contain detailed requirements for setbacks, water and pressure testing, casing structure, and construction, including site preparations and maintenance.

SPDES and SWPP plans require that operators disclose particular information and submit plans aimed at preventing water contamination and sediment erosion. They must disclose the proposed additives and proposed volume of each additive; the proposed percent of water, proppants and each additive product; and documentation showing that the proposed additives have reduced aquatic toxicity and pose a lower potential risk to water resources and the environment than available alternatives. The rules offer trade-secret protection.

To prevent water contamination and sediment erosion, operators must continually monitor well activity, such as stormwater discharges, water usage, and flowback and produced water volumes. They must have certification for planned disposal methods, secondary-containment measures, spill-prevention plans, and methods to store flowback water. In December 2011, the New York Department of Conservation extended the closing date for the public comment period from December 12, 2011, to January 11, 2012.

North Dakota. In September 2011, North Dakota proposed new regulations for fracing as part of a larger set of proposed regulations. Under the proposed rules, companies that do not use a fracturing string inside the intermediate casing string must disclose the fracturing-fluid composition, including the trade name, supplier, ingredients, chemical abstract number, and the maximum ingredient concentrations of all additives and the fluid. No disclosure is required for wells that use a fracturing string.

The proposed rules also outline specific safety systems that operators must use, including pressure-relief valves, diversion lines, and remote operated fracturing valves. Reports indicate that on December 20, 2011, North Dakota Governor Jack Dalrymple delayed the full set of regulations over concerns that the waste-disposal rules were too vague and do not provide enough regulatory guidance to oil producers, according to an article by Dale Wetzel in Business Week. The North Dakota Industrial Commission was expected to revisit the regulations in mid-January.

Idaho. Idaho’s Oil and Gas Conservation Commission approved new rules governing fracing on November 15, 2011. The rules cover permit applications, post-treatment reports, freshwater-protection measures, well-integrity testing and pressure monitoring. In the permit application, the operator must describe the formations, stimulation design and fluid constituents. Before fracing can begin, the operator must conduct a mechanical-integrity test of the well casing or casing-tubing annulus. During stimulation, the operator must monitor and record the annulus pressure at the casinghead and, if intermediate casing has been set, the pressure between the intermediate casing and production casing.

The post-treatment report must disclose the volume of treatment fluid used, the pressures during stimulation, the percentages by volume and total volumes of the base treatment fluid, individual additives and proppants, and information about disposal of waste materials. The rule will become effective pending review and approval by the 2012 Idaho State Legislature.

New Mexico. In early August 2011, the New Mexico Oil and Gas Association proposed a rule requiring disclosure of fracing-fluid composition used in wells. The New Mexico Oil Conservation Commission held a hearing on the proposed rule in mid-November. Reports indicate the rule was adopted, but no order or official announcements from the Oil Conservation Division have been issued yet.

Colorado. In mid-December 2011, the Colorado Oil and Gas Conservation Commission adopted regulations requiring disclosure of chemical ingredients and water volumes used in fracing. The regulations further require disclosure of concentrations of chemicals in fracing fluid. Additionally, if an operator is granted trade-secret protection, the chemical family name of each ingredient must still be disclosed. Colorado’s regulations are scheduled to take effect on April 1, 2012, and apply to all wells fraced in the state. Disclosure must be made to fracfocus.org within 60 days of completing fracing activities.

Texas. On December 13, 2011, the Railroad Commission of Texas adopted the fracing Chemical Disclosure Rule, pursuant to HB 3328 passed by the Texas Legislature in June 2011. The regulations require public disclosure of chemicals used for fracturing that are either regulated by OSHA or are otherwise intentionally added, along with the actual or maximum concentrations of each. The regulations specifically exempt chemicals unintentionally added, chemicals that occur naturally, or chemicals not disclosed by the manufacturer, supplier or service company. Companies can also claim trade-secret exemptions, which must be approved by the Texas Railroad Commission.

Operators must also disclose the total volume of water and base fluid used. Only wells permitted after the effective date are subject to the requirements. Although the Legislature required the regulations to be adopted by July 1, 2013, the Railroad Commission issued proposed regulations and approved the rule in less than six months. The rule will apply to all wells for which the commission issues an initial drilling permit on or after February 1, 2012.

Local municipalities have also proposed fracing regulations. In August 2011, the North Texas city of Grand Prairie in the Barnett shale became the first municipality in Texas to ban the use of city water for fracing. One month earlier, water officials for the Ogallala Aquifer in part of the Permian Basin included fracing activities in the district’s first-ever water use restrictions. And, in the Lubbock-based High Plains Underground Water Conservation District No.1, new water restrictions aimed at fracing go into effect in 2012. Other Texas municipalities are considering measures.

Texas’s fracing water-use restrictions may be linked to the fact that the state is currently experiencing the worst drought since record-keeping began more than 116 years ago. Further, while three to four million gallons of water are needed to fracture a typical well, South Texas’s Eagle Ford shale, due to its peculiar geology, requires as many as 13 million gallons of water to fracture a single well.

In response to increased regulations, oil and gas companies have resorted to trucking water into drilling sites, recycling fracing fluids to reduce the amount of water needed for future drilling, and replacing drilling-site dirt roads with limestone to preserve water that would otherwise be used to reduce dust.

Relevant lease provisions

The water quantity and alleged quality issues discussed here can create substantial issues for oil and gas lessees, but certain provisions, including force majeure and continuous drilling clauses, can help prevent disputes.

In general, force majeure clauses extend the lease despite the occurrence of some event outside the reasonable control of the contracting parties, such as an act of God, a shortage in material or equipment, or a law, order or regulation of the government. As discussed above, fracing involves a heavy use of water. Some areas may experience water shortages and restrictions, and others may face legal impediments to drilling, such as the current moratorium within the Delaware River Basin. To protect the lessee, leases should explicitly designate that legal orders and water shortages that prevent drilling trigger the force majeure clause and extend the lease.

Continuous drilling provisions generally extend a lease despite the absence of production if the lessee is engaged in “drilling operations or reworking operations” on the leased property. But it may be unclear whether fracing activities constitute such “operations.” To avoid confusion, the lease should expressly reference whether fracing constitutes the type of operation that will trigger the lease savings clause. A lease should also specify that fracing is permitted on the leased area, to ensure the lessee’s ability to engage in fracing.

Additional lease provisions can address water-quality concerns. A lease can provide for the continuous monitoring of water in the area, including an initial sampling and testing to establish a baseline. Water use can be restricted, and conservation-minded efforts, such as construction of limestone roads at drilling sites, can be mandated. The disposal of waste water from fracturing activities can also be addressed, including any recycling of the water.

Barclay Nicholson is a partner in Fulbright & Jaworski LLP’s Houston office, where he focuses on energy and business disputes (bnicholson@fulbright.com). He serves on the firm’s shale and fracing task force. Andrea Fair is an associate at the firm (afair@fulbright.com).