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Increased Oil and Gas Setback Requirements are Coming to a State Near You: Key Legal and Practical Concerns

John R. Jacus and Eric Waeckerlin
Attorneys, Davis Graham & Stubbs LLP in Denver, Colorado.

Ceding to increased public concern and pressure over hydraulic fracturing, the Colorado Oil and Gas Conservation Commission (“COGCC”) is in the midst of developing new rules that will increase setback and other requirements placed on oil and gas operations within the state (COGCC also recently passed a baseline groundwater monitoring rule, which is less controversial). Given the intense nationwide focus on the oil and gas industry brought about by concerns over hydraulic fracturing, industry can expect similar regulatory focus across other oil and gas states. Rulemakings of this nature present thorny legal issues for regulatory officials as well as numerous difficult practical considerations for industry, landowners, municipalities, and environmental groups. The experience in Colorado has highlighted several key legal and practical concerns that will almost certainly exist in any state oil and gas setback rulemaking.

Constitutional Concerns

Promulgating or increasing the stringency of existing setback requirements implicates several constitutional concerns. For example, increased setback and other requirements that affect where, when, and how an operator can drill can impair both a landowner’s and an operator’s freedom to contract. Similarly, extending setback distances often creates a regulatory scheme that spills onto adjacent property. When this occurs, setback rules effectively confer legal standing, and potentially veto authority, on adjacent landowners. Such interference risks depriving surface and mineral landowners of the enjoyment of their property rights, potentially implicating regulatory and other takings concerns. Setback rules must also address existing wells and avoid retroactive application that would violate constitutional prohibitions on ex post facto laws.

Statutory Authority

A state regulatory agency, such as the COGCC, derives its authority exclusively from state law. State law typically confers both general and specific authority upon its regulatory agencies. For example, the Colorado the Oil and Gas Conservation Act (“the Act”) grants the COGCC broad authority to regulate oil and gas drilling (e.g., “The commission has jurisdiction over all persons and property, public and private, necessary to enforce the provisions of this article”). At the same time, the Act limits this broad authority by listing specific activities the COGCC may regulate (e.g., the manner of drilling, recordkeeping, spacing, well classification etc.). One of those specific activities is the authority to require notice, which under the Act (and other laws), runs only to surface owners. It is questionable whether the Act confers authority on the COGCC to require notice (or other requirements) to run to non-surface, i.e., adjacent, owners.

In addition, most state legislation also requires regulatory action to balance competing legislative preferences—in this case, encouraging responsible oil and gas development in a manner consistent with protection of public health and the environment. Without supporting evidence that the protection of public health and the environment is either necessary or achieved by increased setback distances (see discussion below), a setback rule that effectively limits development risks not achieving this legislatively-mandated balance.

Where’s the Science?

Increased setbacks and other regulations, as a general rule, remove flexibility and increase transactional costs. They tend to insert bureaucracy and expand the ability of adjacent landowners, interest groups, and municipalities to direct or influence oil and gas operations. Yet, the critical question, which as a matter of law must be asked and answered by the regulatory agency, is: what benefit is being achieved by the additional regulations? With respect to setbacks, while proximity to sensitive populations such as schools, hospitals, or elderly residences may present a unique case, it remains a fact that very little (if any) scientific evidence or data supports increasing setback distances from either a public health or environmental standpoint.

For example, a June 2008 air sampling analysis by Quality Environmental Professional Associates in Colorado, concluded that the risk of benzene exposure downwind from four well pads was 18 in one million, compared to the risk of benzene exposure in an urban setting of 98 in one million and the risk of benzene exposure due to off-gassing from home furnishings of 15 in one million. Another study by the Texas Department of State Health Service in 2012, including urine and blood samples of 28 people near the town of Dish (in the Barnett Shale), concluded that the detection of Volatile Organic Compounds (“VOCs”) was likely to have been caused by smoking tobacco or using common household products and was not consistent with community-wide exposure to airborne contaminants. A January 2011 report issued by the Pennsylvania Department of Environmental Protection (DEP) “did not identify concentrations of any compound that would likely trigger air-related health issues associated with Marcellus Shale drilling activities.” A 2008 assessment of the Barnett Shale reviewed aggregate health statistics in Denton County, Texas (also near Dish). The researchers concluded that “even as natural gas development expanded significantly in the area of the past several years, key indicators of health improved across every major category during those times.” Other studies have come to similar conclusions. Moreover, none of these studies take into consideration additional oil and gas air emission control requirements recently enacted under federal law, and increasingly required under various state laws.

From a regulatory perspective, the point is not that such studies should not be conducted or that a better understanding of the potential health and environmental risks from oil and gas operations is not a worthy goal. Rather, the point is that, in terms of lawful regulatory action, regulations must be grounded in science, supported by evidence, and bear a rational connection to information in the record. These are fundamental tenets of administrative law. A rule, like the Colorado setback rule, that purports to provide public health and environmental benefits, but which lacks any scientific basis or support (and may even contradict the accumulating scientific evidence) is likely to be challenged and/or struck down as arbitrary and capricious agency action.

Conclusion

The story in Colorado has yet to conclude. The public process of the setback rulemaking will wrap up in the next several weeks, and additional setback regulations will be put in place. It is possible that some of the problems discussed above will result in legal challenges to the resulting COGCC rule. Whether the rule will survive these challenges remains to be seen. Regardless, similar or identical legal and practical concerns will present themselves in most if not all states that look to pass similar setback regulations. For this reason, it will be important for operators across the country to pay attention to developments in Colorado.

John R. Jacus and Eric Waeckerlin are attorneys in the Environmental Law Group at Davis Graham & Stubbs LLP in Denver, Colorado.

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