United States: California Moves To Further Regulate Unconventional Oil And Gas Production: A Review Of Senate Bill 4 And Its Potential Impact On Shale Development In The Golden State

Keywords: California, oil and gas, Senate Bill 4, shale, well stimulation treatment, hydraulic fracturing

Since 2010, more than 20 states have adopted new laws or regulations specific to hydraulic fracturing, a process used to stimulate oil and gas production that involves pumping pressurized fluids and proppants down a wellbore to create or restore fractures in a target geologic formation. Along with horizontal drilling, advanced hydraulic fracturing technologies have given exploration and production (E&P) companies the ability to economically tap into the United States' vast "unconventional" hydrocarbon formations for the first time, particularly low-permeability shale formations.

With the wave of new regulations, it has become increasingly important for operators and oilfield services companies, and their counsel, to keep themselves informed about new regulatory developments affecting the oil and gas industry. This update addresses California's recently enacted Senate Bill 4 and its potential impact on future shale development in the state.

Introduction

California is the third largest oil producer in the United States and home to some of the richest (untapped) oil- and gas-bearing shale formations in the world. California's Monterey Shale is considered the largest shale-oil formation in the United States, holding an estimated 15.4 billion barrels of oil, equivalent to approximately two-thirds of the total recoverable, onshore shale-oil reserves in the contiguous United States. By comparison, the South Texas Eagle Ford Shale holds an estimated 3 billion barrels, and the North Dakota Bakken Shale holds an estimated 4 billion barrels.

Yet, more than 10 years after the "shale revolution" took off in the United States, there has been no large-scale shale development in California, and the state's crude oil production comes largely from conventional sources (with only about 20 percent from unconventional sources). Indeed, California's crude oil production has continued to decline over the past decade while states such as North Dakota are exceeding record production levels year after year.

To date, the single largest challenge to increased shale development in California has been the unique geology of the Monterey Shale. Unlike other major shale formations, the Monterey Shale is tectonically faulted and fragmented. This has complicated the exploration process and, according to published reports, no company has yet been able to "crack the code" to economically tap into the Monterey.

Despite the rarity of hydraulic fracturing in California, its use has nonetheless become a controversial issue in the state. Indeed, Senate Bill 4 was not the first effort to address the use of hydraulic fracturing and other well stimulation methods key to unconventional oil and gas development.1 For several years, the legislature considered numerous bills that would have further regulated hydraulic fracturing, but they all failed to win approval. On a parallel track, the initiation of a rule-making process and publication of draft regulations in early 2013 by the California Division of Oil, Gas and Geothermal Resources (DOGGR) ensured that, even if the legislature failed to act, the regulatory scheme would be modified. After significant debate and several amendments, Senate Bill 4 passed both houses and was signed by the governor on September 20, 2013.

Application of Senate Bill 4

Senate Bill 4 applies broadly to oil and gas activities involving "well stimulation treatments." The bill defines "well stimulation treatments" as "any treatment of a well designed to enhance oil and gas production or recovery by increasing the permeability of the formation ... [including but] not limited to, hydraulic fracturing treatments and acid well stimulation treatments." The bill does not, however, apply to "steam flooding, water flooding, or cyclic steaming[,] .... routine well cleanout work, routine well maintenance, routine removal of formation damage due to drilling, bottom hole pressure surveys, or routine activities that do not affect the integrity of the well or the formation." In addition, the bill does not apply to treatments on wells used at underground gas storage facilities.

No Moratorium

Senate Bill 4 does not contain an express prohibition or moratorium on hydraulic fracturing. Rather, the law requires the DOGGR and other agencies to promulgate new rules and regulations and take other actions that address well stimulation treatments. Until such new rules and regulations are adopted, an operator is allowed to proceed with well stimulation treatments provided that the operator notifies the DOGGR, provides a "complete well history" and certifies compliance with certain sections of §3160.

Senate Bill 4 requires the DOGGR to conduct, by July 1, 2015, an environmental impact report (EIR) pursuant to the California Environmental Quality Act (CEQA). It remains to be seen whether the EIR required for well stimulation activities prior to the enactment of regulations will be used as a reason to effectively prohibit well stimulation prior to that time. Currently, there is ongoing litigation on the issue of whether the language of Senate Bill 4 frees operators from the need to go through CEQA until the DOGGR's EIR is complete. Governor Brown recently signaled that the DOGGR's EIR required under the law may take up to 18 months to complete.

Independent Scientific Studies

In addition to the EIR that the DOGGR must conduct, Senate Bill 4 requires that the Natural Resources Agency (an umbrella agency that includes the DOGGR) undertake and complete by January 1, 2015, an independent scientific study on well stimulation treatments. The study is to cover various specific items, with the goal of evaluating "the hazards and risks and potential hazards and risks that well stimulation treatments pose to natural resources and public, occupational, and environmental health and safety."

In addition, a study is required to be completed by 2020 evaluating acid matrix stimulation techniques, based on data collected by the state, and establishing "threshold values" for preventing, as far as possible, damage to life, health, property and natural resources. In this respect, the new law is broader than similar initiatives in other states that focus mostly or exclusively on hydraulic fracturing. For reasons that are not entirely clear, acid treatments of wells also became the subject of comment in the press and from interest groups, and so Senate Bill 4 includes coverage for "acid fracturing treatments" and "acid matrix stimulation treatments," as well as hydraulic fracturing. The agency is also required to give a progress report to the legislature every four months until the studies are completed.

DOGGR to Promulgate New Rules and Regulations

Senate Bill 4 gives the DOGGR regulatory authority to promulgate (in consultation with other state and local agencies) new regulations specific to well stimulation treatments, including new rules governing the construction of wells and well casings and full disclosure of the composition and disposition of well stimulation fluids. The DOGGR must adopt and implement these new regulations by January 1, 2015, but the DOGGR is widely expected to finalize the regulations much sooner.

In addition, §3160(c) provides that the DOGGR is required to enter into "formal agreements" with a number of other state and local agencies "clearly delineating requirements associated with well stimulation treatments and well stimulation treatment-related activities, including air and water quality monitoring, in order to promote regulatory transparency and accountability."

Well Permit System as Means for Enforcement

The bill requires an operator to apply for a well stimulation permit prior to performing any well treatments and would prohibit the operator from either conducting a new well stimulation treatment or repeating a well stimulation treatment without a valid, approved permit. The DOGGR will utilize this permitting mechanism as a means of enforcement once it adopts new rules and regulations specific to well stimulation treatments.

In addition to applying for a permit, §3160(d) requires that the operator submit to the DOGGR a significant amount of information about the planned well stimulation activities. At the discretion of the DOGGR supervisor, this permitting process may be combined with other well permitting matters. The operator's application must provide details about the well and stimulation treatment, including the dimensions of the job, the expected chemical composition of the well stimulation fluids, a water management plan, a groundwater monitoring plan and other aspects of the proposed operation. The DOGGR is required to furnish copies of issued permits to various agencies. The bill also requires the operator to provide notice to the DOGGR at least 72 hours prior to the actual start of a well stimulation treatment in order for the DOGGR to be able to witness the treatment.

Before a well treatment can begin, the bill further requires the operator to provide a copy of the approved well stimulation treatment permit to specified tenants and property owners at least 30 days prior to commencing a treatment. The operator is to engage "an independent entity or person" to give 30 days' advance notice and certain information to "every tenant of the surface property and every surface property owner or authorized agent of that owner whose property line location is one of the following:

(i) Within a 1,500 foot radius of the wellhead or

(ii) Within 500 feet from the horizontal projection of all subsurface portions of the designated well to the surface.

The identity of the surface property owner is to be established by reference to county tax records. The statute does not, however, provide a mechanism for determining the identity of tenants.

Unlike other state laws, Senate Bill 4 also gives a property owner the right to request that the operator undertake and pay for water testing and analysis of a surface or well water source that is "suitable for drilling or irrigation purposes." The testing includes follow-up measurements after the well stimulation has occurred.

Well Stimulation Fluid Chemical Disclosure

Like the laws in many other states, Senate Bill 4 requires operators in California to publicly disclose information about all chemical additives that they use in "well stimulation treatments" via FracFocus. FracFocus is an online searchable chemical disclosure registry that emerged in April 2011 to allow operators to voluntarily disclose information about hydraulic fracturing treatments to the public on a well-by-well basis. FracFocus is a joint project of the Ground Water Protection Council and the Interstate Oil and Gas Compact Commission. As of November 4, 2013, there were nearly 56,000 disclosures posted on FracFocus and more than 500 participating companies.

The bill requires that the operator make this disclosure within 60 days of the cessation of a well stimulation treatment. This is in addition to the disclosure the operator must make to the DOGGR officials before commencing the treatment. Ten states currently utilize FracFocus as a means of official state chemical disclosure, including Texas, Oklahoma, North Dakota, Colorado and Pennsylvania.

No later than January 1, 2016, the DOGGR is also to have its own web page for disclosure. Apparently in light of some criticism of the functions of the FracFocus web page, the DOGGR web page is required to allow the public "to easily search and aggregate, to the extent practicable, each type of information required to be collected... using search functions" on the web page. FracFocus recently released a new version of its search feature in order to address many of these criticisms.

While requiring public disclosure, the California law also allows companies to protect certain proprietary information from disclosure by asserting trade secret protection. This is for good reason. E&P companies, oilfield service companies, independent researchers and universities have developed, or contributed to the development of, a wide array of hydraulic fracturing and horizontal drilling technologies. In the highly competitive and diversified oilfield services market, the development of new hydraulic fracturing technologies can confer distinct market advantages to those that use them. In the event that an operator, service company or supplier withholds information on the grounds that it is proprietary trade secret information, then the withholding party must provide the DOGGR with the following information in order to substantiate its claim:

  • The extent to which the trade secret information is known by the supplier's employees and others involved in the supplier's business and outside the supplier's business.
  • The measures taken by the supplier to guard the secrecy of the trade secret information.
  • The value of the trade secret information to the supplier and its competitors.
  • The amount of effort or money the supplier expended developing the trade secret information and the ease or difficulty with which the trade secret information could be acquired or duplicated by others.

In the event that the DOGGR disagrees, the party claiming trade secret protection must seek relief in court or the DOGGR will release the information.Where proprietary trade secret information has been withheld, the withholding party must provide substitute information for public disclosure that includes a list of the chemical constituents of the additive and Chemical Abstract Service (CAS) identification numbers.

The DOGGR is also required to develop a procedure to make trade secret information available to health professionals. This is a common provision in state chemical disclosure laws and mirrors some aspects of federal law.

Senate Bill 4 allows health professionals to obtain proprietary trade secret information in the event of an emergency or to diagnose or treat a patient. The health professional must, however, submit a written statement of need. The health professional can then share such trade secret information with other persons as may be professionally necessary in order to diagnose or treat a patient, subject to certain restrictions, and those with whom he or she shares trade secret information cannot be required to sign a confidentiality agreement.

DOGGR Reporting

In addition to the other interim reporting required of the DOGGR while the new permitting program is being developed and implemented, the DOGGR must make comprehensive annual reports starting on January 1, 2016.

Fines

Senate Bill 4 significantly increases the amount that an operator or service company performing a well stimulation treatment can be fined for a regulatory violation. Previously, an operator or service company engaged in oil and gas production activities, including well stimulation treatments, was only subject to a fine of up to $25,000 per violation of the DOGGR's oil and gas regulations. There was no minimum floor for fines or applicable per diem fine. Now, an operator or service company engaged in oil and gas production activities involving well stimulation treatments is subject to a civil penalty of not less than $10,000 and up to $25,000 per day per violation of DOGGR's regulations specific to well stimulation treatments.

Other Agency Involvement

As noted above, the DOGGR must consult with a number of other state and local government agencies in the areas where the DOGGR is responsible. Senate Bill 4 requires that the State Water Resources Control Board (SWRCB) develop "model groundwater monitoring criteria," to be implemented on a well-by-well basis, or on a regional scale. The stated purpose of these criteria is to "assess the potential effects of well stimulation treatments ... on the state's groundwater resources in a systematic way." These new criteria are to be completed by July 1, 2015. Regional groundwater monitoring programs (based upon the developed criteria) are to be implemented by the SWRCB and regional water boards by January 1, 2016.

To the extent that the DOGGR shares jurisdiction with a federal entity, Senate Bill 4 requires that the DOGGR's rules and regulations apply in addition to all applicable federal laws and regulations.

Conclusion

Governor Brown's signing statement for Senate Bill 4 indicates that he is directing the DOGGR's parent agency, the Department of Conservation, to develop "an efficient permitting program ... that groups permits together based on factors such as known geologic conditions and environmental impacts, while providing for more particularized review in other situations when necessary. The bill needs some clarifying amendments and I will work with the author in making those changes next year." Inasmuch as the Governor's public statements have suggested that he encourages responsible development of the state's oil and gas resources, his signing statement suggests that he intends to develop a workable and practical program for allowing well stimulation treatments in California. Having an effective, efficient and workable regulatory program will be important in the years to come as technology develops and more information is learned about the state's shale potential.

Indeed, California's geologic and technological challenges in the Monterey Shale today are not wholly unlike the challenges faced in the North Texas Barnett Shale 15 years ago or the North Dakota Bakken just five years ago. In each case, the problem was not knowing that there were shale hydrocarbon reserves in those areas—that had been known for decades. Rather, the problem was finding a way to economically extract the hydrocarbons trapped in those formations. In fact, with seemingly insurmountable technical barriers, the industry largely ignored shale for decades. That all changed in the late 1990s and 2000s.

Mitchell Energy, a relatively small, independent Texas exploration and production company, did what nearly everyone at the time thought was impossible—the company developed a way to economically tap into the natural gas-rich Barnett Shale in North Texas. In the following years, different companies further advanced the technology originally used by Mitchell to tap into the Barnett Shale, adapting it to the unique geologies of other shale gas plays through the 2000s and then to shale oil plays starting in 2008. In the end, the real question regarding shale development in California should not be "if," but "when."

Originally published November 4, 2013

Footnote

1 See, e.g., S.B. 4, 2013-2014 Leg., R.S. (Cal. 2013).

Learn more about our Energy practice

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2013. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions