Industry, States Face Tough Fight on BLM Fracking Rule

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By Alan Kovski

Aug. 26 — The odds are against success for the lawsuits attempting to block the new federal regulations issued to govern hydraulic fracturing on federal and Indian lands, but the litigation may be just the start of the fighting, in the views of attorneys familiar with the subject.

Negotiated changes in the regulations from the Bureau of Land Management (BLM) also are a possibility, or a remand of the rule for tweaks and clarifications, the attorneys said.

If the rule goes into effect, there could be any number of lawsuits over whether leases have been undercut in value—arguably a “taking” of property—because of the burdens created by the new regulations.

If nothing else, the added layer of regulations will serve as another reason for companies to avoid bidding on federal leases and look instead to state and private property for exploration and development opportunities, the attorneys agreed.

Rule Stayed for Lawsuits.

The BLM, an Interior Department agency, issued the rule March 26 to update federal regulations on well integrity, wastewater handling and chemical reporting for oil and natural gas wells using the well stimulation technique called hydraulic fracturing, or fracking (80 Fed. Reg. 16,127; RIN 1004–AE26). The BLM said the rule, now stayed by a court, is needed to keep pace with changing industry practices.

Two oil and gas associations, the Independent Petroleum Association of America and the Western Energy Alliance, sued Interior for what they called an arbitrary and capricious rulemaking in violation of the Administrative Procedure Act. Wyoming and three other states sued the agency for what they called a violation of state sovereignty, their position bolstered by the Ute Indian tribe, which said the rule ignored tribal sovereignty and posed the risk of unreasonable economic harm.

The lawsuits were consolidated while the U.S. District Court for the District of Wyoming considers whether to issue a preliminary injunction.

Judge Scott Skavdahl said in June that he would decide on an injunction about three weeks after the BLM files an administrative record on the rule with the court. He issued a stay on the rule pending his injunction decision (Wyoming v. Interior, D. Wyo., No. 2:15-cv-00043, 6/23/15; 122 DEN A-8, 6/25/15)122 DER A-12, 6/25/15)121 ECR, 6/24/15)46 ER 1958, 6/26/15)2015 WLPM, 7/2/15).

The BLM was given until Aug. 28 to file the administrative record, which would make a decision on a preliminary injunction likely in September.

Uphill Battle Anticipated for Plaintiffs.

It is always an uphill battle to convince a federal court to throw out a significant rulemaking, said Matt Douglas, an attorney in the Denver office of the law firm Arnold & Porter LLP. That also led him to express skepticism about a preliminary injunction, which requires a court to be convinced that the plaintiffs have a likelihood of success in their lawsuit.

Courts are reluctant to overturn a federal rule when the agency issuing the rule is operating within its purview, agreed Larry Nettles, an attorney in the Houston office of Vinson & Elkins LLP.

“Congress has given the agency broad discretion to adopt regulations it thinks are reasonable,” Nettles said.

Nettles was willing to entertain the possibility that the rule could be remanded for corrections to address the elements that the oil and gas associations described as unclear or impractical. “There may be some trims and cuts here and there,” Nettles said.

The difficulty for BLM in any remand for substantive changes would be the need for another rulemaking process, including a public comment period. “I'm not aware of a way around that.”Matt Douglas
Arnold & Porter LLP

Douglas suggested the possibility of the BLM and state officials negotiating an agreement that harmonizes the federal and state regulations, but he did not express an opinion on whether that is likely.

But Douglas said the difficulty for the BLM in any remand for substantive changes would be the need for another rulemaking process, including a public comment period. “I'm not aware of a way around that,” he said.

State, Federal Regs Can Conflict.

States regulate oil and gas drilling—including fracking—on federal as well as other lands with a state's borders. The new federal regulations will form an additional layer that, in the view of the oil industry, will be a very poor fit, creating a mix of redundancies and differences that will at the very least slow down work.

“That to me just sounds like a nightmare,” said Bill Kroger, an attorney in the Houston office of Baker Botts LLP. “You really want to have one-stop shopping.”

The lawsuits in the Wyoming court may be just a step in a prolonged conflict. “I can also see the battle shifting to a legislative one,” Kroger said. “It may not be resolved until the next election.”

“I can also see the battle shifting to a legislative one. It may not be resolved until the next election.”Bill Kroger
Baker Botts LLP

Republicans in Congress have indicated their willingness to curtail the BLM's regulatory effort, but they cannot force anything they want through the Senate, and they do not have an ally in the White House.

If lawsuits and legislation fail to overturn the rule, it will not necessarily be the end of the litigation. Individual companies may find that they cannot economically develop a lease. “There might be all kinds of additional claims” from companies,” Kroger said.

Complications Can Mean Delays.

The complications of a set of federal regulations that do not neatly match up with state regulations could discourage competition for federal leases. Some companies already avoid federal lands.

BLM approvals of drilling permits took an average of 300 days three years ago. Last year, the agency had cut the permitting time to under 200 days, according to BLM Director Neil Kornze (45 ER 1106, 4/11/14)(66 DER A-20, 4/7/14)(66 DEN A-5, 4/7/14).

By contrast, the North Dakota Department of Mineral Resources took an average of only 44 days to issue a drilling permit in the fourth quarter of 2014.

Nettles at Vinson & Elkins said his clients in the oil and gas sector are pessimistic about the delays that the new regulations will create for getting a drilling permit.

“They've told me, with the new requirements of the rule, they expect it to take more than a year,” he said.

“I think that whole waiver program is illusory.”Larry Nettles
Vinson & Elkins

The BLM rule has a provision for a waiver of the federal regulations if state regulations are at least as stringent, but the waiver would apply only to one procedural element at a time, such as pressure testing of a well in a particular way at a particular stage of a project, rather than applying to a state's whole regulatory regime.

“I think that whole waiver program is illusory,” Nettles said.

Costs Expected to Go Up.

The overlay of new federal regulations will increase costs for companies on federal lands, although the amount of increase is disputed. The BLM estimated the rule's cost at an average of $11,400 per well, a tiny part of the $4 million to $8 million typically spent on a well involving fracking and horizontal drilling.

In its final rule in March, the agency wrote, “The BLM understands that delays in approvals of operations can be costly to operators and the BLM intends to avoid delays whenever possible.”

“Operators are going to look for lower-cost places to drill and develop.”Bill Kroger
Baker Botts LLP

The agency did not attempt to make a cost estimate for delays in permitting. That would be speculative, it said.

“There's a lot of small operators that look to be affected,” Kroger said. “I think those regulations really hurt some of the smaller operators.”

The smaller operators, including family-owned businesses, do not have large permitting staffs and decade-long time frames for development projects. And large or small, companies add up the incremental costs, which can be higher onfederal lands because of such varied factors as inadequate geological data, inadequate infrastructure and the sheer distance to an appropriate refinery for a particular type of crude oil.

“Operators are going to look for lower-cost places to drill and develop,” Kroger said.