Preliminary Injunction Motion Filed To Stop BLM’s Final Fracking Rule

Last Friday, the Independent Petroleum Association of America (IPAA) and the Western Energy Alliance (WEA) opened their arguments on a preliminary injunction motion to halt the federal Bureau of Land Management’s (BLM) final rule regulating hydraulic fracturing on public lands until resolution of the litigation.

In its supporting memorandum, the IPAA and WEA detail the process by which the BLM arrived at its final rule and highlight several issue they submit favor a preliminary injunction. The industry groups challenge the BLM’s issuance of the rule over comprehensive comments in the record that detail technical and legal problems with its proposal. In particular, the groups fault the BLM for ignoring or misunderstanding technical aspects of oil and gas production and the economic consequences of the final rule; they contend both undermine the procedural legitimacy of the rulemaking process. Specifically, the groups challenge several provisions of the final rule as impossible and, thus, per se arbitrary, including, for example:

  • Requiring operators to certify fluids used in hydraulic fracturing comply with all applicable permitting and notice requirements and all federal, state, tribal, and local laws, rules, and regulations;
  • Undefined and vague “mechanical integrity test” for any casing or fracturing string, which do not appear different than ones operators are currently required to perform; and
  • Expanding earlier requirements to isolate freshwater-bearing formations to include “usable water” that does not take into account the potential for high levels of salinity.

The IPAA and WEA further argue that the final rule lacks a rational justification because the BLM has not substantiated the existence of a problem the rule is meant to address, the rule is contrary to other existing law, and it suffers from procedural deficiencies.

To that end, the industry groups contend they are likely to succeed on the merits of their suit and that their members will be irreparably harmed if the Wyoming federal court does not issue an injunction. The BLM will now have an opportunity to respond to the arguments set forth by the IPAA and WEA. The court has not yet set a hearing date for the preliminary injunction motion.

In the State of Wyoming’s related case challenging the BLM’s final hydraulic fracturing rule, the State of Colorado has now joined in that suit as a petitioner, along with the State of North Dakota.

UPDATE: Governor Gary Herbert indicated yesterday (May 19), that the State of Utah intends to also seek to intervene in the State of Wyoming’s case against the BLM concerning its final rule regulating hydraulic fracturing.

Mineral Law Blog will continue to monitor and report on these legal developments as they progress.

New Federal Oil-By-Rail Regulations Published

Today, May 8, 2015, the Pipeline and Hazardous Materials Safety Administration published a final rule for rail transport of crude oil in the Federal Register. These rules come after several high-profile oil train derailments, including one recently in North Dakota that caused the evacuation of a nearby town.

The final rule applies to “high-hazard flammable trains,” defined as trains with a continuous block of 20 or more tank cars loaded with a flammable liquid or 35 or more tank cars loaded with a flammable liquid dispersed through a train. The final rule regulates: (1) tank car design standards, (2) braking systems, (3) speed restrictions, (4) routing restrictions, (5) classifications of unrefined petroleum-based products, and (6) notification requirements.

Tank Car Design

New tank cars constructed after October 1, 2015 are required to meet new design criteria. Tank cars must be constructed with 9/16 inch steel walls and a head shield with a minimum thickness of 1/2 inch. The entire protection system must be covered with a metal jacket of at least 11 gauge steel. Tank cars must also include improved pressure relief valves and bottom outlet valves. All existing tanks must be retrofitted according to a risk based schedule in the next three to five years. Continue Reading

New Rules on MLPs & Qualifying Income: What Oil Services and Exploration Companies Need to Know

On Tuesday, May 5, 2015, the Internal Revenue Service (“IRS”) released proposed regulations defining qualifying income for Master Limited Partnerships (“MLPs”). MLPs are publicly traded partnerships that are taxed as a partnership rather than a corporation.

Being taxed as a MLP has many advantages. While shareholders in a corporation face double taxation  ̶  paying taxes first at the corporate level, and then at the personal level when those earnings are received as dividends  ̶  owners of a partnership are taxed only once, when they receive distributions. The absence of taxes at the company level gives MLPs a lower cost of capital than is typically available to corporations, allowing the MLPs to pursue projects that might not be feasible for corporations.

To qualify as a MLP, at least 90% of the entity’s gross income must be “qualifying income.” Previously, there had been no detailed list of what constitutes qualifying income.

These proposed regulations use the term “qualifying activities” to describe activities relating to minerals or natural resources that generate qualifying income. The IRS has now provided an exclusive list of operations that constitute qualifying activities. The activities addressed include exploration, development, mining or production, processing, refining, transportation, and marketing of any natural resource. Continue Reading

The Silver Lining of America’s Economy

Minerals Make Life – an initiative created by the National Mining Association – has recently developed an informative infographic on the important role silver plays in our society. Out of all metals, silver is unique in that it has the highest electrical and thermal conductively. These characteristics make silver an important ingredient in products we use every day, including automobiles, microwaves, cameras and plasma TVs. Further, silver is a major economic driver and a job creator in the United States. According to the U.S. Geological Survey, in 2014, more than one thousand tons of silver was produced in the United States, valuing at approximately $718 million.

It could be said that the road to green energy is literally paved with silver. The primary ingredient in most solar cells is silver. An average solar panel contains about two-thirds of an ounce of silver. Indeed, the solar industry uses about 5% of the world’s silver supply.

For more information regarding the importance of silver and domestic mineral production, visit Minerals Make Life.

By Mike Mills (michael.mills@stoel.com) and Eric Skanchy (eric.skanchy@stoel.com).

Department of Energy Report Calls for U.S. to Modernize Energy Infrastructure, Invest in Natural Gas Pipelines

On Tuesday, April 21 the Obama Administration released the first Quadrennial Energy Review (“QER”) as a component of President Obama’s Climate Action Plan.  The extensive report analyzes energy infrastructure in the United States, and “identifies the threats, risks, and opportunities for U.S. energy and climate security, enabling the federal government to translate policy goals into a set of integrated actions.”  The primary purpose of the QER is to “modernize” the U.S. energy sector by replacing crumbling infrastructure, by increasing reliance on domestic energy sources, and by implementing a “clean energy economy built to last.”

The report highlights the United States’ complex and advanced energy production system, and includes descriptions and analysis of the different energy sectors.  For example, the report notes that the U.S. is the world’s leading producer of oil and natural gas, and the country is less dependent on foreign oil than it has been in over 40 years.

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USEPA Releases Proposed Rule on Fracking Wastewater Treatment; Says There Will be No Costs to Industry

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.

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Another George Clooney Film in the Making? Nevada Supreme Court Rejects Rule Against Perpetuities Argument for Mining Agreement

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.

North Dakota Requests to Intervene in Lawsuit Challenging Federal Fracking Regulations

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 (michael.mills@stoel.com), Andrew Pieper (andrew.pieper@stoel.com), and Shannon Morrissey.  Ms. Morrissey is a Law Clerk with Stoel Rives LLP and is not currently licensed to practice law in California.

North Dakota And Others Look To Challenge New Federal Fracking Regulations

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.

Obama Administration Releases Federal Fracking Regulations

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.

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