3 December 2012

A tougher fracking regime in prospect

The Parliamentary Commissioner for the Environment will recommend a tougher regulatory regime for fracking next year.
New Zealand Energy and Natural Resources
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The Parliamentary Commissioner for the Environment will be recommending a tougher regulatory regime for fracking when she delivers her final recommendations to Parliament next year.

This is clear from her interim report, released on Tuesday, which concluded that:

  • the risks associated with fracking can be managed effectively by the implementation of operational best practice, enforced through government regulation, but
  • the current New Zealand framework is fragmented and may not be adequate to the task.

Although the report did not deliver formal recommendations, it outlined seven interim findings relating to the environmental risks of oil and gas production and to regulatory oversight. Crucially, the Commissioner states that a moratorium on fracking is not presently justified.

Fracking (or 'hydraulic fracturing') is a process of injecting fluid containing sand and chemicals at high pressure to fracture rock in order to extract previously inaccessible oil and gas.

The context

The Commissioner decided to conduct the fracking investigation after receiving requests from MPs on both sides of the House, local councils and members of the public. Several local authorities are looking to the Commissioner for guidance in developing their own fracking policies, delivered through their district and regional plans.

Fracking has been in use in New Zealand since 1989 but has been pretty much confined to the Taranaki Basin. However oil and gas exploration permits have now been granted in other parts of the country, particularly in the East Coast of the North Island, where fracking techniques may be required for extraction. The geology of this area is very different to the Taranaki, having a greater mix of rock types, including shales, and much higher seismicity.

Public concerns about the safety risks associated with fracking are not confined to New Zealand. A number of studies have been conducted or are underway in other jurisdictions, among them a recent UK study by the Royal Society of London which found that fracking can be made safe provided "operational best practices are implemented and enforced through regulation". This finding was influential with the Commissioner and is quoted by her.

Inquiry part of a broader work stream

A few hours before the release of the Commissioner's interim report, the Government announced new health and safety (HSE) regulations to cover the oil and gas sector. These will bring New Zealand into line with UK and Australian practice and will apply from June next year.

New requirements are:

  • operators of larger, higher risk installations (both onshore and offshore) will be required to prepare a safety case to be submitted to and accepted by the Ministry of Business, Innovation and Employment (MBIE) before work can commence
  • fees of between $70,000 and $100,000 will be required to cover MBIE's costs for the assessment of these safety cases, depending on the type of installation. A revised safety case will cost between $34,000 and $54,000
  • operators of smaller scale, lower risk onshore installations will be required to prepare an HSE overview in lieu of a safety case
  • all operators will have to report 'near miss' incidents to ensure that MBIE has sufficient data to inform its regulatory priorities
  • the regime will cover the whole life cycle of the well – from design and construction to decommissioning – and operators will be required to ensure that all phases are subject to independent and competent outside scrutiny.

The Government also introduced a Supplementary Order Paper to strengthen the HSE provisions in the Crown Minerals (Permitting and Crown Land) Bill. Changes include:

  • extending the definition of 'good industry practice' to include HSE considerations
  • requiring the Minister of Energy and Resources to seek the view of the appropriate health and safety regulator before issuing a Tier 1 exploration or mining permit, and
  • providing that HSE requirements must have been met before mining can begin.

In addition, the Independent Taskforce on Workplace Health and Safety, appointed as part of the Government's response to the Pike River coal mining tragedy, is preparing a reform package for presentation to Ministers in April next year.

And the Environment Minister has instructed the Ministry for the Environment to produce clear guidelines on the respective functions of central and local government in relation to the control of fracking.

These developments will affect the context into which the Commissioner will deliver her final report.

Key findings

Four of the seven interim findings relate to the different stages of oil and gas production that are key to protecting the environment from the risks of fracking.

They provide an indication of the areas in which the Commissioner feels that more regulatory guidance or direction may be required.

  • Choose the well site carefully (ensuring that the geology and hydrology of the site is well understood both by the regulators and by the companies).
  • Design and construct wells to prevent leaks (the integrity of the well is very important, the number of layers of casing, how far the casing extends, the quality of the cement that binds the well to the surrounding rock, the ability of the structure to survive earthquakes).
  • Prevent spills and leaks on the surface (the risk of contamination from waste storage can be reduced by minimising the use of toxic chemicals, lining storage pits, using tanks as much as possible).
  • Store and dispose of waste with care (currently in New Zealand wastewater is generally injected back into deep rock layers. How safe this practice is will depend on local geological factors).

The remaining three findings are concerned with the quality of regulation and enforcement and will be examined further in the second phase of the Commissioner's inquiry. The Commissioner notes that:

"When fracking is done well, the chance and severity of environmental damage is small compared to some other economic activities. On the other hand, when it is done badly, the risks are higher. Thus, managing operations well right through the process is very important".

Problems with the current framework are:

  • oversight is complex and fragmented
  • regulation may be too light-handed so that operators are perhaps being trusted too much to do 'the right thing', and
  • a 'social licence' for fracking has yet to be earned as there has not always been sufficient communication and engagement with local communities to build up the requisite trust.

The Commissioner comments that there are many regulators – MBIE, the High Hazards Unit and the territorial authorities – and that it is not clear how their different areas of responsibility intersect. It is unclear, for example, who is responsible for:

  • assessing site-specific risks to the environment from fracking fluid
  • examining well integrity for environmental risks, and
  • monitoring abandoned wells.

This lack of clarity is exacerbated by wide variation in regulation among councils. Some examples:

  • drilling a well is a permitted activity in Taranaki so is only controlled by conditions set out in the regional plan whereas, in Hawke's Bay, it is a controlled activity, meaning that a resource consent under the Resource Management Act (RMA) is required, and
  • Waikato Regional Council requires only that decommissioned wells be sealed and abandoned in a manner that prevents cross-contamination between water bodies or changes in water pressure while Gisborne District Council is highly prescriptive in its approach.

Specific regulatory gaps which the Commissioner discusses in some detail are:

  • once a company has been granted a permit, it seems to be free to decide where to drill within the permitted area without any input from either central or local government
  • although the operator must take "all practicable steps" to notify the High Hazards Unit in MBIE 20 days before drilling begins, the actual drilling plans do not require the approval of the Unit
  • it is not clear who is responsible for well integrity – the High Hazards Unit or regional councils
  • in the absence of New Zealand standards for well design and construction, companies are tending to follow the specifications applying in their home jurisdiction
  • New Zealand's HSE regulation is completely separate from its environmental regulation
  • there is no central guidance to councils on fracking (the Commissioner suggests that the Environmental Protection Authority may be the appropriate body to provide this, given the expertise it will need to develop to perform its regulatory responsibilities in relation to off-shore drilling), and
  • even where operators are required to provide (often highly technical) data to councils, MBIE, New Zealand Petroleum & Minerals and to the High Hazards Unit, there is "no guarantee that the information is always being understood and used to enforce best practice – or even good practice".

Where to from here

Because the Commissioner is an independent Officer of Parliament, she reports to Parliament rather than to the Cabinet.

However, her recommendations will be influential because of the political sensitivities created by the Pike River disaster and because the Government recognises that the public needs to have confidence in how the practice of fracking is managed.

Ministers have asked MBIE to prepare a detailed response to the Commissioner's interim report so that this can inform her final recommendations, due in mid 2013.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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