United States: California's New Hydraulic Fracturing Regulations: Implications And Next Steps

Last Updated: November 26 2013
Article by Elizabeth A. Lake

Elizabeth Lake is a Partner in the San Francisco office

California's Senate Bill 4 (SB 4) is one of the first laws in the United States to regulate hydraulic fracturing (or "fracking"). On November 15, 2013, the state's Division of Oil, Gas, and Geothermal Resources (DOGGR) issued its first set of draft regulations implementing the controversial new law, in accordance with SB 4's statutory requirements. DOGGR also issued a notice of preparation of an Environmental Impact Report (EIR), kicking off a year-long process intended to result in final regulations by January 1, 2015. The draft regulations are available here.

Comments on the currently proposed draft regulations must be submitted by January 14, 2014. Comments on the scope of the EIR must be submitted by January 16, 2014.

Interim Regulations Forthcoming

DOGGR has indicated that draft emergency interim regulations will be issued on December 13, 2013. They will be in place by January 1, 2014, and will govern hydraulic fracturing during the coming year. To that end, on November 20, 2013, DOGGR sent out a Notice to Operators to alert them to the pending emergency regulations and to clarify that if operators want to use well stimulation treatments in January 2014, they must notify neighbors by December 2, 2013. The interim well stimulation treatment notice form is available here.

DOGGR has also announced that in January 2014, it will convene a working group to help develop draft regulations addressing group permit procedures. Those draft regulations will be issued in March 2014.

Finally, DOGGR is working on formal agreements with other resource agencies, such as the Department of Toxic Substances Control, the California Air Resources Board and the State Water Resources Control Board, to develop formal agreements (due on January 1, 2015) regarding the agencies' respective authority, responsibilities and other matters regarding the implementation of SB 4.

Looking Ahead to 2014

It will be a busy year, and not just for DOGGR. Other agencies are also undertaking independent actions related to hydraulic fracturing and SB 4 implementation. Specifically, as required by SB 4, the State Water Board is developing groundwater monitoring criteria associated with the new regulations, and must develop by July 1, 2015 the model criteria that address, among other things, sampling scales and sampling methods.

The California Air Resources Board needs to address the SB 4 notification and reporting requirements associated with air quality. (In October 2013, its staff proposed some modifications to the regulation for mandatory reporting of greenhouse gases associated with hydraulic fracturing.) In addition, the Natural Resource Agency is conducting its SB 4-required study of well stimulation treatments and in December 2013 will begin its analysis to meet the statutory report deadline of January 2015.

There will be lots of regulatory activity to track, and it will be important for interested parties to stay involved. As a first step, understanding the scope and implications of the first set of DOGGR draft regulations is critical. This process will be informative to other states thinking of developing their own laws and regulations.

This alert provides a quick primer on hydraulic fracturing, a summary of California's regulations and a discussion of next steps.

Hydraulic Fracturing 101

Hydraulic fracturing and other well stimulation treatments break down (fracture) dense rock that has natural gas (or oil) bound tightly in the interstitial pores and allows the gas to be extracted. The basic process involves drilling a well deep down to the targeted layer, typically 2,000 to 10,000 feet below the earth's surface. Once the rock layer with natural gas (called the hydrocarbon zone) is reached, the drill moves horizontally through that layer. At this time, a mixture of water, sand and chemicals is injected at high pressure. The high-pressure fluid cracks or fractures the rock; the sand particles or other proppants hold the cracks open, allowing the oil or gas to flow more freely to the well.

The same well that is drilled to inject the well stimulation fluid is then used to extract the natural gas. This well passes through other layers of soil and rock and in some places will pass through drinking water aquifers — layers beneath the earth in which all the interstitial pore space is filled with water. Critics are concerned that chemicals from well stimulation fluids can leach into groundwater and pollute drinking water sources, and some are also concerned that the injection of high-pressure fluids can cause earthquakes. Due to the depth of hydraulic fracturing versus the depth of groundwater aquifers, the most likely way for groundwater contamination to happen is through a breach in the well itself, rather than upward migration of well stimulation fluid from the hydrocarbon zone. The extent and magnitude of earthquake impacts, if any, are not well understood. Therefore, California's draft permitting regulations provide one piece of the regulatory puzzle and will be further informed by the various concurrent processes, including the EIR and other agency actions.

Key Provisions of the Draft Regulations

DOGGR's draft regulations establish a permitting process for well stimulation drilling operations. The newly proposed permitting process applies only to well stimulation activities (hydraulic fracturing, acid fracturing and acid matrix stimulation) not to subsurface injection or disposal projects, which remain subject to existing regulations. The draft hydraulic fracturing regulations focus on disclosure, well integrity testing and impact modeling, well stimulation fluid handling, and monitoring and reporting, as discussed below. The anticipated costs of these regulations are provided in DOGGR's Economic Impact Analysis, available here.

Disclosure

Operators must submit a permit application with a long list of informational items (26 total), including, among other things, the anticipated volume of well stimulation fluid to be injected, the identity and concentration of chemicals used in the well stimulation fluid, water management and disposal plans, and certification from the Regional Board that the well is covered by a groundwater monitoring plan. The draft regulations preserve the trade secret exception provided in SB4 if the claim is substantiated and asserted in the application. However, the trade secret might not be protected if there is a breach under Section 1785(d) of the draft regulations.

In addition, operators must provide public notification at least 30 days before commencing well stimulation treatments. This notice must be provided by an independent third party to surface property owners and tenants within a 1,500-foot radius of any wellhead that will be used for well stimulation treatments, or within 500 feet of the surface projection of where the any horizontal parts of the wellbore is located, if greater than 1,500 feet from the wellhead. The notice must include a copy of the well stimulation permit and notice of the availability for surface water and groundwater sampling.

Well Integrity Testing and Impact Modeling

California's existing well construction standards are designed to ensure zonal isolation, meaning that oil, gas or any well stimulation fluids will stay in the well. This is done by placing a cement barrier between the well and the surrounding soil or rock. SB 4 and the associated DOGGR draft regulations do not require new well construction techniques. Instead, SB 4 and the draft DOGGR regulations build on these standards.

  • Operators must perform an evaluation to ensure that there are no voids or cracks in the cement before performing a well stimulation treatment. DOGGR estimates that at least 95 percent of well stimulation treatments already involve some sort of cement evaluation. Costs for a radial cement evaluation log can be $3,000 for a shallow well and up to $10,000 for a deep well.
  • Operators must perform a three-dimensional modeling analysis to demonstrate that there is no potential for well stimulation fluids to migrate out of the hydrocarbon zone that they were injected into. This analysis must include all wells and faults within a radius of twice the anticipated well stimulation treatment length. If the productive hydrocarbon zone extends more than five times the anticipated well stimulation treatment length, the model must include the geologic formations adjacent to the hydrocarbon zone to ensure geologic and hydrologic isolation during and following well stimulation. DOGGR assumes that operators have a good understanding of the geology near and around the wells subject to well stimulation treatments based on modeling such that the proposed regulations simply make a standard practice a requirement. DOGGR estimates that the modeling software can cost between $37,000 and $100,000, and that additional costs will be incurred through professional time required to perform the analysis.
  • Operators must pressure test the well and associated equipment prior to starting any hydraulic fracturing. DOGGR states it is generally standard practice to pressure test prior to well stimulation, and may cost up to $4,000 to $8,000 for a full day.

Well Stimulation Fluid Handling

One concern raised by critics of hydraulic fracturing in California is the potential storage and handling of well stimulation fluids in open, unlined pits that could leak into drinking water aquifers. The draft regulations address this concern by requiring operators to:

  • store well stimulation fluids in compliance with current secondary containment requirements (unless it is a temporary or portable production facility),
  • account for stimulation treatment fluids in spill contingency plans, and
  • test unused stimulation treatment fluids to determine if they are hazardous before transporting them offsite.

Monitoring and Reporting

To ensure integrity of wells that are using and have used well stimulation treatments, the draft regulations require ongoing monitoring, specify minimum standards for that monitoring and include reporting requirements. For example:

  • Operators must monitor key parameters during the well stimulation and notify DOGGR if there is any indication that a breach occurred.It is current industry practice to monitor fluids and pressure during well stimulation treatment, so DOGGR does not anticipate that this requirement will add new costs for operators.
  • Operators must immediately report a breach or well failure to DOGGR and the Regional Water Quality Control Board. DOGGR notes that costs to notify and rectify the breach will depend on the nature of the incident.
  • Operators must monitor the well once every two days for 30 days after the well stimulation treatment, and monthly until the operators sees a 95 percent reduction in well stimulation fluid in the fluid produced by the well. The cost of additional monitoring required by the proposed regulations could range from $3,000 – $7,000 per well, or $216,000 – $504,000 for a representative operator.
  • Operators must report and disclose on a public website specified information, including, among other things, the composition and amount of well stimulation fluids used. This provision includes the limited trade secret exception.
  • Operators must submit a report within 60 days after cessation of well stimulation treatment to DOGGR, detailing what happened during the well stimulation treatment. This report must note if the USGS recorded any earthquakes over magnitude 2.0 in the area of the well since the start of well stimulation treatment.

Next Steps

The 60 days of public comment period on the draft regulations is underway. Again, comments are due on January 14, 2014. Given the contentious nature of the law, there will likely be numerous comments from both industry and environmental groups. In addition, the regulations may change as a result of the California Environmental Quality Act (CEQA) review process that is also just getting underway.

Significant uncertainty revolves around the benefit of third-party notice provisions, the extent of groundwater monitoring, the type/costs/effectiveness of modeling sufficient to understand the extent of the treatment area of influence, the extent of trade secret protection in the event of a well breach, the need for hazardous testing of stored fluids so long as they remain stored, to name but a few issues.

Holland & Knight is prepared to help you navigate these proposed regulations. We have extensive experience in permitting and entitlement work for projects, including oil and gas projects, in California.

The author wishes to thank Holland & Knight Associate Joanna "Joey" Meldrum for her assistance with this alert.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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