23 March 2012
Opponents of hydrocarbon development have been doing a good job of linking hydraulic fracturing to every alleged environmental problem in oil and gas production and questioning the extent of shale reserves. With this notoriety, government responses to fracturing in the United States are rapidly evolving at the federal, state, and local levels. In addition to participating in these legislative processes, in-house counsel should review the developing regulations to evaluate whether their companies have sufficient policies and procedures in place to make sure facts are gathered up-front to defend production operations from environmental enforcement actions and tort claims. What follows are a few tips for going about that task.
There is plenty of raw material for deciding how to minimize liabilities. While various federal agencies are actively evaluating national fracturing rules, the states have been far more active in actually promulgating requirements. Arkansas, Colorado, Michigan, Ohio, Oklahoma, Pennsylvania, Texas, West Virginia, and Wyoming all recently have adopted disclosure or operational requirements for fracturing. Local governments in Texas, New York, and Pennsylvania also have taken aggressive action ranging from restrictions on fracturing to outright bans.
Besides working on new regulations, both federal and state agencies are bringing enforcement actions when contamination is found near fracturing operations. Those claims are often based on circumstantial evidence. Today’s operators may be targeting deep geologic formations, but hydrocarbon constituents can be expected to be present in the shallow zone as well. Although extracting those hydrocarbons currently may be uneconomical, they still may end up in people’s homes and drinking water.
Recent research shows the extent of this issue. The Center for Rural Pennsylvania compared water quality before and after drilling in 233 groundwater wells within 5,000 feet of the Marcellus Shale well pads. No major influences of gas drilling on water quality were detected. There was no increase in dissolved methane levels near hydraulically fractured sites and no correlation between dissolved methane and distance to the nearest Marcellus well. Nevertheless, it bears emphasizing that approximately 24 percent of the groundwater wells did contain detectable dissolved methane before any nearby drilling, and approximately 40 percent had at least one preexisting water problem, such as an exceedance of drinking water quality standards.
Significant effort and investigation may be needed to defend against allegations that fracturing caused environmental impacts separate from such preexisting conditions. Consequently, companies should consider whether their existing procedures will allow them to demonstrate up-front—instead of in the midst of a public relations disaster or lawsuit—that their activities cannot have been responsible for any conditions first noticed after the start of drilling. That may require detailed reviews of local conditions and operational practices.
One option for minimizing and more easily defending claims is to adopt internal procedures that adapt useful safeguards from industry standards and regulations in other jurisdictions. The first step is to perform a baseline environmental survey. As discussed earlier, many substances in a drinking water well may originate from natural sources. Homeowners, nonetheless, are likely to blame hydrocarbon well drilling, fracturing, or other recent hydrocarbon production for those preexisting conditions. Before drilling, a carefully managed survey that incorporates sampling as well as an assessment of likely migration pathways, such as previously abandoned boreholes, can help insulate an operator from unfounded claims and forestall allegations that the investigation was designed, after the fact, merely to limit liability.
Typically, environmental assessments contain geology sections. While those frequently receive short shrift, the issue deserves extra attention in fracturing assessments. Northeastern Pennsylvania, for example, commonly contains gas-bearing and potable water-bearing formations above the depth of the targeted Marcellus Shale. Various fractures and joints provide pathways for the migration and buildup of methane. Forewarning of such conditions may help prevent gas migration incidents.
Anecdotal evidence suggests that improperly sealed wells may be a more likely contributor than fracturing to cases of water contamination and hydrocarbon migration. Liability risk mitigation measures, therefore, might include procedures to optimize cement placement, to confirm with testing that the well is sealed, and, just as importantly, to document those steps are taken.
Another way to mitigate fracturing liability risk is through the choice of materials. The process for selecting fracturing fluids should include an evaluation of associated potential liability and whether more environmentally friendly formulations are available. Regardless of what chemicals are selected, they will be managed at the ground surface where they will have a much easier path to drinking water than when they are injected into deep geologic formations. All the effort of designing and implementing a safe fracturing job potentially will be wasted if the fracturing chemicals are spilled into the ground. That means having documented operating procedures and ensuring that they are followed. Even the best-laid plans, however, do go awry. A fast, effective response in those cases is likely to limit the extent of the damage. That puts a premium on having practical and robust emergency plans customized to local conditions, backed by specific training, with clear lines of communication.
For companies subject to SEC reporting, in-house counsel should monitor developing regulations and ongoing fracturing controversies to evaluate whether all associated risks, trends, demands, and uncertainties are appropriately disclosed. Given the imprecise nature of shale play reserve estimation, this should include consideration of whether reported estimates of proven, probable, or possible recoveries are sufficiently conservative to avoid overstatement allegations.
No matter how a well owner/operator chooses to manage environmental liabilities from nonconventional oil and gas production, the stakes involved are sufficiently high to warrant advance consideration of these issues, rather than following the “usual procedures” and dealing with problems as they arise. Development of shale oil and gas has relied upon evolving technology; liability management techniques should be equally forward thinking.