Hydraulic Fracturing: Short-Term Key Issues for Industry
Kelley Drye Client Advisory
December 10, 2010
Introduction

The day after the 2010 mid term elections, President Obama surprised many when he called for increased development of America's natural gas resources and by extension the increased use of hydraulic fracturing (a/k/a "fracking"). The call for more natural gas drilling by a Democratic administration highlights the ever-increasing complexities associated with natural gas drilling and fracking in particular. Whether it be regulatory, legislative, legal, or practical - natural gas fracking is one of the most visible and contentious environmental issues of the day. Questions regarding whether and when the practice is safe, whether the state or the federal government should regulate, and if and how environmental groups and industry can reach consensus in what promises to be the next big resource boom must all be addressed in the coming years.

In the first of a multi-part series on fracking, this article explores the key issues that will affect industry in the short-term, including the push for disclosure of fracking fluids, development of best management practices ("BMPs"), and the Environmental Protection Agency's ("EPA") upcoming study.

What is Hydraulic Fracturing?

Hydraulic fracturing, or "fracking" for short, is a method of extracting natural gas reserves, primarily in low-permeability gas reservoirs (i.e., rock formations with limited porosity and few interconnected pores preventing gas or fluid from passing through easily). As with any natural gas well, the initial wellbore is drilled through shallow groundwater into and below impermeable rock formations that separate the groundwater from the hydrocarbon producing zones.

To make the unconventional shale-gas more accessible, a mixture of water, sand, and specially engineered chemicals, known as "fracking fluid" or gel are pumped at high pressure into the natural gas reservoir, causing fractures to extend either horizontally or vertically away from the wellbore in opposing directions. The fractures increase the connectivity of natural gas reserves, ultimately allowing access to the gas at increased and economically viable volumes. The chemical/sand/water mixture is then pumped back out of the wellbore, leaving behind proppants (typically sand), which keep the fractures open permitting more gas to flow. Once the mixture is removed, the pressure difference allows the gas to escape into the wellbore for recovery.1 It is the potential for communication between the groundwater layers and the hydrocarbons during production that has prompted the most concern over the practice.

Since 1947, the oil and gas industry has used hydraulic fracturing to recover natural gas reserves in relatively accessible geologic formations using conventional technologies. While accessible sources are still being discovered, the industry is increasingly turning to unconventional natural gas resources, which are located much deeper than the already tapped conventional gas reserves. Advances in drilling technologies, including horizontal drilling and fracking are allowing companies to exploit these unconventional gas reserves that heretofore have been unreachable or economically unviable. As market and policy forces continue to drive cheaper and cleaner domestic fuels, the pressure to develop these unconventional resources continues to increase.2

Perhaps nowhere is the pressure to tap unconventional resources greater than in the Marcellus Shale - a shale formation that stretches from the southern part of New York, through the western half of Pennsylvania, the eastern third of Ohio, almost all of West Virginia, and small portions of Maryland and Virginia. It is estimated that there are between 50 and 500 trillion cubic feet ("tcf") of natural gas reserves in the Marcellus - making it (at the high end) the second largest source of natural gas in the world with enough gas to last over three centuries. However, significant shale gas reserves exist throughout the country, including in Texas and the West.3

Key Issues

A.  Disclosure

The ongoing fracking debate makes clear that one of the most significant and visible issues is the composition, management, and disclosure of fracking fluid.4 Following the lead of some states, EPA recently sent nine drilling companies voluntary disclosure requests seeking the composition of their fracking fluid. Despite EPA's efforts, many drilling companies have resisted full disclosure of fracking fluid, typically on grounds that the composition information is made available during the permitting process or that it constitutes confidential and proprietary intellectual property or trade secrets.

Whether the fracking composition is made available or not, the drilling industry continues to reassure regulators that the chemicals are relatively benign, present in minute quantities, and strictly managed to ensure no contamination.5 Yet, in 2010, House Energy Committee Chairman Henry Waxman (D-CA) reported that two companies (Halliburton and BJ Services) continued to use diesel in fracking fluid, despite having signed an agreement with EPA in 2003 not to do so.

Environmentalists have been resolute in demanding disclosure of fracking fluid chemicals as the first major step toward broader regulation and have called on Congress for help. Disclosure provisions were included in the Senate's legislative response to the Gulf Oil Spill, but the bill did not receive a floor vote in the Senate and is not expected to be taken up prior to the end of the 111th Congress. More recently, Representative DeGette (D-CO) and Senator Casey (D-PA) introduced the Fracturing Responsibility and Awareness of Chemicals (FRAC) Act, which would reverse the "Halliburton loophole" and require disclosure of the chemical constituents used in any fracking process. Environmental groups have indicated that they will continue to push disclosure legislation in both the House and Senate in addition to legislation reversing the Halliburton loophole allowing EPA to regulate the activity.6

B.   Best Management Practices

Another key issue will be the development and implementation of BMPs. Industry has generally resisted a move toward duplicative federal regulation and appears to be promoting BMPs as an alternative to either strict disclosure rules or legislation authorizing EPA regulation under the SDWA. Industry representatives argue that duplicative federal regulation could greatly inhibit the production of much-needed oil and natural gas, besides delivering a severe blow to the U.S. economy. A recent three-part study by IHS Global Insight estimated that federal regulation could cost the U.S. between $84 billion and $374 billion in Real Gross Domestic Product losses, accompanied by a loss of between 676,000 to three million jobs.

The industry has not spoken with a unified voice as to what BMPs should entail, or how they should be incorporated, if at all, into state regulatory programs; however, some clues are emerging. During a recent Department of Interior forum, several industry spokespersons addressed the issue. An overarching concern for the industry is that each drilling site is unique in its geology, hydrogeology, and surface characteristics, making a set of detailed BMPs which would apply nationwide impracticable. The American Petroleum Institute ("API") and others have begun to develop broad principles, which would be designed for further site-specific refinement. Included in API's BMPs, are standards for well casing and construction, data collection guidelines, and monitoring and testing protocols. Other suggested BMPs include standards for the reuse and recycling of wastewater (including fracking fluid), proper construction and lining of wastewater ponds, plans to curb emissions and other air impacts, and protection against surface water depletion.7

For their part, in addition to calling for the repeal of the 2005 SDWA fracking exemption, environmental groups like the NRDC, and some state regulators emphasize that BMPs must be comprehensive and incorporate the concept of "no drill zones" - i.e., places where the proximity to, and geology of, drinking water sources are such that no matter how carefully constructed, the risk of drinking water contamination is simply too great. NRDC is working in states like New York to identify such zones as well as demand full disclosure. Other initiatives by environmental groups include regulations to limit water withdrawals, and additional requirements imposed during the permitting process.

C.  EPA's Study

On October 8, 2009, in response to widespread national concern, Congress adopted a conference report in conjunction with EPA's funding bill urging EPA to commence a new study on the relationship between fracking and drinking water. Congress encouraged EPA to use "a credible approach that relies on the best available science, as well as independent sources of information . . . to be conducted through a transparent, peer-reviewed process that will ensure the validity and accuracy of the data." Congress' mandate acknowledges the growing public concern over fracking, its potential connection to drinking water contamination, and implicit in its charge, the shortcomings with a prior 2004 EPA study.8

EPA has begun the process of assembling the panel to carry-out the study. Mindful of the inadequacies of its past efforts, EPA is taking care in naming the panel. Of course, this has prompted maneuvering from both industry and environmental groups to position favorable viewpoints.9 Nominations for positions concluded October 1, 2010, and the Agency is expected to announce the panel members soon.

Meanwhile, EPA has begun circumscribing the study's scope. Early indications are that the Agency favors a, site-wide, life-cycle study. Such an approach would be significantly broader than the 2004 study and would focus on multiple potential contamination and exposure pathways - going beyond just the direct potential connection between fracking and drinking water. For example, a lifecycle analysis could account for potential impacts on land-use, erosion, storm-water runoff, water resource depletion, local air quality, community health, ecosystem services, along with potential ecological and health risks associated with potential drinking water contamination. In addition, and in contrast to the 2004 study, the report - whether broad in scope or not - likely will consider non-conventional natural gas reserves (i.e., shale), not just coalbed methane.

Notably, EPA has begun to emphasize environmental justice across its programs. Given the Agency's increased focus in this area and the likelihood that fracking will impact thousands of largely rural, poor communities throughout the country (particularly in the Marcellus Shale Area) EPA's report will likely accommodate environmental justice considerations - which would lend to a broad, life-cycle approach.

Members of EPA's Science Advisory Board, however, have cautioned EPA to limit the scope of the study - indicating that a life-cycle assessment, while potentially helpful, would not be realistic in the time-frame EPA has set for itself (i.e., publishing a report by the end of 2012). Instead, the members have called on the Agency to take a site-specific, risk-based approach that focuses on the greatest risks to human health first. Such an approach, narrower in scope, would focus on the environmental risks injection fluids pose to drinking water, and may consider the composition, handling, and storage of fracking fluid.

While too early to tell, the eventual study most likely will strike a compromise between a comprehensive life-cycle assessment and a study confined simply to potential direct drinking water impacts. Whatever the scope, the study's outcome will be a watershed moment, and depending on the conclusions may open the door for a comprehensive federal regulatory scheme (precisely the opposite effect the 2004 study had).

Conclusion

Over the next several years there promises to be a number of substantial developments related to the practice of fracking. Already, environmentalists have had success in pushing for greater disclosure of the composition of fracking fluids - a movement that is likely to gain momentum. Meanwhile, industry continues to develop BMPs as an alternative to comprehensive federal regulation or more stringent state regulations. As environmentalists and industry jockey for position, EPA will be developing what likely will be the first-ever nationally focused look at fracking impacts. The conclusions drawn by EPA will be important. The next article in the series explores the historic and current regulation of fracking at the federal level, and how EPA's ongoing study may change the regulatory environment.


1 See Schlumberger Oilfield Glossary, available at http://www.glossary.oilfield.slb.com/Display.cfm?Term=permeability.; See also Orford, Adam, "Fractured: The Road to the New EPA ‘Fracking' Study", Marten Law, September 17, 2010.

2 Natural gas is used to heat about half the homes in the United States. Natural gas is also used for electricity generation in about twenty percent of electric utilities in the United States. Because of its relatively low carbon content, the drive for cleaner fuel has elevated the importance of natural gas in the United State's energy portfolio. Indeed, following deregulation in 1990, most new electric power generation capacity has been based upon natural gas.

3 Several other prominent shale plays include the Barnett Shale in Texas with proven reserves of 2.5 tcf and potentially up to 30 tcf; the Haynesville Shale in Northern Louisiana, Southern Arkansas and Eastern Texas with an estimated 250 tcf of natural gas resources; and the New Albany shale in Illinois and Indiana, with reserves estimated at 160 tcf.

4 As of November 9, 2010, eight of the nine companies had either fully complied or unconditionally promised to comply with EPA's request.

5 See e.g., Marcellus Share Coalition "In the Spirit of Full Disclosure", stating that 99.5% of fracking fluid is water and sand, with the remaining 0.5% comprised of a known mixture of chemicals, including acids, glutaraldehyde, sodium chloride, N, n-Dimethyl formamide, borate salts, polyacrylamide, petroleum distillates, guar gum, citric acid, potassium chloride, ammonium bisulfate, sodium or potassium carbonate, proppant, ethylene glycol, and isoproponal. Website available at http://marcelluscoalition.org/wp-content/uploads/2010/06/msc-spirit-of-full-disclosure.pdf.

6 Given the results of the midterm election, however, the likelihood of either piece of legislation passing has been somewhat diminished.

7 For example, on December 9, the Delaware River Basin Commission recommended measures to protect surface water contamination and depletion within the Delaware River watershed. These include preserving minimum stream flows through prior-approved withdrawals, minimum setbacks, financial assurance, and stricter regulation on fracking wastewater.

8 In 2004, EPA commenced a study to ascertain the impacts to underground sources of drinking water directly related to hydraulic fracturing of coalbed methane wells. The report concluded that "injection of hydraulic fracturing fluids into coalbed methane wells poses little or no threat to [underground sources of drinking water] and does not justify additional study at this time . . . EPA did not find confirmed evidence that drinking water wells have been contaminated by hydraulic fracturing fluid injection into coalbed methane wells." Significant concerns were raised regarding EPA's conclusion and industry's involvement in the report.

9 For example, the short list of environmentalists for the panel include Theo Colvurn, a Colorado zoologist and pharmacist and member of the Endocrine Disruption Exchange, and Anthony Ingraffea, a Cornell professor and prominent critic of fracking. See Soraghan, Mike, New York Times, "Controversial Candidates on ‘Short List' for EPA Fracking Panel" (September 20, 2010). On the industry side, Jon Olson, a former Mobil research engineer and current professor at the University of Texas, Austin also is slated to be on the panel. Id.