North Carolina has just taken significant steps forward toward potential development of the state’s shale gas resources. The Energy Modernization Act (also known as Senate Bill 786; the “Act”), ratified by the legislature and then signed into law by Governor Pat McCrory on June 4, 2014, is designed to be the final legislative authorization before finalization of a full modern regulatory program and issuance of state permits for shale gas development in North Carolina.
BackgroundFor most of the last fifty years, North Carolina has not been on the map when it came to oil and gas production; in the case of maps developed by the U.S. Energy Information Administration, North Carolina is quite literally not on the map. This status has been due partly to a lack of proven resources; partly to an outdated Oil and Gas Conservation Act; and most importantly, that horizontal drilling and hydraulic fracturing were prohibited in the state.
That all began to change in 2008 and 2009, when the North Carolina Geological Survey found evidence to suggest that commercially viable quantities of natural gas may exist in shale deposits in the state. Legislative movement immediately followed: as covered in prior alerts, the North Carolina General Assembly ordered a study of horizontal drilling and hydraulic fracturing in 2011. The following year, the General Assembly passed the Clean Energy and Economic Security Act (S.L. 2012-143), which reconstituted North Carolina’s Mining Commission as the “Mining and Energy Commission” (the “Commission”) and charged it with developing “a modern regulatory program for the management of oil and gas exploration and development in the State and the use of horizontal drilling and hydraulic fracturing treatments for that purpose” by October 1, 2014. S.L. 2012-143 § 2(c); N.C. Gen. Stat. § 113-391(a).
Since its formation, the Commission has been at work drafting such a modern regulatory program. As the Commission nears completion on its comprehensive set of regulations, the Act sets the stage for North Carolina to begin issuing permits for horizontal drilling and hydraulic fracturing, potentially as early as mid-2015.
Key Provisions of the Energy Modernization ActBelow is a summary of the key provisions of the Act. In addition to the items below, the Act makes a number of other, minor changes to the administrative process for oil and gas rules, the method of appointment of Commission members, and removes a handful of antiquated concepts from North Carolina’s oil and gas statutes.
Finalization of Rules and Potential Issuance of Permits Perhaps most importantly, the Act sets a time table for the potential issuance of permits for oil and gas development activities using horizontal drilling and hydraulic fracturing. The Act sets out the following timetable and process:
New Oil and Gas Commission Established The Act ends the terms of all sitting members of the Commission, effective July 31, 2015. Effective the following day, the current duties of the Commission will be split between a newly established nine-member North Carolina Oil and Gas Commission and an eight-member Mining Commission. The selection of members to these new commissions will be similar to the current Commission in terms of the criteria for selection and the persons and bodies making the appointments.
Fees and Taxes The Act alters the fee for drilling oil and gas wells, outlines a severance tax, and prohibits local taxation.
First, instead of a flat $3,000 fee for each well drilled in search of oil and/or gas, the fee will be $3,000 for the first well drilled on a pad and $1,500 for each additional well on the same pad, essentially offering a 50% discount to any developer who puts multiple wells on a pad.
Second, the Act institutes a sliding-scale severance tax over the course of roughly eight years, as follows:
Finally, the Act prohibits local governments from taxing severance, production, processing, ownership, purchase and sale, or transportation of energy minerals produced, as well as ownership of facilities and equipment related to these practices. The Act also excludes from the property tax base energy mineral interests in property for which a development permit has not been issued. It is noteworthy that the Act gives general direction, but does not specify how severance tax revenue will be used by the State.
Local Government Authority In addition to the prohibition on local taxation, the Act pre-empts local governments from prohibiting oil and gas exploration, development, and production activities, and from enforcing ordinances that have the effect of prohibiting these activities. However, general local zoning and land use ordinances may still apply, as long as they do not have the effect of prohibiting the exploration, development, or production of oil and gas. The Act creates an appeal process by which any party that believes its activities to have been prevented by local ordinance may petition the Commission for a hearing to review the matter. If the ordinance prohibits or has the effect of prohibiting oil and gas exploration, development, and production activities, or use of horizontal drilling or hydraulic fracturing for that purpose, and the activity would otherwise be permitted and does not present an unreasonable health or environmental risk, the Commission may pre-empt the ordinance.
Environmental Issues The Act makes several changes to statutes related to cleanup and reclamation of oil and gas development sites, including imposition of financial assurance to cover any environmental damage:
Trade Secrets and Confidential Information Among the most-frequently discussed and most hotly debated topics related to shale gas development in North Carolina are the scope and limitations on public disclosure of information related to the contents of hydraulic fracturing fluids. Such information may constitute trade secrets or business confidential information normally protected from public disclosure. The Act provides that any person, “upon a showing satisfactory to the Commission,” may request that certain information be treated as confidential and protected from public disclosure if such information “would divulge methods or processes entitled to protection as confidential information pursuant to” North Carolina’s public records law. The public records law, N.C. Gen. Stat. § 132-1.2, protects business or technical information that derives independent actual or potential commercial value from not being generally known or readily ascertainable, and that is the subject of reasonable efforts to maintain its secrecy. Commission decisions as to confidential treatment of information may be challenged by appeal to Superior Court as a complex business case, and the court is required to award attorneys’ fees to a party that seeks disclosure and substantially prevails or against a party that institutes an action that the court determines was filed in bad faith or was frivolous.
Information that the Commission determines to be confidential will be reviewed by the State Geologist for compliance with chemical release standards and chemical prohibitions. This determination must be made and certified before a horizontal drilling or hydraulic fracturing operation using material subject to trade secret protection may commence. In addition, the State Geologist, in conjunction with the State Health Director, must inform local health departments of additional parameters that should be included in testing for nearby private drinking water wells.
Confidential information would only be permitted to be disclosed under the following conditions and to the following persons:
In the case of disclosure to a health care provider or a fire chief, DENR is required to disclose the information immediately and to inform the owner of the confidential information as soon as practicable, but no later than 24 hours after disclosure. The owner may require execution of a written statement of need and a confidentiality agreement.
Surface Use Disturbances The Act also requires notice to surface owners prior to commencing development activities and modifies or clarifies potential areas of liability. Any oil or gas developer or operator who leases subsurface resources must provide written notice of proposed activities to the lessor at least 30 days before operations begin. This notice must include at least a description of the plan of exploration or development, a proposed start date, and a designated contact person for communications with the lessor.
The Act also reduces the radius within which an operator is presumptively liable for any water supply contamination, down from 5,000 feet to one-half mile. It also clarifies that seismic and geophysical data collection operations will not result in liability for trespass, as long as the collector is undershooting from an off-site location with no physical entry, or they obtain the landowner’s written consent. However, the data collector is still liable for physical or property damage resulting from seismic or geophysical data collection activities.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of the law firm’s clients.