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Issues to Watch in Shale PlaysThe energy shale revolution has had particular impact on three major legal areas: conservation regulation, environmental protection and community impact. In-house lawyers must be prepared to protect their clients in all of these arenas, write John R. Hays Jr. and Alicia R. Ringuet.
The United States is undergoing a shale energy revolution driven by hydraulic fracturing, or "fracking," and horizontal drilling. This revolution dramatically will strengthen the domestic energy supply. Indeed, it may allow the country to become energy independent by 2035, according to the International Energy Agency's World Energy Outlook 2012.
Fracking nonetheless has proven controversial among environmentalists and others. For these and other reasons, the shale revolution has spurred an increase in regulations in Texas and across the country. Complicating matters is the fact that, while oil and gas regulation traditionally has been left to the states, government at all levels is regulating fracking in one manner or another.
The shale revolution has had particular impact on three major legal areas: conservation regulation, environmental protection and community impact. In-house lawyers must be prepared to protect their clients in all of these arenas.
First, consider conservation regulation. In Texas, the rule of private ownership is arguably the single most important doctrine of oil and gas law. This is subject to the rule of capture, which precludes liability for drainage of a neighbor's tract so long as one produces the oil or gas by lawful means and without negligence.
Against this background, the Railroad Commission of Texas long has enforced regulations governing well spacing and density to prevent waste and protect correlative rights. However, regulators wrote these rules, in large part, for vertical wells. With the unprecedented increase in horizontal drilling, the Railroad Commission has moved to adapt the rules to fit horizontal wells.
As an example, nearly a century ago, the Railroad Commission drafted Rule 37 (16 Texas Administrative Code §3.37), a spacing rule, and initially adopted it in in contemplation of vertical wells. But the rule also applies to cutting edge horizontal wells, and special field rules are refining the rule's application. These refinements include the take-point rule, which requires that only perforated portions of a horizontal well comply with Rule 37's spacing rules, and the stacked-lateral rule, which treats all stacked wellbores from multiple wells as single wells, to avoid the prohibition against double assignment of acreage.
These special field rules have helped address issues unique to horizontal drilling. The question is whether these and other special field rules should be incorporated into Rule 86, the Railroad Commission's statewide rule for horizontal wells, found at 16 Texas Administrative Code §3.86.
Since Rule 86's adoption in 1990, the Railroad Commission has adopted many special field rules to accommodate horizontal drilling. At present, however, the commission adopts these rules on a field-by-field basis. Therefore, some rules that promote horizontal drilling may apply in the Barnett Shale, for example, but not in the Eagle Ford Shale, complicating life for the legal departments of companies active in multiple regions. Including these types of special field rules in Rule 86 would allow for more predictability and uniformity in application of spacing rules.
As it stands today, prior to developing a particular field, lawyers for an operator must consider whether special field rules exist for a target field, whether those special field rules are adequate, and, if not, whether special field rules should be adopted or amended.
Environment and Community
Second, environmental matters make up a large part of the portfolio of work for any oil and gas company's legal department. Traditionally, the federal government has left oil and gas regulation to the states, including regulation of environmental matters.
For example, the Resource Conservation and Recovery Act, 42 U.S.C. §6901 et seq., the federal statute that governs solid- and hazardous-waste disposal, exempts oil and gas exploration and production wastes from regulation as hazardous wastes. In addition, the Safe Drinking Water Act at 42 U.S.C. §300h(d)(1)(B)(ii), exempts fracking (except fracking with diesel fuels) from its underground injection control program.
Fracking thus currently is exempt from federal regulation under some of the major environmental laws. But this is not to say that fracking is entirely exempt from federal regulation. The Environmental Protection Agency has issued air pollution standards at 40 C.F.R. Part 60 that apply to fracked natural gas wells, and the federal government may seek to extend its authority over fracking in the future. This area bears watching.
Potential water contamination tends to be the focus of state environmental regulation of fracking. There are three potential routes to contamination: 1. fractures from fracking operations reaching the groundwater (very unlikely, given the rock overburden); 2. faulty or insufficient surface casing or cement jobs; and 3. surface contamination.
Texas has responded to these potential environmental concerns in a number of ways. The Railroad Commission has proposed an extensive set of amendments to its Rule 13 (16 Texas Administrative Code §3.13), which governs well casing and cementing, and also to its rules on recycling of oilfield wastes. Further, the commission has adopted rules implementing the frack fluid disclosure statute enacted in 2011 by the Texas Legislature.
Third, in-house lawyers must be vigilant on issues of company operations' community impact. Increased oil and gas activity in areas around the state has had a major effect on local neighborhoods, towns and cities. Without question, there has been a great benefit, including the creation of thousands of jobs and generation of millions of dollars in state and local revenues.
However, negative consequences also have resulted. For example, large oilfield trucks carrying pipe, produced water and frack tanks have a major negative impact on county roads in South Texas and across the state, but counties possess a very limited ability to collect additional fees to offset increased costs of road maintenance. This is an issue before the Legislature this session.
The advent of the shale plays has also led to a dramatic increase in urban drilling. As a result, Fort Worth and other municipalities in the Barnett Shale have enacted drilling and other ordinances. Through zoning, permitting and similar methods, municipalities may be able to regulate drilling and development patterns. In-house lawyers need to be vigilant in protecting their companies' interests in all of these areas.
The shale revolution, driven by horizontal drilling and hydraulic fracturing, stands to yield an energy abundance that may well lead to the reindustrialization of America, with the attendant jobs and other benefits. That is one reason the continued regulatory and legal response is critical. In-house attorneys must help craft the rules so they allow continued sound development instead of destroying creativity and initiative.
John R. Hays Jr. is a partner in Hays & Owens in Austin. A former examiner with the Railroad Commission of Texas, he is an adjunct professor of energy law at the University of Texas School of Law. Alicia R. Ringuet is an associate with the firm.