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Marcellus Drilling Shares Enforcement Spotlight: Part 2
July 31, 2011

Editor’s Note: This is the second of two articles addressing recent enforcement activities targeting Marcellus Shale well development activities. The first installment was published in the July issue.

In addition to the ongoing Clean Water Act enforcement efforts by both federal and state regulatory agencies and environmental groups, there is also a focus on parts of the Clean Air Act (“CAA”), as well as the underground injection control (“UIC”) provisions of the Safe Drinking Water Act (“SDWA”), seemingly aimed at further regulation of, or stopping, Marcellus Shale drilling activities.

One significant issue under the CAA concerns when to “aggregate” various sources of pollution as a single “stationary source.” Aggregation is important in this context because stationary sources (such as oil and gas activities) that emit certain quantities of air emissions above prescribed thresholds are considered to be a “major stationary source.” Construction of new major stationary sources, or “major modifications” to existing stationary sources that would result in increased emissions above such regulatory thresholds, are subject to the more stringent New Source Review (“NSR”) permitting requirements. Some regulators and environmental organizations are now arguing that emissions from compressor stations and various oil and gas wells connected by pipelines should be “aggregated” as a single stationary source and thus subject to much more stringent controls.

The CAA regulations related to the “aggregation” argument cite the following factors to consider in determining what sources are a single source: (1) whether the activities belong to the same industrial grouping; (2) whether the activities are under common control of the same person or entity; and (3) whether the activities are located on one or more contiguous or adjacent properties. 40 C.F.R. § 52.21(b)(6). The issue being debated for the oil and natural gas industry, then, is what constitutes “continuous” or “adjacent” facilities or properties. EPA’s position on this issue has changed with changes at the White House. Under President Bush, EPA took the position that, for the oil and gas industry, proximity was the most important factor, suggesting that activities separated by more than a short distance are not contiguous or adjacent. Under President Obama, the EPA issued a memorandum retracting the prior emphasis on proximity and instead weighing the three factors equally.

EPA will have another opportunity to weigh in on the aggregation issue by July 28, 2011, when EPA must propose revisions to its air toxics rules and new source performance standards (“NSPS”) for oil and gas drilling operations. As with the NSR program, the NSPS contain definitions which could squarely address the aggregation issue. However, EPA’s recently adopted definition of “facility” for purposes of greenhouse gas reporting is particularly troublesome. For purposes of the GHG reporting rule, EPA defines an onshore oil and gas production facility as all equipment on or associated with a well pad under common ownership and control and located within a single hydrocarbon basin, as defined by the American Association of Petroleum Geologists. While this definition is expressly limited to the GHG reporting rule, it is nevertheless far broader than EPA’s previous guidance and regulations pertaining to aggregation.

While the industry waits for additional guidance on the issue, individual state and federal decisions related to permitting provide some room for optimism. On February 2, 2011, EPA Administrator Jackson denied a petition by WildEarth asking EPA to object to a permit issued by the Colorado Department of Public Health and Environment (“CDPHE”) to Anadarko Petroleum Corporation (“Anadarko”) for its Frederick Compressor Station. WildEarth argued CDPHE should have included emissions from nearby gas wells owned by Anadarko along with the emissions from the compressor station in determining whether the Station was a “major stationary source.” EPA denied WildEarth’s petition – stating the compressor station “and the other emission sources did not have a unique or dedicated interdependent relationship and were not proximate and therefore were not contiguous or adjacent . . ..” This decision seems to build on an EPA Region VIII decision to issue a permit to BP American Production Company’s compressor station facility in Colorado, which focused on a lack of “exclusive or dedicated” interdependence of the various sources and concluded aggregation was not warranted or appropriate.

Consistent with these federal decisions, WVDEP recently defeated an aggregation argument raised by the Group Against Smog and Pollution (“GASP”). GASP appealed minor source air permits issued to a subsidiary of Chesapeake Energy – Appalachia Midstream Services, LLC (“Appalachia Midstream”) to the West Virginia Air Quality Board (“Board”). GASP argued that the emissions from two compressor stations and the wells that fed those stations should have been aggregated as one source and that Appalachia Midstream should have been forced to obtain a NSR permit as a major stationary source. The Board upheld the permits as issued, finding that GASP’s concept of “single source” did not comport with the common sense understanding of what constitutes a plant or facility.

EPA Region III has also been flexing its regulatory authority in its administration of the Underground Injection Control (“UIC”) Program. In Pennsylvania, EPA – not PADEP – administers the UIC program. On April 15, 2011, EPA Region III met with PADEP to discuss UIC issues, and specifically the practices of one particular company – Tunnelton Liquids Company (“TLC”). EPA then sent PADEP a letter asserting that TLC’s practice of mixing oil field brine with sludge from treatment of acid-mine-drainage (“AMD”) leachate for underground injection was not authorized and “must cease immediately.” EPA Region III subsequently issued a notice of violation and intent to issue an administrative order to TLC, which characterizes TLC’s injection of brine and AMD fluids as an unauthorized Class I and/or II injection. Although WVDEP is responsible for implementation of the UIC Program within this state, we anticipate the same level of oversight from EPA Region III here, especially with regard to underground injection of waste produced from fracking operations.

Outside Region III, EPA is pushing the limits of its authority under the SDWA to regulate fracking activities – and according to one federal judge in Texas, EPA pushed too far. On June 20, 2011, Senior District Judge Royal Furgeson stayed an emergency order issued to Range Resources Production (“Range”) to cease operation of two wells for allegedly contaminating the drinking water of two residential wells. Although not raised by Range, Judge Furgeson stayed the emergency order on due process grounds, stating “[t]he court is struggling with the concept that the EPA can enforce the Emergency Order and obtain civil penalties from Range without ever having to prove to this Court, or another neutral arbiter, that Range actually caused the contamination . . ..” The order was stayed pending the results of Range Resource Corporation’s appeal to the U.S. Court of Appeals for the 5th Circuit to nullify the order on due process grounds.

With West Virginia’s failed attempt to revise its oil and gas regulations in the 2011 Regular Session, it is reasonable to expect that EPA Region III will subject operators and WVDEP to similar enhanced scrutiny as witnessed in Pennsylvania and push the limits of their authority under the SDWA to regulate fracking activities in West Virginia.

Bankruptcy & Creditors' Rights James D. Elliott