Register for a complimentary CLE webinar: Best Practices for Avoiding Common Issues Arising from Hydraulic Fracturing (Fracking) Extraction Agreements - Tuesday Dec. 20th 2PM EST http://www.eventsvc.com/LexisNexis_HB/register/8aa10302-64b8-4d6d-87aa-9888ce665812
Attend this free webinar and learn about some of the special components of these lease agreements, how to avoid common pitfalls and best practices for negotiating the best terms possible. Also learn the basics of hydraulic fracturing, how royalties are calculated, special issues for tax sale properties and much more during this complimentary webinar.
Jim Rubin and Jennifer Morrissey of SNR Denton, in an excerpt of the recent White Paper, Fracking in the Spotlight: What Regulatory Developments Can Be Expected and How Companies Can Best Position Themselves, state the following.
Background. Natural gas is increasingly becoming a major source for power generation in the United States. In 2009, natural gas fueled more than 20% of the nation's annual electricity production. That percentage is expected to rise significantly as older coal plants are retired and coal generation is subject to ever more stringent regulations. The nuclear renaissance in the U.S. appears stalled due to rising construction costs and safety issues in the aftermath of the nuclear crisis in Japan, and widescale dependence on renewables is not yet economic. At the same time, natural gas has become our nation's most cost-effective power generation option in terms of both fuel and construction costs. Natural gas reserves are becoming more plentiful as techniques are developed to reach unconventional shale gas sources, such as found in the Marcellus, Haynesville and Barnett shale deposits. The gas has always been there, up to 10,000 feet underground, but the development and increased use of horizontal drilling and hydraulic fracturing - or "fracking" - has made these large deposits newly accessible.
Fracking is not without challenges and controversies. The development of our nation's natural gas supplies will depend on the regulatory framework that develops in this area.
Fracking 101. Fracking itself is not a new technology. It has been used in the oil and gas sector for over 60 years. Fracking is a well-stimulation technique that employs high pressure fluids - water, sand and a small mixture of chemicals - to create and prop open small fissures in shale rock, providing a path for gas entrapped within underground formations to move easily to perforated wellbore for extraction. By combining fracking with new horizontal drilling techniques, companies are now able to reach deep supplies of shale gas that in the past would have not been physically or economically accessible. The process also allows access to far greater quantities of gas with much less surface disruption than with vertical drilling alone.
But natural gas production, even with the new techniques, remains a heavy industrial process with significant environmental impacts. For one, fracking requires large amounts of water - between 2.4 and 4 million gallons for each well. This water can become contaminated with traces of fracking chemicals as well as substances occurring naturally in the subsurface, including metals and radioactive materials. A significant amount of water remains in the well after fracking, while the water that returns to the surface, or "flowback," contains concentrated brine and other contaminants and must be properly handled, treated or disposed. Companies have begun to use recycled water, but this, too, requires storage and eventual disposal as the water becomes too contaminated for future use.
The Controversy Over Fracking. The potential for pollution of drinking water aquifers as well as surface waters has created much of the controversy surrounding fracking, though gas production can also affect air quality through the use of drilling machinery, heavy trucks, and so forth. Added to this concern is the fact that many companies use a variety of chemicals in their fracking fluids that are considered proprietary, leading to a concern that undisclosed toxic chemicals are being released into the environment.
Concerns over the potential contamination of surface and groundwater have grown exponentially over the last several years as gas drilling has proliferated near urban areas in the northeast that overlie the Marcellus Shale formation. Even though the fracking activity takes place far below potable aquifers, there is still the potential for leaks from improper concrete seals in the well bore and other construction defects. Responding to these concerns, several states and municipalities have recently banned, at least temporarily, further drilling (see below). A handful of lawsuits have been filed in a number of states alleging that fracking activity is responsible for contamination of wells and harm to the health of residents near drilling sites.
More recently, a number of press reports, including a series in the New York Times, have generated new controversy over the disposal of large amounts of fracking wastewater into water treatment facilities, which then release the water into rivers. The arti cles cite federal and state studies identifying naturally occurring radioactive materials and other contaminants that may overwhelm or fail to be neutralized by the treatment plants and thus flow into the environment downstream of water treatment facilities.
Finally, concerns have been raised about precisely how much water companies are actually recycling, how that water is eventually disposed of, and the potential impacts from use of recovered brine.
Current Regulation of Fracking. One public misconception about fracking is that it is unregulated, which has added fuel to the controversy. This misconception is rooted in the fact that at the federal level, hydraulic fracturing is specifically exempted from the federal Safe Drinking Water Act (SDWA), except if diesel is used in the process. Drilling fluids, produced waters, and other wastes associated with the exploration, development, and production of natural gas are exempt from the hazardous waste provisions of the Solid Waste Disposal Act, and hydrogen sulfide air emissions from oil and gas drilling are also not regulated as hazardous air pollutants under the federal Clean Air Act.
In fact, most regulation of drilling activity occurs at the state level. State oil and gas permitting and oversight regulations control the issuance of drilling permits and the required practices for drilling and operating the wells, including the design and installation of cement casings through water-bearing zones and the disclosure of chemicals used in the process.
Recently, some states with significant drilling and fracking operations have stepped up oversight. For example, due to concerns over groundwater contamination, New York has taken a very cautious regulatory approach to fracking. By preventing issuance of new permits for fracking in the Marcellus Shale underlying the state, New York has created a de facto moratorium on the process. The state's environmental agency is conducting a study on the environment impacts of fracking, and the Cuomo administration says it will not lift the moratorium until that study is completed in June 2011. New York further stated that it will not wait for the results of the EPA study. State regulations also govern the drilling process and require the disclosure of chemicals used in the process.
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