On Tuesday, April 7, the U.S. Environmental Protection Agency (“USEPA”) published a proposed rule in the Federal Register for regulation of wastewater from unconventional oil and gas operations (“UOG”), which includes hydraulic fracturing. The rule, titled “Effluent Limitations Guidelines and Standards for the Oil and Gas Extraction Point Source Category,” is a Clean Water Act (“CWA”) regulation and imposes pretreatment requirements for existing and new sources. In accordance with the prescribed standards, oil and gas operators would be required to pretreat their wastewater fluid before it is transferred into publicly owned utilities. The proposed rule contains technology-based pretreatment standards.
The Nevada Supreme Court recently decided that the rule against perpetuities does not apply to area-of-interest provisions in commercial mining agreements. While you should not expect this case to become a summer blockbuster starring George Clooney, it nonetheless provides certainty for area-of-interest provisions in older mining agreements in Nevada (and lends insights into how other states might address this issue).
In Bullion Monarch Mining, Inc. v. Barrick Goldstrike Mines, Inc., Bullion Monarch Mining (“Bullion”) claimed that Barrick Goldstrike Mines (“Barrick”) owed Bullion royalty payments under an area-of-interest provision in a commercial agreement between Bullion and Barrick’s predecessor-in-interest. (Case No. 61059, filed Mar. 26, 2015.) An area-of-interest royalty agreement is one in which a “party agrees to pay a portion of not-yet-acquired mineral interest’s output” to another party within a certain area of interest. (Id. at p. 9.)
Barrick argued that the area-of-interest provision in the agreement was void because it violated the rule against perpetuities, which requires an interest in real property to “vest, if at all, not later than twenty-one years after some life in being at the creation of the interest.” (Id. at p. 3.) Nevada’s statutory rule against perpetuities exempts nondonative transfers from the rule; however, the statutory rule did not apply here because Nevada’s statute (adopted in 1987) was not in effect at the time of the agreement. Therefore, Barrick argued that the common law rule against perpetuities would apply, even to a nondonative transfer such as a commercial mining agreement.
In rejecting Barrick’s position, the Court based its decision largely on policy: “applying the rule to area-of-interest royalty agreements does not further public policy.” (Id. at p. 2.) The court stated that “there is no human decedent exercising dead-hand control over still-living descendants,” thus the purposes of rule against perpetuities would not be served by applying it to this agreement. Finally, the Nevada Legislature exempted commercial, nondonative transfers from the statutory rule and other courts have not applied the rule to commercial agreements, which show the common law rule has evolved since 1864 (Nevada’s statehood) to exempt commercial agreements.
By Michael Sherman and Shannon Morrissey. Ms. Morrissey is a Law Clerk with Stoel Rives LLP and is not currently licensed to practice law in California.
On Wednesday, April 1, the state of North Dakota filed a motion to intervene in Wyoming’s lawsuit challenging the Bureau of Land Management’s (“BLM”) federal hydraulic fracturing regulations. (Wyoming v. U.S. Dept. of Interior, Case No. 15-CV-43-5 (Mar. 26, 2015).) The BLM’s Final Rule, released on March 26, 2015, governs fracking on Federal and Indian lands. The Final Rule supplements existing federal fracking regulations by imposing additional requirements such as chemical disclosure and wellbore cement integrity testing.
In its initial complaint, Wyoming argued that the BLM’s Final Rule “exceeds the agency’s statutory jurisdiction, conflicts with the Safe Drinking Water Act, and unlawfully interferes with the State of Wyoming’s hydraulic fracturing regulations.” North Dakota agrees with Wyoming’s arguments and further states that the BLM “exceeded their statutory authority by seeking to regulate the underground injection of fluids and proppants under the Federal Land Policy and Management Act, and the Mineral Leasing Act.” (Memorandum in Support of State of North Dakota’s Unopposed Motion to Intervene as a Petitioner, at p. 2-3.)
North Dakota’s motion to intervene emphasizes the significance of hydraulic fracturing in the state, and details the state’s existing fracking regulations. North Dakota is the second largest producer of oil and natural gas in the country, and “[e]nergy producers in North Dakota extract over 1 million barrels of oil per day from hydraulically fractured horizontal drilling wells pursuant to a comprehensive state regulatory program.” (Id. at p. 3.) The BLM’s Final Rule impacts fracking in North Dakota because approximately one-third of oil production occurs on Indian lands and about 5% occurs on Federal lands in the state. North Dakota practices “responsible development” of its natural resources, and the state’s “regulatory role and authority is diminished and displaced by the Final Rule,” which is inconsistent with the state’s regulatory scheme. (Id. at p. 6.)
Lynn Helms, the Director of the North Dakota Industrial Commission (“NDIC”), Department of Mineral Resources filed a declaration in support of North Dakota’s unopposed motion. In his declaration, he detailed the state’s fracking regulations, explaining that unique local conditions are considered when regulating oil and gas development. Helms emphasized the inconsistencies between the BLM’s Final Rule and North Dakota’s regulations. For example, he stated that there will be a six-month delay for operators on Indian and Federal lands because they must obtain a permit from the BLM and NDIC.
By Mike Mills (email@example.com), Andrew Pieper (firstname.lastname@example.org), and Shannon Morrissey. Ms. Morrissey is a Law Clerk with Stoel Rives LLP and is not currently licensed to practice law in California.
Less than one week after the Bureau of Land Management (BLM) released its Final Rule governing hydraulic fracturing practices on federal lands, North Dakota will proceed to explore the state’s legal options for challenging the new regulations. At their March 24 meeting, the members of the North Dakota Industrial Commission—comprised of Governor Jack Dalrymple, Attorney General Wayne Stenehjem, and Agriculture Commissioner Doug Goehring—voted unanimously to investigate potential legal action against the Final Rule, including the possibility of filing a lawsuit on its own or with others states, or joining an existing industry lawsuit filed immediately following release of the regulations.
The new BLM hydraulic fracturing regulations—set to take effect on June 1—supplement existing regulations by requiring operators to submit additional information with its drill permit application, including plans to monitor cement barriers lining wells, provisions to store waste fluid, and disclosure of chemicals used in the hydraulic fracturing process. Though these regulations do not effect hydraulic fracturing on private or state-owned lands, they will impact federal and tribal lands.
The BLM’s North Dakota Field Office currently oversees more than 4 million acres of federal, tribal, and other public lands in the state. It also manages about 2,000 oil and gas leases, with additional trust responsibility for more than 3,000 leases on the Fort Berthold Indian Reservation and other Indian tracts.
On March 20—the same day the BLM’s Final Rule was announced—the Independent Petroleum Association of America and the Western Energy Alliance filed a petition for review under the Administrative Procedure Act in Wyoming federal district court. Among their allegations, the industry groups stated that the “BLM’s rulemaking represents a reaction to unsubstantiated concerns and the administrative record lacks the factual, scientific, or engineering evidence necessary to sustain the agency’s final rule.” As such, the groups asked the court to “find the rule invalid and set aside the challenged agency action.” The petition is available here.
*Update: Shortly after this post went live, news came that the state of Wyoming had filed a lawsuit (PDF) challenging the BLM’s Final Rule. (Wyoming v. U.S. Dept. of Interior, Case No. 15-CV-43-5 (Mar. 26, 2015).) Wyoming is the first state to challenge the regulations. Among other claims, Wyoming argues that the BLM’s Final Rule “exceeds the agency’s statutory jurisdiction, conflicts with the Safe Drinking Water Act, and unlawfully interferes with the State of Wyoming’s hydraulic fracturing regulations.”
**Update: At a meeting of the North Dakota Industrial Commission on March 31, Governor Dalrymple and Attorney General Stenehjem voted to join the state of Wyoming’s suit challenging the BLM’s Final Rule. Agriculture Commissioner Goehring was absent. Stenehjem indicated that his office would act immediately to intervene in the case.
Mineral Law Blog will continue to monitor and report on these legal developments as they progress.
Today, Friday, March 20, the Bureau of Land Management (“BLM”), an agency within the Department of the Interior, published regulations for hydraulic fracturing on Federal and Indian lands. The Final Rule becomes effective in 90 days and will impact about 2,800-3,800 wells each year. In 2013, 90% of the 2,800 new wells on Federal and Indian lands were stimulated using hydraulic fracturing techniques, according to the BLM. (Hydraulic Fracturing on Federal and Indian Lands, Final Rule, at p. 14.) The regulations do not apply to fracking activity on private and state-owned land, where most of the fracking in the United States occurs.
Requirements under the Final Rule
The overarching purpose of the Final Rule is to provide a “baseline for environmental protection.” (Id. at p. 12.) Principally, a permit is required under existing oil and gas regulations. Before beginning operations, an operator must submit an Application for a Permit to Drill (“APD”) to the BLM and wait for approval. As the new regulations supplement the existing regulations, and do not replace them, this permit requirement will continue under the new regulations.
As many of you know, permitting delays are not only frustrating but can have real consequences for project applicants with contractual deadlines. In the case of a federal oil and gas lease, operators should be mindful of the primary term in their lease as recently highlighted by the Interior Board of Land Appeals (IBLA) in Vaquero Energy, Inc. (185 IBLA 233, Decided Feb. 9, 2015.)
In Vaquero Energy, Inc., the California State Bureau of Land Management (BLM) Office refused to suspend the primary term under an oil and gas lease held by Vaquero Energy, Inc. (Vaquero) to give time for the Section 7 consultation process with the United States Fish and Wildlife Service pursuant to the Endangered Species Act. A Section 7 consultation was required because the lease is located in/near the Sespe Condor Refuge, which provides habitat for the endangered California condor and other protected species.
The BLM rejected the request for a suspension because Vaquero caused its own “dilemma” by failing to timely submit its Applications for Permit to Drill (APDs). Vaquero submitted its APDs with 62 days left in the primary term and requested a suspension of the primary term with only 36 days left. Generally, under the Mineral Leasing Act (30 U.S.C. § 209) suspension is mandatory where the Secretary of the Interior, or any federal agency, is the cause of delay which prevents a “lessee from commencing drilling operations during the primary or extended term of its lease.” (185 IBLA at 236 (internal citations omitted).) In contrast, as interpreted by previous IBLA decisions, the Mineral Leasing Act authorizes the Secretary to use discretion to suspend a lease where the lessee’s inability to commence drilling is due to the lessee’s own fault and not attributable to “any order, delay, or inaction by any federal agency.” (Id. (internal citations omitted).)
When the BLM first denied Vaquero’s request, they observed that “2 months did not allow sufficient time to process the APDs and comply with the [Endangered Species Act].” (185 IBLA 234.) In other words, Vaquero should have filed its requests much earlier, and there was no proof of delay by any federal agency that led to their inability to commence drilling.
By Michael Sherman and Shannon Morrissey. Ms. Morrissey is a Law Clerk with Stoel Rives LLP and is not currently licensed to practice law in California.
In a closely watched, 4-3 decision issued yesterday, February 17, the Ohio Supreme Court ruled that the ‘Home Rule Amendment’ to the Ohio Constitution does not grant the city of Munroe Falls the power to enforce its own oil and gas permitting scheme simultaneously with a state-wide permitting regime. (State ex rel. Morrison v. Beck Energy Corp., Slip Op. No. 2015-Ohio-485.) The state government has the “sole and exclusive authority” to regulate permitting of oil and gas wells and production operations in Ohio, preempting regulation by local ordinances. (Ohio Rev. Code Chapter 1509.02.)
Background of the Case
Beck Energy Corporation (“Beck Energy”) obtained a permit to drill for oil and gas within the city of Munroe Falls from the Ohio Department of Natural Resources (“Department”) in 2011. Operators in Ohio are required to obtain a state-issued permit prior to drilling, subject to specified conditions. Beck Energy’s permit contained a total of 67 conditions, addressing issues such as site preparation, waste disposal, and noise mitigation. (Slip Op. at p. 3.) The case arose because Munroe Falls issued a stop-work order soon after Beck Energy began drilling. The order claimed that Beck Energy was violating several Munroe Falls city ordinances. One such ordinance requires operators to obtain a local zoning certificate prior to drilling. The city requires this local zoning certificate in addition to the state-issued permit.
Beck Energy argued that the city’s permitting ordinances were void because they conflict with Ohio’s statewide permitting scheme. In opposition, the city of Munroe Falls argued that its ordinances constituted a valid exercise of the “home-rule power.” (Slip Op. at p. 5.) The Ohio ‘Home Rule Amendment’ states that “[m]unicipalities shall have the authority to exercise all powers of local self-government to adopt and enforce within their limits such local police, sanitary and similar regulations, as are not in conflict with general laws.” (Ohio Const., Art. XVIII, Sect. 3.)
On appeal, the Ohio Supreme Court held that the ‘Home Rule Amendment’ does not apply here because the local ordinance conflicted with a general state law. 1509.02 is a general law because it “applies to all municipalities in the same fashion.” (Slip Op. at p. 8.) The Court found that the law “operates uniformly” regardless of whether oil and gas operations are occurring in each city in the state. (Id. at p. 7.) Additionally, the court stated: “[w]e have consistently held that a municipal-licensing ordinance conflicts with a state-licensing scheme if the local ordinance restricts an activity which a state license permits.” (Id. at p. 9.)
What this Means for the Oil & Gas Industry
This decision is viewed as a win for the oil and gas industry, including operators utilizing hydraulic fracturing (“fracking”), because it has the potential to make stricter, local regulations of hydraulic fracturing and oil and gas development – including outright bans or moratoria – unconstitutional under state constitutional preemption principles. Further, the rationale in this case is similar to a New Mexico case decided earlier this year. In January 2015, the United States District Court for the District of New Mexico held that a local ordinance banning fracking was preempted by state and federal law. (Read more about this case in our previous blog post.)
The Ohio decision is limited, though, as Justice O’Donnell emphasized is his concurring opinion. He stated that this holding only preempts “parallel municipal ordinances,” and does not necessarily preempt ordinances that “address only the traditional concerns of zoning laws, such as ensuring compatibility with local neighborhoods, preserving property values” and so forth. (Slip Op. at p. 14.) “[I]t remains to be decided whether the [Ohio] General Assembly intended to wholly supplant all local zoning ordinances limiting land uses to certain zoning districts without regulating the details of oil and gas drilling expressly addressed by R.C. [Ohio Revised Code] Chapter 1509.” (Id. at p. 15.)
On Wednesday, January 28, the Senate voted against Amendment 48 which would allow the federal Environmental Protection Agency (“EPA”) to regulate hydraulic fracturing (“fracking”) on state and private lands. The measure was presented by Senator Kirsten Gillibrand (D-NY) as a negotiated amendment to the Keystone XL Pipeline Act. The amendment would have repealed sections of the Energy Policy Act of 2005 which exempt fracking from the underground injection control (UIC) provisions of the Safe Drinking Water Act (“SDWA”). (SDWA § 1421(d).) Environmental organizations refer to this provision as the “Halliburton loophole.” Other attempted amendments to the Keystone XL Pipeline Act have focused on reducing fossil fuel use and regulation of carbon (climate change regulation).
The final vote tallied at 35 for the amendment and 63 against it – a significant defeat. This is noteworthy because it is the first time the Senate has voted on this issue in several years. The Senate vote also portrays tensions between the White House and Congress. It presents a “clear message from the U.S. Senate of broad bipartisan support to keep regulation of hydraulic fracturing in the capable hands of the states and out of the grasp of the Obama Administration,” stated Senator James Inhofe (R-OK).
To date, fracking has only been regulated by the states, not the federal government. For example, California’s Senate Bill 4 (“SB 4”) represents the most comprehensive state regulatory scheme for well stimulation treatments, which includes fracking. (For more information about SB 4, view our SB 4 blog posts.) A similar federal bill, Fracturing Responsibility and Awareness of Chemicals Act (H.R.1921, 113th Congress) also failed in the House of Representatives in 2013. It seems that hydraulic fracturing regulating will remain firmly in the states purview for the foreseeable future.
On January 20, 2015 a U.S. District Judge overturned New Mexico’s ban on hydrocarbon extraction, which included a prohibition on hydraulic fracturing (“fracking”) in the state. (SWEPI, LP v. Mora County et al., Case No. 1:14-cv-00035-JB-SCY, filed Jan. 19, 2015.) Mora County, a political subdivision of the State of New Mexico, enacted the ban through a local ordinance in April 2013. It was the first such prohibition in the country.
Federal District Court Judge James O. Browning based his decision on federal preemption: “Historically, a county cannot enact or supersede federal law. The Ordinance thus goes beyond Mora County’s historical lawmaking just to deprive corporations of their rights.” (Id. at p. 157.) The Mora County ban clashed with both state and federal law regulating the drilling of oil and gas. Under the Constitution’s Supremacy Clause, any local or state law that conflicts with federal law is invalid.
Today, the Environmental Protection Agency (“EPA”) announced a new goal to cut methane emissions from the oil and gas industry. (See White House Fact Sheet.) The EPA’s goal is to reduce methane emissions from the oil and gas sector by 40-45% from 2012 levels by 2025. The proposed regulations will set standards to reduce methane and volatile organic compounds (“VOC”) emissions from “new and modified oil and gas production sources, and natural gas processing and transmission sources.” The EPA will issue a proposed rule in summer 2015, and will issue a final rule as early as next year, in 2016.
Today’s announcement furthers the “Strategy to Reduce Methane Emissions” issued in March 2014, which is an initiative under the Obama Administration’s Climate Act Plan. Further, the EPA previously published standards for VOC emissions from the oil and gas industry in 2012 which aim to protect public health and the environment while permitting expansion of oil and gas production.