The start of a new year leads to annual reflection, prediction and resolution. Let’s do some of it.

Public Relations

The oil business finds itself in a public relations battle because, after all, perception is reality. This is remarkably reminiscent of the impact of nascent environmental laws on the business in the early 1980s.  Fracking, pipeline construction, brine disposal, water usage, increased severance taxes — all face resistance at every turn. While these topics are certainly deserving of discussion, our sense is that much of the resistance is fueled by mis-information or just plain NIMBYism. But unlike the 1980s, in our opinion, this time the oil business  is determined to educate the public. The movie “Gasland” was followed by the movie “Truthland.” Now Hollywood enters the fray with the movie “Promised Land.” Energy In Depth does an excellent job of promulgating information on behalf of the industry. The Ohio Oil and Gas Association  also deserves credit for trying to add balance. Hardly a day goes by that there isn’t something in the news about the promise or the threat posed by the on-coming oil and gas boom and certainly the trend will continue through 2013.

Well Location and Construction

During 2012, the industry, policy makers and regulators made huge improvements to standards that apply to oil and gas exploration and production activities in Ohio. Senate Bill 165 went into effect on Aug. 1, 2012. It established new standards for construction that must be specified in the permit, including a requirement that materials must be used that comply with industry standards for the type and depth of the well and the anticipated fluid pressures that are associated with the well (read more in this Oil & Gas Law Report post). SB 165 regulations also established requirements concerning well stimulation designed to protect groundwater. There are numerous requirements for inspections by, and reports to, governmental authorities. A regulatory program for the cradle-to-grave management of brine, reminiscent of 1980s regulations for hazardous waste, has been adopted.

As summarized on ODNR’s website, Senate Bill 315, which became effective June 11, 2012,  builds on the SB 165 well construction standards and imposes additional regulations to help protect groundwater and the environment. The new law also addresses concerns about frack fluid by requiring chemical disclosure.

Whether this new regulation is reasonable and beneficial is hard to determine. Like all businesses, there are risks. But America needs oil and gas, and we are on top of a major source of supply that will benefit Ohio — and it can be done safely.

Environmental Regulation

Though most regulation of the industry in Ohio is by ODNR, USEPA and Ohio EPA have authority to regulate for the protection of the environment.

On April 17, 2012, USEPA issued regulations, required by the Clean Air Act, to reduce harmful air pollution from the oil and natural gas industry while allowing continued, responsible growth in U.S. oil and natural gas production. These rules include the first federal air standards for natural gas wells that are hydraulically fractured, along with requirements for several other sources of pollution in the oil and gas industry that currently are not regulated at the federal level.

A key component of the final rules is expected to yield a nearly 95 percent reduction in VOCs emitted from more than 11,000 new hydraulically fractured gas wells each year. This significant reduction would be accomplished primarily through the use of a proven process — known as a “reduced emissions completion” or “green completion” — to capture natural gas that currently escapes to the air.

The rule and other background information are posted on the USEPA website.

But even USEPA has its limits. On Aug. 7, 2012, the U.S. Court of Appeals for the Sixth Circuit in Cincinnati vacated a USEPA determination that a natural gas sweetening plant and gas wells supplying it constituted a single “major source” for Title V permitting purposes (read more).

Certainly, environmental issues such as water usage, especially in the Great Lake watershed, as well as air emissions, waste disposal and groundwater protection will continue to be in the news and on regulatory agendas.

Preemption vs. Home Rule

It’s not just what should be regulated and how. Who should regulate is controversial. Whether something should be regulated on the federal, state or local level is an issue as old as the country. The need for uniformity and specialized regulatory expertise calls for anything but local regulation. But that is a hard pill to swallow for local authorities and their constituents (read more).

Through ORC §1509.02, Ohio law vests ODNR with “sole and exclusive authority to regulate the permitting, location, and spacing of oil and gas wells and production operations within the state….” That would seem to settle the issue. Yet counties and municipalities continue to espouse resistance to this determination. And the fight goes on in neighboring states.

In spring 2012, the Pennsylvania legislature passed a law known as Act 13, which prohibits local government from regulating oil and gas activities in contravention of state law. On July 26, 2012, pursuant to a challenge from Robinson Township, a Pennsylvania Commonwealth Court (analogous to Ohio’s Common Pleas Courts ) overturned key provisions of  Act 13. In Robinson Township v. Commonwealth, the Court declared unconstitutional: (1) the provision of Act 13 that preempts local municipalities from enacting zoning ordinances that are more restrictive than the provisions of Act 13; and (2) the provision of Act 13 that authorizes the Department of Environmental Protection (DEP) to waive setback requirements for oil and gas wells from the waters of the Commonwealth. Both sides appealed the decision to the Pennsylvania Supreme Court.

The breadth and depth of ODNR’s preemptive authority is being questioned in litigation (read more). Some state legislators would like to change the current scheme in favor of local governments. See our discussion of HB 537.

This issue, too, will certainly continue to play out in the new year.

Business Development

Horizontal drilling and the fracking associated with it were developed elsewhere. The expertise, at least initially, comes to Ohio in the form of out-of-state workers and companies. The result is that Ohio businesses from steel and construction to portajohns, housing and professional services are scrambling to retool to meet the needs of the handful of exploration, production and midstream companies that are spearheading the boom. Reports of a lack of qualified workers and calls to engage Ohio residents bracket the issue. Ohio schools, too, are adapting to fill the gap.

Ohio has a long history of oil and gas production, but the boom is different this time (read more).

Ohio will struggle to maintain a “business friendly” appearance while trying to tax the industry and protect the environment. The balance is fragile. One big accident; one business-adverse court opinion in any one of a number of relevant legal areas; anything other than a clear, concise and fair set of regulations and the industry can and will move to shale deposits in other states. Certainly the oil and gas industry is a high risk, high cost business — ever the more so now — but the more uncertainty injected into the analysis by state government, the more difficult it will be to have this boom include Ohio.

Governor Kasich has proposed an increase in taxes on the industry and spreading the proceeds around in the form of an income tax decrease. He challenges the industry to accept his proposal with a threat that alternatives could be worse. Others say the increase in severance taxes should be applied to other noble causes. All this while the industry is really just in the “proving it will be economic” stage.

Proposed Additional Regulation

A number of bills have been introduced to deal with perceived issues. Some would regulate landmen while others would require certain provisions in oil and gas leases — even private ones (read more).

During 2013, let’s watch the news in Ohio and pretend we are a decision-maker at some out-of-state oil company with a choice to invest in Ohio or another state.