Federal Rules Threaten to Suffocate the Fracking Industry

In Medieval times one form of dispatching miscreants was called "pressing".  The punishment involved piling stones on top of the offender one at a time slowly suffocating him from the weight on his chest.  Not only did this rid the kingdom of troublemakers but it had a "crucify him" like effect on the gathered witnesses lest they forget who is in charge.

Fast forward and today we are seeing Federal agency after agency pressing forward with new rules on hydraulic fracturing:

DOI BLM Fracking Rule. The Interior Department proposed new rules for hydraulic fracturing on lands controlled by the Bureau of Land Management (BLM). (May 4th - 60 day comment period). The proposed rules impose new well-bore integrity assurance requirements to verify that fluids used do not escape during fracturing operations. Public disclosure of chemicals used during hydraulic fracturing are required to be posted after fracturing operations is done.  Oil and gas operators would also be required to have a water management plan for fracturing fluids that flow back to the surface.

EPA Safe Drinking Water Fracking Rule. US EPA proposed rules on diesel fuel use in hydraulic fracturing under the Safe Drinking Water Act covering both federal and private lands. (May 4th - 60 day comment period)

EPA NSPS Rule. US EPA Administrator Lisa Jackson signed final New Source Performance Standards (NSPS). Under this rule EPA will for the first time regulate air emissions from natural gas wells using hydraulic fracturing. (April 17 - final NSPS rule at 40 C.F.R. Part 60, Subpart OOOO)

EPA NESHAPs. National Emission Standards for Hazardous Air Pollutants (NESHAPs) covers emission sources associated with exploration, production, processing, and transportation of oil and natural gas for upstream and midstream oil and gas industries.  (April 17 - Final Rule at 40 C.F.R. Subparts HH (covering the oil and natural gas production sector) and HHH (covering the natural gas transmission and storage).

Interagency Rules Working Group. President Obama issued an executive order April 17th creating an interagency working group to coordinate policy efforts among the federal agencies that oversee different components of the "development of unconventional domestic natural gas resources."

My purpose here is not to review the details of each of these proposed rules.  But when the President creates a committee to choreograph the rule making process across Federal agencies you can be assured that "pressing" is about to begin.

Why?

To date hydraulic fracturing has been regulated largely by the states.  This made sense since it was used in a few states where there was a growing body of experience with the players and techniques.  State regulation has a vastly different character to it since there has generally been a much better balancing of interests between environmental and economic concerns in protecting the public interest.  So North Dakota, for example, can adopt rules and supervise field operations to protect public health and safety while also assuring that the state's interest in economic growth is not harmed by irresponsible operators.  For more than twenty years this approach has worked without any significant environmental or other problems.

Even US EPA Administrator Lisa Jackson was forced to admit there is very little evidence of environmental problems with fracking to warrant Federal intervention.  That was music to the ears of the states, but it does not appear it will save them from a wave of new Federal regulation over fracking that almost surely will duplicate, preempt or interfere with the states.  On Federal lands the issue is different since much less drilling has been permitted.  Federal rules on federal lands are more wrapped up in the politics environmental issues especially in an election year.

So what should we make of this?

•    Being FOR domestic energy production while being AGAINST it.  The Obama Administration is trying to have it both ways in an election year.  It must seem responsive to its environmental base that opposes hydraulic fracturing because it leads to more domestic energy production and use of fossil fuels.  Yet it must seem responsive to labor and business interests and the public perception that domestic energy production of oil and gas is good for job creation, good for the economy and good for our national security.
•    The Law of Creeping Federal Preemption.   The Federal Government is engaging in an age old turf war with the states using Federal rules to progressively lay the ground work for arguing that the Federal rules preempt state rules in conflict.  The rules proposed and adopted so far play this game with precision narrowly citing Federal statutory authority yet being generously flexible in their application and implementation to avoid raising too much fuss especially before the election.  But make no mistake this battle of Feds vs States is coming.
•    The Death of a Thousand Fracking Rules.  For operators, investors, and the rest of the oil and gas industry just trying to do their jobs, make a living and do some good by developing America's domestic energy potential, new Federal rules are a mixed blessing.  On the one hand the uncertainty about future rules imposes enormous unquantifiable risk in a politically charged election year and beyond.  On the other hand, the piling on of Federal rules on top of state rules drives up the costs and can undermine the economics of many projects.  The worst fear is that rulemaking will be used at the Federal level to achieve a policy outcome that likely cannot be won in Congress.

The growth of domestic energy production from North America's unconventional oil and gas potential is remaking our future and our economy.  The decisions facing the country revolve around how to responsibly develop that potential for our economic revival and growth while balancing it against our broadly held desire to protect the environment for our children and grandchildren.  Rules that clarify ambiguities and promote best practices are good for the industry and good for the country.  Rules that drive up the costs, delay operations, create conflict and confusion are, in fact, the modern version of "pressing".

Let's all pray we do not get all the government we are paying for!

By. Gary L. Hunt

Gary Hunt is President, Scalable Growth Strategy Advisors, an independent energy technology and information services adviser and a partner in Tech & Creative Labs, a disruptive innovation software collaborative of high tech companies focused on the energy vertical. He served as VP-Global Analytics & Data at IHS/CERA; global Division President at Ventyx, now an ABB company; and Assistant City Manager-Austin Texas responsible for Austin Energy and Austin Water.