Study Reveals Environmental Issues in Oil & Gas Leases

There was an excellent article in the New York Times discussing the issues homeowners and landowners are facing when signing oil & gas leases- Learning Too Late of the Perils in Oil & Gas Leases

The Times reviewed 111,000 oil & gas leases from Ohio, Pennsylvania, New York Texas and West Virginia.  It found many of the leases contained very unfavorable terms for landowners and homeowners who sign up with drilling companies.  Many of the issues pertain to the potential environmental problems that may happen once drilling commences or even after work is finished at the property.

Concerns identified included:

  • less than half the leases compensate for water contamination;
  • many lack language to protect against livestock and crop damage;
  • grant driller broad rights to build road, store chemicals and even leave waste in place once drilling has ceased.

Not discussed in the article are other issues that need to be considered by landowners when negotiating leases. 

First, even if the lease contains language which entitles the landowner to compensation if environmental contamination or other property damage occurs, does the company really have the resources to pay?  Its possible the corporate structure is established to prevent liability from flowing to the parent corporation.  

Second, what happens if you neighbors sue you claiming environmental contamination, nuisance or property damage?  Does the lease provide any guarantee that your attorney costs will be paid? 

Landowners are constantly hearing about the opportunities associated with the Marcellus and Utica shale deposits.  However, are they protecting themselves properly in the event something goes wrong?   

Ohio and Pennsylvania Debate Regulation of Hydraulic Fracking Wastewater

Hydraulic fracking provides the opportunity to tap into massive natural gas reserves which is located deep beneath the earth.  In Ohio and Pennsylvania, Marcellus and Utica Shale is sedimentary rock which contains huge quantities of natural gas.

Hydraulic fracking uses water injected at high pressure to break up the rock allowing the gas to be released into wells.  The process uses large amounts of water.  One well may use up to three to eight million gallons of water in about a week. 

Most of the water stays deep underground, but around 10% resurfaces and is called flowback water.  Regulators consider flowback water wastewater from an industrial operation because the water contains total dissolved solids (TDS), salts and metals/oils used to aid in the fracking process.

Disposal of the flowback water has been hotly debated in Pennsylvania where massive quantities of the water have been generated.  Pennsylvania Department of Environmental Protection (Pennsylvania DEP) estimates 235 million gallons of flowback water was generated in 2010.

Methods for Disposal of Flowback Water

The primary method of disposal of flowback water in Pennsylvania was through publicly owned sewage treatment plans (POTWs).  However, concerns emerged that POTWs could only dilute the water, not treat it prior to discharge to streams and rivers. 

Pennsylvania passed regulations establishing effluent standards for treatment of flowback water.  However, the regulations exempted existing loads and only kicked in if a treatment facility was expanding.  Pressure mounted on DEP to regulate disposal of all flowback water.

Industry Voluntarily Ceases Use of POTWs in Pennsylvania

Last week, Pennsylvania DEP announced that the oil/gas industry voluntarily agreed to stop the practice of shipping flowback water to POTWs.  The DEP announcement from last Thursday was covered in Pennlive.com:

Environmental Protection Secretary Michael Krancer told officials in a meeting in Washington, D.C., on Thursday that drilling wastewater is no longer being discharged to rivers or streams in Pennsylvania without full treatment.

DEP spokeswoman Katy Gresh said the agency has not yet confirmed full compliance with Krancer’s request that drillers voluntarily stop taking the wastewater to such facilities.

But she said it has confirmed that “We’ve gone from millions and millions of gallons being discharged to virtually none.”

After the announcement, its seems clear Pennsylvania is moving toward use of dedicated treatment facilities that can treat the brine and materials in flowback water.  Approximately 25 of these facilities are slated to open. 

Debate over Disposal of Flowback Water Shifts to Ohio

Perhaps seeing the debate unfold in Pennsylvania, Ohio regulators decided they needed to tackle the issue over disposal of flowback water.  In part, the issue was brought to a head by a company, Patriot Energy Partners, who had built and operated a pretreatment center connected to the City of Warren's POTW.  The company also was in process to build and operate facilities in Steubenville and East Liverpool.

On May 16th Ohio EPA issued a letter to the Ohio Department of Natural Resources clarifying regulatory authority over the disposal of flowback water.  In part, the letter was issued to clear up a debate between the Agencies as to who had regulatory authority since ODNR regulates oil & gas drilling and Ohio EPA regulates POTWs through NPDES permits.

The letter set forth the Agencies regulatory determination on several key issues:

  • ODNR has regulatory authority over the disposal of flowback water (letter uses the term "brine")
  • POTWs will not be allowed to accept flowback water for disposal (the City of Warren permit will not be renewed)
  • Current Ohio law (R.C. 1509.22) only allows disposal of flow back water by the following methods:
    • deep well injection into underground formations
    • road surface application
    • catchall: other approved methods by ODNR

For practical purposes, deep well injection will likely be the primary method of disposal in Ohio unless its shown that dedicated treatment facilities are a cheaper disposal option.  Its interesting to note that Pennsylvania has only one commercial deep well and Ohio has approximately 150 wells that may be capable of disposing of flowback water.

 

Kasich Names New Directors for Ohio EPA and ODNR

Last week, Governor-Elect Kasich named the new Director's for Ohio EPA (Scott Nally) and the Ohio Department of Natural Resources (David Mustine).  At the press briefing, Kasich reiterated his election theme of returning business growth to Ohio.  This from the Columbus Dispatch:

"These departments are going to send a message to Ohio that we are open for business," Kasich said in naming Scott Nally of Indiana as head of the EPA and former American Electric Power executive David Mustine as director of Natural Resources.

Kasich, a former Republican congressman who will take office Jan. 10, emphasized that he doesn't plan to empower business at "the cost of environmental degradation." But in the next breath, he said he wants to "exploit the wonders of our state."

"When you have something that's really valuable, use it," he said in a briefing at the Rhodes Tower. That includes drilling for oil and gas in state parks and on state land, he said.

Additional Background on Both Appointments

Scott Nally

Current Title: Assistant Commissioner, Office of External Affairs for IDEM

Degree(s): Master of Science from University of Wyoming; Bachelor of Science in Biological Sciences from North Carolina State University

Special license(s): Wastewater Operator certified in Indiana and Virginia; Pesticide Applicator License certified in Indiana

Experience: Regional environmental manager at Perdue Farms Incorporated; numerous publications; held various positions in the environmental and biological sciences; served as president, chairman or board member on various county boards

David Mustine

David Mustine was a Senior Vice President for American Electric Power (AEP) for European business development.  More recently he had his own consulting business. He also served as an investment manager for a Bechtel Group.  He has a B.S. in business from Ohio State, an MBA from DePaul and a MA from Ashland Seminary.

Appointments Consistent with Kasich "Business" Theme

The Governor Elect was all about jobs, jobs and jobs during the election.  He said a key to addressing Ohio's high unemployment rate was creating a better business climate.

Both appointments appear consistent with those themes. Scott Nally served in The Indiana Department of Environmental Management (IDEM) which has been under the leadership of Tom Easterly since 2005 when Governor Mitch Daniels appointed him Commissioner.  Easterly has  had a strong emphasis in running IDEM with an eye toward assisting business in navigating complex environmental regulations. 

Mustine's background at AEP will certainly be viewed with a skeptical eye by many environmental groups in Ohio.  However, he brings a unique business background to a organization whose past two Directors were much more political- both were former State Senators. 

Ohio EPA + ODNR?

 

 

Ohio is facing a $8 billion dollar budget gap.  Governor-elect Kasich has stressed the need to streamline state government as part of solving the budget crisis as well as making government more efficient. 

During his campaign he already announced one very creative proposal to eliminate the Ohio Dept. of Development.  Could an idea being tested in other states- combining State environmental programs-be a proposal worth considering in Ohio? 

Good in Theory?

A brief overview of the current state structure suggests combining responsibilities would gain efficiencies.  Similar functions and staff with similar capabilities are spread across five different state agencies. 

Combining functions and potentially agencies could benefit those organizations.  Greater efficiency is not only good for business, its good for agencies that are constantly fighting for funding to support their programs.

The counter argument is that combining large government agencies you run the danger of creating even a larger bureaucracy.  Not only could there be even more layers of management the organization could become too large to effectively manage. 

An Overview of the Current Ohio Structure

Most environmental regulatory functions are split between the Ohio EPA and the Dept. of Natural Resources.  However,  there are clean up, regulatory and grant programs related to the environment spread across a total of five different state agencies. 

Here is just a quick look at various functions that have commonalities and are divided up between multiple agencies.

Brownfield Redevelopment and Clean Up

  • Clean Ohio Program- divided between Ohio Dept. of Development and Ohio EPA

Federal Water Pollution Permitting Programs

  • Combined Animal Feeding Operations NPDES (Clean Water Act) permit program-  Department of Agriculture
  • NPDES (Clean Water Act) permit program- Ohio EPA

Litter and Recycling

  • Division of Soil & Water Resources (Previously Divisions of Soil & Water Conservation and Division of Recycling & Litter Prevention)- ODNR
  • Division of Solid Waste Management (manages Solid Waste Management District recycling efforts)- Ohio EPA

Wetlands

  • Environmental Review Program (Wetlands)- ODNR
  • Division of Surface Water (401 and Isolated Wetlands Permitting)- Ohio EPA

Ground Water Management

  • Ground water well information (within Division of Soil & Water Resources)- ODNR
  • Division of Drinking and Ground Waters- Ohio EPA

Surface Water and Lake Erie

  • Soil and Water Conservation programs - ODNR
  • Coastal Zone Management Program - ODNR
  • Great Lake Compact Program (Under development)- ODNR
  • Lake Erie grants program- Lake Erie Commission
  • Surface water Lake Erie Unit- Ohio EPA
  • Surface water regulatory and permitting programs- Ohio EPA

Underground Storage Tanks

  • Bureau of Underground Storage Tanks (BUSTR)- regulation and clean up of releases of hazardous substances from USTs- Dept. of Commerce
  • Clean up of hazardous substances un-related to USTs- Ohio EPA
    Diesel Engine Grant Programs

Diesel Emission Reduction Programs

  • Diesel Emission Reduction Grant Program- Ohio Dept. of Development
  • School bus diesel emission grant program- Ohio EPA

The list of similar functions spread across multiple agencies is probably longer.   In addition to similar regulatory functions, each of these agencies maintain their own Information Technology Offices, HR, Motor Pools, Facilities Management, Press Offices and Director's Offices.  Combining support offices could also gain efficiencies.

Not a Budget Fix

After modifications to its funding strategy, Ohio EPA utilizes no general revenue funds to support its programs.  ODNR has substantially reduced its reliance on GRF.  So combining agencies is not going to do much to fix the $8 billion dollar budget hole.

However, both agencies (as well as the other three agencies) assess multiple fees to business to support their programs.  These fees have regularly been increased to support rising human resource expenses within the Agencies.  Fees, while imposing costs on businesses, have traditionally not received the same political attention as GRF.

While streamlining and combining functions may not solve the $8 billion budget hole, it could avoid or reduce the need to raise fees on businesses. 

For a discussion of what has occurred in other states...continue reading.

Michigan was the latest State to combine- pulling together its Dept. of Natural Resources and Department of Environmental Quality.  Governor Granholm attributed the basis of the change to the unprecedented economic funding challenges facing State government. 

Michigan has an interesting history.  Fifteen years ago it decided to break apart the regulatory from the outdoor recreation functions.  Now its combining them back together again.   Not everyone was a fan of recombining the Agencies.  This from a Michigan newspaper story reporting on the proposal to combine DEQ with Natural Resources:

Russ Harding, who was the first DEQ director when it was formed in 1995 under then-Gov. John Engler, said that recombining the agencies will save far less than $2 million because it may only involve the elimination of a couple of top administrative positions.

Harding, who was one of three people that wrote the executive order the split the DNR and DEQ, said the division was intended to separate regulatory programs into a distinct department.

From a budgetary point of view, Harding, who now works for the Mackinaw Center free market public policy think tank, said that merging the departments is just “rearranging deck chairs.”

Harding said he’s been critical of plans to recombine the departments because of concerns that it could lead to increased hassles for those seeking permits.

In 2009, the State of Washington was the latest State to review combining environmental regulatory functions. A comprehensive report was issued that looked at national trends in dividing up environmental regulatory responsibility within State governments. This was taken from the introduction of the report that examined the proposal:

When Governor Chris Gregoire delivered her second inaugural address, she asserted that state government needs to rethink the way it delivers programs and services. This document begins a public dialogue on reforming Washington State’s work in natural resources.

The impetus for having these conversations now is the recognition that these are unprecedented economic times, and that natural resource agencies, as well as its many partners, cannot ride out the recession and then revert to business as usual. Instead, the Governor challenged state officials to use this crisis to make hard decisions that increase efficiencies and reduce costs. In this environment, we must seize the opportunity to reform so we can respond to the evolving needs of this century. This is the state’s moment to improve customer service and reform state government.

Washington's combination of agencies at this point is only virtual.  It has created a single website- "One Front Door to Washington's Outdoors"-  to access all information regarding environmental regulation and natural resources.   

Overview of Other State Government Structures

Single Agency Structure: 

Rhode Island is the only state that has its natural resources, environmental protection and agricultural authorities combined into a single agency. 

However, in an interesting twist on combining agencies, Massachusetts created the Executive Office of Energy and Environmental Affairs.  The Executive Offices provides overall management to several Departments- Department of Agricultural Resources, Department of Conservation and Recreation, Department of Environmental Protection, the Department of Energy Resources, Department of Fish and Game and Department of Utilities. 

Two Agency Structure: 

Ten states have combined their basic natural resources functions with environmental protection into a single agency.  Each has a separate Agricultural department.

  • Michigan:  Department of Natural Resources and Environment
  • Connecticut: Department of Environmental Protection
  • Delaware: Department of Natural Resources and Environmental Control
  • Georgia:  Department of Natural Resources
  • Iowa: Department of Natural Resources
  • Kentucky:  The Energy and Environment Cabinet
  • Massachusetts:  Executive Office of Energy and Environmental Affairs
  • New Jersey:  Department of Environmental Protection
  • New York:  Department of Environmental Conservation
  • North Carolina:  Department of Environment and Natural Resources
  • Vermont:  Vermont Agency of Natural Resources
  • Wisconsin:  Department of Natural Resources

Three-Agency Structures

At least nine states operate under a three-agency structure (natural resources, environment and agriculture).

  • California:  Natural Resource Agency, Environmental Protection Agency
  • Colorado:  Department of Natural Resources, Environmental Protection Agency
  • Illinois:  Department of Natural Resources, Environmental Protection Agency
  • Indiana:  Department of Environment, Department of Natural Resources
  • Maryland:  Department of Environment, Department of Natural Resources
  • Minnesota:  Department of Natural Resources, Pollution Control Agency
  • Missouri:  Department of Natural Resources, Pollution Control Agency
  • Ohio:  Environmental Protection Agency, Department of Natural Resources
  • Utah:  Environmental Quality Agency, Department of Natural Resources

 

Ohio EPA and ODNR Propose Major Fee Increases in Upcoming State Budget

During Governor Strickland's State of the State he made the "no new taxes" pledge.  However, the Governor did mention that to balance the budget he will propose "new fees, fines and penalties."  No specifics were provided, however, now that details are beginning to take shape the Governor Strickland has been criticized for his roll out of the nearly 120 fee increases.

While there are more significant fee increases on vehicle registration and other health care related services, this being an environmental blog, I will focus on the new ODNR and Ohio EPA fee increases.  As discussed below, it is going to be more costly for businesses (and residents) to get rid of their waste.  This should create even a greater incentive for businesses to look at their practices and see if there are ways to reduce the amount of waste that has to be disposed of in solid waste landfills.   This could be through process changes that reduce the amount of waste generated or it could be recycling/re-use of waste materials generated.

However, the ability to recycle or re-use solid waste generated as part of business operations is dependent upon Ohio EPA's beneficial re-use rules.  Unfortunately, those rules have not come forward which makes it more difficult for businesses to evaluate their options.  While the fee increases may push evaluation of "greener" alternatives to disposal, businesses face uncertainty as long as clear re-use standards are not established.

Here is a link to a spreadsheet put together by the Ohio Office of Budget Management which shows all the fee increases and the projected revenue (which reaches over $1 billion dollars). Here is a breakdown of the proposed fee increases as it relates to the environment:

Municipal Solid Waste (MSW)
While I was at Ohio EPA, the agency moved from general revenue (GRF) to fees to pay for its programs.  The municipal solid waste tipping fee was chosen because it was a broad based fee that touches residents and businesses.  Due to its broad based application, the Agency could use the funding to support various programs outside of the Division of Solid and Infectious Waste.  Sort of like a tax...right.

The proposed state budget will build upon past fee increases and further increase the MSW tipping fee by $1.25 a ton. This will bring the MSW tipping fee from $3.50 a ton to $4.75 a ton. Of the proposed $1.25 increase,  Twenty-five cents would go to ODNR for the Soil and Water Conservation Districts. The remaining $1.00 will go to Ohio EPA to support various programs.

Construction and Demolition Debris (CDD)
The proposed budget will increase the CDD tipping fee by $2.70 a ton. This will bring the CDD tipping fee from $1.70 a ton to $4.40 a ton. This amounts to an 60% increase in the fees for CDD.  The $2.70 increase would be divided as follows:  $2.25 will go to ODNR for the Soil and Water Conservation Districts and .45 will got to Ohio EPA for operation costs throughout the agency.

Green building practices under the U.S. Green Building Council's LEED program award points for recycling and reuse of construction waste.  With this significant fee increase contractors and project owners should seriously contemplate recycling this material versus disposal even if they are not working on a green building project.

New E-Check Fee
Ohio EPA has proposed an increasing the fee for purchasing new tires by $2.30 per tire.  This fee is projected to generated $15 million in new revenue.  The previous tire fee was used to pay for programs to eliminate tire dumps around the State.  This has been one of the greatest success stories in Ohio.  This increase would be devoted to an entirely new purpose-paying for Ohio's automobile emission testing program (E-check).

Energy Extraction Fees

ODNR for its part has proposed a new fee on oil, coal and natural gas extraction.  Together these fees are projected to generate over $7 million in new revenue.  The energy extraction fees have not been warmly received by industry who argue that raising costs on these energy related resources will simply result in increased costs for individuals and businesses around the state.  

As fees go up for use of resources and disposal of waste, businesses have further incentive to examine green alternatives.  This could be improved energy efficiency. establishment of a co-gen facility that could reduce electric fees, recycling, and reduction of waste streams.

(Photo:D'Arcy Norman/everystockphoto.com)

Important Issues Unaddressed After Passage of Great Lakes Compact

With Michigan and Pennsylvania's passage of the Compact, all of the Great Lake States have now endorsed it.  The next step is to go to Congress for ratification.   While the press has almost exclusively concentrated on the diversion aspects of the Great Lakes Compact, there are other provisions that could have important ramifications for businesses.  Ohio has yet to pass enabling legislation that will grant authority to the Ohio Department of Natural Resource to implement other important aspects of the Compact, most notably regulation of water withdraws. 

The driving force behind the Compact was to ban diversions to other States and Countries.  But the Compact also requires each of the eight states to establish a regulatory program for new or increased withdraws from the Great Lakes basin. Ohio's enabling legislation will decide critical issues such as- how much water must be withdrawn before a permit will be required?  The Compact sets a default number of 100,000 gallons per day (gpd).  Other states have established higher thresholds, such as 1,000,000 gpd.

Another critical question - what type of review is required if a business triggers the need for a withdraw permit?  The Compact contains very broad language that requires a review of impacts to the Great Lake basin from which the withdraw takes place.  However, the Compact grants the states a tremendous amount of discretion to establish the level of review associated with new withdraws.  For example, Ohio could prohibit issuance of a withdraw permit if the proposed project would result in decreased flow in a tributary of Lake Erie.  Ohio could also require a detailed review of the impacts to the ecosystem if a withdraw is allowed.

While focus has rightfully been on protecting this tremendous freshwater resource from being diverted elsewhere, there are important policy questions that still remain unanswered.  How Ohio and the other Great Lake States regulate withdraws within their states will arguably have a more direct and immediate impact on its constituents. 

 

Ohio already requires all individuals and business to register with the Ohio Department of Natural Resources a withdraw of 100,000 gpd taken anywhere in the State of Ohio. (See, Ohio Revised Code Section1521.16)   The requirement has been in place since 1988 and is retroactive.  Therefore, it covers all facilities who currently withdraw more than 100,000 gpd. 

ODNR has compiled the data it has assembled through these registrations.  The withdraw information provides some insight into which sectors of the economy are the largest users of water in the State of Ohio. 

It is important to note that withdraw is not equivalent to consumption.  For example, the power sector is responsible for the largest amount of water withdraw in the state.  The vast majority of these withdraws are for cooling water which gets returned to the receiving stream from which it withdrawn. 

National data appears to be pretty consistent with Ohio.  Below is a chart from the USGS that shows an assessment of water use from 1950-2000.  The most notable differences between the charts is how much water is used for irrigation purposes nationally versus what is used in Ohio.

 

Note:  the ODNR chart has errors.  The total number of facilities with withdraws over 100,000 gpd is 1,970 not 1,685 as indicated on the chart.