Supreme Court Holds EPA Can Regulate Greenhouse Gas Emission For Large Industries

On June 23, 2014, the Supreme Court issued an opinion in Utility Air Regulatory Group v. Environmental Protection Agency, No. 12-1146 (2014), which affirmed the Environmental Protection Agency ("EPA")'s authority to impose limits on greenhouse gas emissions by major emission sources, like power plants and oil refineries, so long as the plants would otherwise need permits for emitting conventional pollutants.  The issue before the Court was whether the EPA has authority under the Clean Air Act to regulate carbon dioxide emissions from stationary sources.  The ruling affirms that the EPA has authority to regulate such emissions from roughly 83% of the stationary sources across the U.S.  The Court dismissed the EPA’s authority to regulate emissions of relatively small sources such as schools, apartment buildings, and shopping centers.

In 2007, the Supreme Court adopted a method of regulating greenhouse cases under the Clean Air Act, Massachusetts v. Environmental Protection Agency (2007).  That opinion instructed that if the EPA determines that greenhouse gases constitute a danger to human health or the environment it could regulate them.  The EPA made such a finding and initiated rule making.  However, the Clean Air Act has very specific thresholds that trigger permitting obligations for air pollutants, one hundred (100) tons per year or two hundred and fifty (250) tons per year depending on the type of industry.

The EPA was faced with emissions of greenhouse gasses in volumes much larger than criteria pollutants regulated by the Clean Air Act, which resulted in the imposition of regulatory obligations on millions of sources that are not required to have permits.  Policing these additional un-permitted sources presented an administrative impossibility for the EPA.  The EPA sought to impose higher permit triggering thresholds for greenhouse gases in a process it called tailoring.

The Supreme Court's recent opinion rejects the EPA's tailoring approach, but holds the EPA can limit the regulation of greenhouse gases to facilities that are required to obtain a permit under the Prevent Significant Deterioration ("PSD") program.  This ruling provides guidance to the EPA, but several questions remain unanswered.  At what threshold will greenhouse gasses be regulated under the PSD program?  Will the EPA have to re-promulgate new thresholds?  Regardless of the EPA's regulatory course of action, significant challenges are expected due to the contention surrounding greenhouse gas regulation.

EPA Document May Be a Precursor to Federal Regulation Concerning Fracking Disclosures

One of the biggest concerns environmentalists have expressed about hydraulic fracturing is the lack of detailed disclosure of the chemical compounds used in the process.  Recent activity by the EPA suggests that the federal government may be preparing to take on a larger role with respect to chemical reporting.

In August 2011, the EPA received a petition from 115 environmental groups.  The petition requested that the EPA issue rules pursuant to the Toxic Substances Control Act, 15 U.SC. § 2601 et seq., requiring, among other things, reporting of the identity of chemicals and mixtures used in fracking activity. 

On May 9, the EPA issued an Advance Notice of Proposed Rule Making in response to the petition.  The Advance Notice seeks input from stakeholders on various aspects of the chemical disclosure issue.  It includes a numerous questions on which the EPA is soliciting comments.  The questions are divided into the following eight subject areas:

  • "Overall Approach to Reporting and Disclosure of Chemical Substances and Mixtures Used in Hydraulic Fracturing"
  • "Who Should Report or Disclose Information on Chemical Substances and Mixtures Used in Hydraulic Fracturing"
  • "Scope of Reporting or Disclosure of Information on Chemical Substances and Mixtures Used in Hydraulic Fracturing"
  • "Use of Third-Parties"
  • "Reporting Threshold and Frequency of Reporting or Disclosure"
  • "Data Collection Efficiency"
  • "Health and Safety Studies of Chemicals and Mixtures Used in Hydraulic Fracturing"
  • "Safer Chemicals and Transparency"

One particularly interesting aspect of the Advance Notice is the extent to which it reveals a willingness by the EPA to consider creative regulatory solutions.  For example, the EPA asks respondents to discuss whether it would be preferable to impose mandatory reporting across the board or seek voluntary reporting of some or all information.  Respondents are also asked to address how incentives might be used to encourage voluntary disclosure of information.  The EPA also seeks comments on the prospect of using third-party certification as an alternative to, or in conjunction with, mandatory government reporting.  In such a scenario, third parties would certify that operators are employing best practices or complying with regulatory standards.

The EPA has extended the original 90-day comment period to September 18, 2014.  Given the intense public interest in fracking, the Advance Notice is sure to draw a large number of responses.  It will be interesting to see what federal rules, if any, come out of the process.

Senate Bill Could Hinder Flood Protection Lawsuit

On April 16, 2014, the Louisiana State Senate passed Senate Bill 553 which would unwind a carefully watched lawsuit against 97 oil and gas companies filed by the South Louisiana Flood Protection Authority - East ("SLFPA-E") for damages associated with coastal erosion. 

The suit filed by the SLFPA-E is being prosecuted by private attorneys, hired on a contingency fee basis, who maintain that canal building, dredging and other construction projects by oil and energy extraction and pipeline companies have caused extensive coastal damage and erosion.  In the unlikely event the suit is completely successful, the contingency fee agreement could result in hundreds of millions, if not billions, of dollars being paid to the small group of attorneys representing the SLFPA-E.

The fight is among the most contentious of the legislative session.  At issue is the best way to seek restoration money and whether the oil and gas industry should be held responsible for the destruction of Louisiana’s wetlands. 

Senate Bill 553 amends a current law which requires state boards and commissions to secure written approval of the Governor and the Attorney General to employ special counsel by expanding the law's application retroactively to regional flood protection authorities.  According to the Bill, it is the Legislature's intent that agreements that do not comply with this retroactive requirement are contrary to public policy and void ab initio.

The Senate Bill also amends the law to require certain state boards, commissions and flood protection authorities to obtain prior approval of contingency fee agreements for the engagement of special counsel from the Joint Legislative Committee on the Budget.  The Bill now moves to the House of Representatives for debate. 

The Louisiana Oil and Gas Association views the Senate's passage of Bill 553 as a positive first step in its effort to protect industry against a litigious legal climate which forces companies to spend millions of dollars on legal fees and court costs.  Meanwhile, environmentalists and coastal protection groups maintain the suit as a symbol of the state's environmental future and are urging their members to contact their representatives to vote against Senate Bill 553.           

There have been other bills introduced this legislative session designed to protect the oil and gas industry from an onslaught of similar lawsuits.  The topics of the bills vary (coastal management issues HB 862, legacy lawsuit reform SB 667, and attorney general bill HB 799, regarding contingency fees).  Nevertheless, it will be interesting to see whether SB 553 will remain fully intact following its debate in the House of Representatives and what impact, if any, the House debate will have on this oversized lawsuit against the Louisiana oil and gas industry.  

EC "Recommendation" on Fracking Could Be a Precursor to Binding Regulations

The United States is not the only place where the regulation of hydraulic fracturing is a major issue of concern.  It is also a hot topic in Europe, as demonstrated by the European Commission's recent promulgation of a "Commission Recommendation" on "minimum principles" for high volume hydraulic fracturing.

The EC issued the Recommendation on January 22, 2014.  It applies to "high volume hydraulic fracturing," which for purposes of the Recommendation means injecting 1000 cubic meters or more of water per fracturing stage or 10,000 cubic meters or more of water during the entire fracturing process.  Among the principles included in the Recommendation are:

  • Strategic planning- The Recommendation urges member states to prepare a strategic environmental assessment before beginning to grant licenses for high-volume hydraulic fracturing.
  • Site selection- The Recommendation calls on EC members to require operators to conduct a risk assessment of potential drilling sites to ensure that high volume hydraulic fracturing at the site will not result in ground water pollution or disrupt other activities around the site.
  • Baseline study- Member states are to ensure that operators conduct a baseline study of the environmental status of a drilling site before operations commence and report the results to the proper regulatory authority.
  • Operational requirements- Member states should require operators to employ best practices in carrying out their operations, including development of site specific water management plans, testing to ensure well integrity, and immediate reporting of incidents.  Member states are also called upon to ensure that operators minimize water consumption and the use of chemicals to the extent feasible.
  • Monitoring- Operators should be required to monitor the well site and the surrounding area before, during, and after high volume fracking occurs, using the baseline study as a reference point.
  • Financial guarantee- The Recommendation directs member states to require operators to post a financial guarantee to cover potential liability for environmental damage before commencing operations.
  • Information- Member states should require operators to provide the public with information concerning the chemical substances and volumes of water used in fracking.  The Recommendation also states that public authorities should publish certain information, including numbers of wells completed and planned, names of operators, permit conditions, baseline studies conducted, monitoring results, and results of inspections.

The Recommendation "invites" member states to put the minimum principles spelled out in the Recommendation into effect within six months.  It also contemplates that member states will provide annual reports on the measures they have put in place, with the first report due by December 2014.  The EC will create a publicly available "scoreboard" to compare the situation in each member state.

The fact that the EC's action on high-volume fracking took the form of a recommendation and not a legal mandate has been a source of controversy.  Environmental activists and officials in some European Union member states had pushed for legally binding regulations on fracking.  The creation of voluntary recommendations is seen as a victory for European shale-gas leaders like the UK, Poland and the Czech Republic, which lobbied against the imposition of binding regulations.  Not only are the principles set out in the Recommendations non-binding, but they are generally stated in broad terms, allowing member states a measure of flexibility in determining how they will be implemented.

The fight to impose binding, Europe-wide regulations on fracking is far from dead, however.  The Recommendation states that the EC will review the Recommendation's effectiveness eighteen months after its publication (i.e., in June 2015).  As part of that review, the EC will determine what additional measures — including binding legislation — might be needed.  The promised review may well prompt member states with active shale gas industries to make a serious effort to implement the Recommendation's provisions and/or impose additional state-specific laws.

The English-language version of the Recommendation is available here.

AP Report Shows Link Between Drilling and Water Contamination [Maybe]

The Associated Press has published a report on well-water contamination from oil and gas drilling that purports to "cast[] doubt on industry suggestions that such problems rarely happen."  The report, which was picked up by media outlets across the country, is based on data obtained from regulators in four states that have been at the forefront of the recent drilling boom:  Pennsylvania, Ohio, West Virginia and Texas.

The AP review found that Pennsylvania authorities had confirmed at least 106 water well contamination cases (out of more than 5000 wells drilled) since 2005.  Ohio reported 6 confirmed contamination cases out of 190 complaints received from 2010 through November 2013.  West Virginia regulators reported 122 contamination complaints over the past four years, with enough evidence in four of those cases for the drillers to agree to take corrective action.  In Texas, a spreadsheet maintained by the Railroad Commission documents 62 claims of water well contamination over the past two years.  The Commission, however, has not confirmed any case of contamination caused by drilling in the past ten years.

While the data obtained by the AP appears at first glance to confirm drilling opponents' fears, it is difficult to draw firm conclusions.  For example, at least with respect to the Pennsylvania and Ohio data, it is unclear whether a "confirmed" case of contamination simply means that contaminants were confirmed to be present in a water well or that a connection to drilling activity was confirmed.  The distinction is obviously significant.  In some cases, contaminants may be naturally occurring or come from sources other than drilling.  The AP report references a 2011 Penn State study that found that about 40% of water wells tested prior to drilling failed at least one federal drinking water standard.

Also, while some may be quick to draw a connection between the contamination cases reported by the AP and the controversial practice of fracking, that connection is not absolutely clear.  A spokesman from the Ohio Department of Natural Resources told the AP that none of the six confirmed instances of contamination in Ohio related to fracking.  The AP article notes that conventional drilling continues, so at least some of the contamination cases could be related to conventional wells.  And, as noted above, it is not clear how many of the confirmed contamination cases are related to drilling activity, as opposed to other sources.

An interesting, if not particularly surprising, aspect of the AP report is the differences it reveals in the recordkeeping and responsiveness levels among various states' regulators.  The report states that, during a multiple-year period starting in 2011, the Pennsylvania Department of Environmental Protection "aggressively fought" efforts to obtain information about drilling-related complaints, claiming that it did not track "determination letters" relating to contamination complaints.  When Pennsylvania did provide information to the AP, it simply consisted of raw numbers of complaints and confirmed instances of contamination.  The Railroad Commission of Texas, on the other hand, quickly provided a 94-page spreadsheet providing details such as the date of the complaint, the identity of the landowner and the drilling company, and a summary of the alleged problems.

It will be interesting to see whether regulators in states like Pennsylvania will improve their tracking of drilling-related complaints and/or become more forthcoming with information in response to the AP report and other efforts like it.  The AP article quotes several sources who suggest that transparency might help improve public confidence in both regulators and industry.

The AP report was written by Kevin Begos and posted on January 5, 2014.  It is available from many sources on the Web, including at http://bigstory.ap.org/article/some-states-confirm-water-pollution-drilling.

Gas in the Well, or Just Hot Air?

Last month, a high-profile Texas case involving hydraulic fracturing returned to the news.  On October 10, Texas's Second Court of Appeals in Fort Worth overruled requests for rehearing and en banc reconsideration.  That action preserved an April decision that allowed natural gas producer Range Production Company and its parent, Range Resources Corporation (together, "Range"), to proceed with defamation and business disparagement claims against homeowner Steven Lipsky.

Mr. Lipsky and his wife claim that they began noticing problems with their residential water well shortly after Range drilled a gas well near their property.  The Lipskys contacted Elisa Rich of Wolf Eagle Environmental, who conducted tests that she said confirmed the presence of gases in the Lipskys' well.  The Lipskys and Ms. Rich notified the EPA, which issued an emergency order finding that Range's activities had caused or contributed to the presence of gas in the Lipskys' water well and ordering Range to act in response.  The Justice Department later filed suit at the EPA's request alleging that Range had not complied with the terms of the emergency order.

Meanwhile, the Railroad Commission of Texas ("RRC") also investigated the Lipskys' well.  After a January 2011 hearing in which the Lipskys and the EPA declined to participate, citing inadequate notice, a panel of RRC commissioners unanimously found that Range had not caused or contributed to the presence of gas in the Lipskys' well.

In June 2011, the Lispkys filed a civil suit against Range and others based on the alleged contamination of their well.[1]  Range not only contested the lawsuit, but asserted claims against the Lipskys and Ms. Rich.  Range's claims for defamation, business disparagment, conspiracy and aiding and abetting were based on allegations that the Lipskys and Ms. Rich embarked on predetermined plan to trigger an EPA investigation and blame Range for contaminating the Lipskys' well based on data that they knew was misleading and contradicted by valid evidence.

The Lipskys and Ms. Rich filed motions to dismiss under the Texas Anti-SLAPP statute.  After the trial court denied the motions, the court of appeals allowed the Lipskys and Ms. Rich to pursue a petition for writ of mandamus.

In an April 22, 2013 opinion,[2] the court of appeals allowed Range to proceed with its claims against Mr. Lipsky, but called for the dismissal of Range's claims against Ms. Lipsky and Ms. Rich.  The court found that Range had presented sufficient evidence to establish a prima facie case against Mr. Lipsky for defamation and business disparagement, specifically citing Mr. Lipsky's comments to the effect that Range had secured the RRC determination through corruption.  But the court found that Range did not present enough evidence to proceed with its remaining claims, including all of its claims against Ms. Lipsky and Ms. Rich.

The case has a number of interesting wrinkles that generated attention, and not just for the obvious connection the hot-button issue of fracking.  Range's decision to assert claims against the Lipskys and Ms. Rich was widely discussed.  Range contends that it is fighting back against a concerted effort to spread false accusations against it.  Not surprisingly, Mr. Lipsky and environmental concerns view the matter differently.  They see an effort to intimidate outspoken critics not only of Range, but of fracking in general.

The interplay between state and federal regulators is another source of interest.  The RRC and the EPA made contradictory findings about the source of the gas in the Lipskys' well, raising questions about the relative authoritativeness of each agency's findings.  The EPA was also criticized for overstepping its bounds by bypassing state regulators, although the Lipskys and their supporters contend that the EPA only intervened because the Lipskys were getting "the runaround" from the RRC.

The EPA's involvement generated headlines in other ways as well.  After imposing the emergency order against Range and asking the Justice Department to file suit to enforce it, the EPA withdrew the order on March 29, 2012 and the Justice Department stipulated to dismissal of the enforcement suit the next day.  In June 2012, six U.S. Senators signed a letter in which they not-so-subtly suggested that the EPA may have overreached in issuing the order and making public statements "definitively incriminating Range."  But others have suggested that the EPA's seeming about-face came not because the emergency order was ill-considered, but because of threats by Range to refuse cooperation with a national study on fracking.[3]  (Still another possibility is that the EPA's decision was based entirely on the U.S. Supreme Court's May 21, 2012 decision in Sackett v. EPA, 566 U.S. ---, 132 S. Ct. 1367 (2012), as discussed in a prior entry on this Blog.)

There is also a connection to controversial former EPA Region 6 Administrator Alfredo Armendariz, whose involvement and statements were prominently featured in Range's trial court pleadings.  In April 2012, shortly after the EPA withdrew the emergency order against Range, Dr. Armendariz resigned from his EPA post after video surfaced of him likening his philosophy on the use of EPA enforcement actions against industry to the tactics of Roman conquerors who crucified newly subjugated villagers to "make examples out of them."  Some saw a connection between those comments and the EPA's actions in the Lipsky case.

Dr. Armendariz was not the only figure in the case who stepped aside in 2012.  In June 2012, the trial court judge assigned to the case recused himself after Mr. Lipsky filed a motion based on campaign fliers in which the judge trumpeted his decisions as having caused the EPA to "back down" — an obvious reference the Lipsky case.[4]

These factors and others have combined to make the Lipsky case a particularly interesting one for both proponents and opponents of fracking.  It will continue to draw interest as it winds its way through the courts.

 


[1]           The Lipskys' claims were later dismissed on jurisdictional grounds. 

[2]           In re Lipsky, --- S.W.3d --- (Tex. App. Ft. Worth 2013), 2013 WL 1715459.

[3]           Ramit Plushnick-Masti, Associated Press, "EPA Changed Course After Oil Company Protested" (Jan. 16, 2013), available at http://news.yahoo.com/epa-changed-course-oil-company-protested-082012084.html (accessed Nov. 19, 2013).

[4]           See, e.g., Mark Drajem, Bloomberg, "Texas Judge Steps Aside in Gas Case He Used in Campaign" (June 7, 2012), available at http://www.businessweek.com/news/2012-06-07/texas-judge-steps-aside-in-gas-case-he-used-in-campaign (accessed Nov. 19, 2013).

Natural Gas: Should It [All] Stay or Should It Go?

Several recent posts on this blog have discussed some of the legal and economic issues that have arisen since advanced extraction techniques like hydraulic fracturing have allowed U.S. natural gas production to rise to record levels.  The export of natural gas to foreign countries is one issue that has received increased attention in recent months.

The export of natural gas is regulated pursuant to the Natural Gas Act, 15 U.S.C. § 717b.  In very general terms, no person is allowed to export natural gas without first obtaining an order authorizing it to do so.  In the case of countries that have free trade agreements (FTAs) with the U.S. covering natural gas, applications are to be granted virtually automatically.  For other countries — most countries in the world, including key allies like Japan — approval comes only after a process whereby the Department of Energy and FERC determine whether the proposed export project would be consistent with the public interest.

In the not-so-distant past, exporting natural gas would have been virtually unthinkable.  Demand far outstripped domestic supply.  As recently as the mid-2000s, it appeared that the U.S. would become one of the largest natural gas importers in the world.  That changed with the revolution in production techniques.  Surging production caused the price of natural gas to drop in the U.S. from over $13.00 per million BTU in mid-2008 to less than $4.00 a year later.  The supply glut — and the corresponding price decline — caused producers to ease back on new drilling activity and seek new outlets for natural gas, including exportation.  Currently, almost 20 export applications are pending.

The fact that natural gas exports are even being considered owes largely to the extremely low domestic gas prices that have prevailed in the past few years.  In order to ship natural gas overseas, it is necessary to put the gas through a liquefication process.  That process, plus shipping costs, adds several dollars to the price of exported gas.  If the difference between natural gas prices in the U.S. and those in export destinations were to decrease, there would no longer be any incentive to export natural gas.

On May 17, 2013, the Department of Energy approved one application.  That application, by Freeport LNG Expansion and FLNG Liquefaction, contemplates a terminal on Quintana Island, Texas that would send up to 1.4 billion cubic feet per day of natural gas overseas for 25 years.  The Freeport project joins Cheniere Energy's Sabine Pass project (located in Cameron Parish, Louisiana) as just the second project to receive approval for export to countries with which the U.S. does not have an FTA.  The Sabine Pass facility is expected to begin exporting in 2015 or 2016.  To illustrate how quickly the natural gas supply situation in the U.S. has changed, the Sabine Pass facility was originally constructed in 2008 as an import terminal.

Export approval is a controversial subject.  An unlikely alliance between manufacturing concerns and environmental groups has formed to oppose natural gas exports.  Environmentalists are concerned that exports will lead to more production, which in turn will lead to increased use of fracking and other techniques that environmentalists oppose.  Manufacturers that use natural gas in their processes have benefitted from historically low natural gas prices.  Many have invested in new facilities or expansion projects.  They argue that exports will drive natural gas prices higher and deprive U.S. industry of a competitive advantage.

Natural gas producers counter that the market should dictate how natural gas supplies are allocated.  They see no compelling reason why the federal government should maintain restrictions on the energy sector simply to favor the manufacturing sector.  They also argue that any effect exports might have on domestic natural gas prices would be offset by increased production.  Increased production would also benefit the economy by adding exploration and production jobs.  These arguments find some support from a Department of Energy-commissioned study by NERA Economic Consulting, which found that natural gas exports would have an overall-positive impact on the U.S. economy.

The debate also has geo-political ramifications.  Some export proponents argue that exporting natural gas will strengthen U.S. relations with key gas-importing allies, including Japan and some European countries.  It could also help reduce the ability of countries like Russia to use their gas supplies as leverage against America's European allies.

With close to twenty export applications pending and well-funded interests advocating on both sides, natural gas exportation is an issue that is likely to continue to receive considerable attention for the foreseeable future.  The government can be expected to continue to tread carefully given the economic and geopolitical stakes.

Much Watched Fracking Compromise Bill Faces Uncertain Future

The State of Illinois is one of the current battlegrounds in the national debate over hydraulic fracturing, or "fracking."  That state is being closely watched in large part due to the current effort to pass a comprehensive regulatory bill that is touted as an unusual compromise between industry and environmental groups.

Illinois is home to a portion of the New Albany Shale, a formation that is believed to hold between 1 billion and 8 billion cubic feet of natural gas.  That is not a tremendous amount compared to some other widely known plays like the Marcellus Shale, but there is also some belief that the New Albany formation may contain oil and other liquid hydrocarbons.

Fracking regulation is a hot-button issue in Illinois.  Illinois has yet to pass any comprehensive regulatory package.  Energy companies have leased an estimated 500,000 acres for drilling, but have held off on commencing operations until they know what rules will apply.  Meanwhile, Southern Illinois, where the New Albany Shale is located, is the most economically-challenged area of the state.  Many politicians, local residents and businesses are hopeful that drilling activity will help alleviate economic conditions.  Environmentalists are concerned that the economic boost will not be worth the damage they fear will be done to the environment.

Efforts in recent years to pass fracking regulations failed.  John Bradley, a state representative from Southern Illinois, came up with a plan.  He convened a group of negotiators from both sides of the issue to try to hash out a fracking bill that both sides could live with.  Bradley selected a core group of four negotiators from environmental groups, four from industry, plus representatives from state government, including the attorney general's office, governor's office, regulatory agencies, and the legislature.  Several months of sometimes tense negotiations resulted in a bill that was filed in February and received nationwide attention.

The bill is Illinois House Bill 2615.  Among its features are:

  • Mandatory baseline water testing before fracking starts and monitoring during operations, with a presumption of liability for any contamination that appears during operations;
  • A requirement that flowback and produced water be stored in closed containers, or, in emergencies, in lined pits for up to seven days;
  • A requirement that water ultimately be disposed of in injection wells, which are to meet prescribed standards and be tested every five years;
  • Mandatory disclosure to state officials of the agents that will be used for fracking, with the caveat that companies can claim trade-secret protection to prevent disclosure to the public at large;
  • A requirement that companies plug nearby abandoned wells to prevent water from flowing back up through those wells;
  • Limits on the release and flaring of natural gas during operations;
  • A bonding requirement of $50,000 per permit or $500,000 to cover multiple permits;
  • Provisions for public notice and comment in connection with permit applications, and mailing of notice to landowners within 1,500 feet of a proposed well site;
  • Best practice standards for well design, construction and monitoring.[1]

Environmental interests have not uniformly supported the bill.  Some groups rejected the bill, preferring to fight for a ban or moratorium on fracking.  Even groups that nominally support House Bill 2615 are conflicted.  They are simultaneously supporting rival legislation that would impose a two year moratorium, but explaining that fracking appears inevitable and House Bill 2615 may be the best possible outcome.

When the bill was filed, negotiators on both sides warned of the fragile nature of the compromise.  They issued statements that any attempt to amend the bill could cause them to withdraw support altogether.  Those warnings proved prophetic, as the bill has suffered setbacks.  The Illinois House Speaker, who was once thought to support House Bill 2615, has announced that he supports a bill that would impose a moratorium instead.  In mid-March, the bill stalled due to a dispute over severance taxes.  Less than a week after a deal was reached on that issue, an amendment was added that would require unionized well water contractors to be in place at each well site until drillers themselves were licensed.  That caused some industry-related groups to withdraw support for the bill.  A committee vote had to be postponed because it appeared that the bill would not have enough support to advance to the full House.[2]

And so the Illinois fracking bill once hailed as a potential "national model"[3] faces an uncertain future.  Many will continue to watch Illinois to see whether the hard fought fracking compromise is able to survive the legislative process.

 


[1]           Kari Lydersen, "In Illinois, Environmentalists and Industry Compromise on Fracking Bill," Midwest Energy News (2/22/2013), available at http://www.midwestenergynews.com/tag/fracking/.

[2]           Julie Wernau, "Push for Fracking Bill Delayed by Surprise Amendment," Chicago Tribune (Mar. 22, 2013), available at http://articles.chicagotribune.com/2013-03-22/business/ct-biz-0322-fracking-20130322_1_oil-and-gas-illinois-oil-surprise-amendment.

[3]           Tammy Webber, "Illinois Fracking Deal Could Be the National Model," Associated Press (Mar. 7, 2013).

Out of the Past: Poorly Drafted Indemnity Agreements Can Expose Transferors to Unexpected Future Liability for Past Operations

Recent announcements regarding the construction of major processing facilities, such as Sasol's announcement regarding its plans for an integrated gas-to-liquids and ethane cracker complex near Lake Charles (discussed in a prior post), bring to mind legal issues that have arisen in connection with such facilities in the past.  One such issue has to do with the potentially unforeseen problems with indemnity arrangements entered in connection with the transfer of such facilities.

Indemnity, of course, is an important issue when an industrial facility is sold or otherwise transferred.  This is true even of a well-run facility.  Often, after the passage of years and advances in scientific knowledge, practices that once were considered industry standard turn out, in retrospect, to have been harmful.  For this and other reasons, companies that transfer facilities often require indemnity from their transferees or demand that the transferee assume the transferor's environmental liability.  The transferor thus obtains some certainty by cutting off potential future civil liability for its past operations at the facility.  Or so it thinks.

In Louisiana, there are two basic types of obligations and corresponding rights:  real and personal.  Joslyn Mfg. Co. v. Koppers Co., 40 F.3d 750, 755-56 (5th Cir. 1994); see La. Civ. Code arts. 1763-1766.  A real right "is a right in a thing that can be held against the world."  La. Civ. Code art. 1763, cmt. b (1984) (emphasis added) (citing 1 Yiannopoulos, Property 380 (2d ed. 1980)).  The corresponding real obligation is said to "attach to the thing," or "run with the land."  See La. Civ. Code art. 1764, cmt. b (1984).  This means that the real obligation is automatically transferred to a person who acquires the property to which the real obligation is attached.  See La. Civ. Code art. 1764; Joslyn Mfg., 40 F.3d at 756.

A personal right, on the other hand, is the legal power that one person has to demand a performance from another person.  See Joslyn Mfg., 40 F.3d at 756 (quoting Yiannopoulos, La. Civ. Law Treatise, Property § 203, at 370 (3d. Ed. 1991)).  Unlike with real obligation, when property is transferred, the transferee does not assume his transferor's personal obligations with respect to the property.  See La. Civ. Code art. 1764; Joslyn Mfg., 40 F.3d at 756.

Because an obligation created by agreement is considered personal in the absence of some affirmative indication that it is intended to create a real obligation upon the land itself, an indemnity or assumption of liability usually only creates a personal obligation on the direct transferee unless the transferor is careful to include specific language evidencing an intent to create a real obligation that runs with the land.  See Joslyn Mfg., 40 F.3d at 757.  This can create unforeseen problems for a company that transfers a production facility and negotiates liability protection from its transferee.

In re El Paso Refinery, LP, 302 F.3d 343 (5th Cir. 2002), a case applying Texas-law principles somewhat similar to those discussed above, illustrates the potential problem.  Texaco operated a refinery in El Paso, Texas from 1929 until 1984, when it transferred the facility to a subsidiary, TRMI Holdings, Inc.  Id. at 346.  As part of the transaction, TRMI assumed all environmental liability with respect to the facility.  Id.  Two years later, TRMI sold the facility to El Paso Refinery, L.P.  Id.  The transaction documents included covenants that purported to prevent any subsequent owner from seeking contribution from TRMI or compelling TRMI to take any remedial action.  Id.

El Paso Refinery later filed for bankruptcy.  Id.  A group of creditors ultimately acquired the refinery, and gave notice of their intent to assert environmental and contribution claims against TRMI and Texaco.  Id. at 347.

As one of its defenses, TRMI asserted the covenants it secured when it transferred the facility to El Paso Refinery.  Id. at 354.  After analyzing those covenants, however, the Fifth Circuit concluded that they did not qualify under Texas law as "real covenants" that run with the land and bind subsequent owners.  Id. at 356-57.  They were only personal covenants that did not bind subsequent acquirers and thus did not preclude the present refinery owner's claims against TRMI or Texaco.

Of course, even where an indemnity provision does not create a real right/obligation, the transferor may still have a personal right to indemnity or other protection from its direct transferee.  That personal right is of no value, however, when the direct transferee is defunct or — as in In re El Paso Refinery — insolvent.

The In re El Paso Refinery case is an example of how a company that transfers a processing facility might not obtain the full measure of protection from future civil liability that it thought it bargained for.  Companies transferring facilities would be wise to carefully negotiate and draft the indemnity and other provisions they create to shield themselves from future liability.

Expropriations: One Possible Result of the Natural Gas Drilling Boom

One possible effect of the ongoing natural gas drilling boom is an increase in expropriations.  Several Louisiana state and federal statutes authorize private companies to expropriate private property for the purpose of constructing, operating and maintaining natural gas pipelines and related equipment.  Those statutes include La. R.S. 19:2, La. R.S. 30:554, and 15 U.S.C. § 717f.

Before expropriating private property, companies seeking to acquire an interest in property for pipeline-related purposes are obligated to attempt negotiations with the property owner.  See, e.g., La. R.S. 19:2.  If expropriation proceedings become necessary, the company seeking expropriation must show that its purpose is "public and necessary."  See La. Const. Art. 1, § 4(B)(4); ExxonMobil Pipeline Co. v. Union Pacific R. Co., 2009-1629 (La. 3/16/10), 35 So. 3d 192, 196-97.  Once the expropriator satisfies that baseline requirement, it enjoys vast, though not total, discretion in determining the extent and location of the property to be expropriated.  ExxonMobil Pipeline, 35 So. 3d at 200.  The Louisiana Supreme Court has identified four factors the expropriator should consider: costs, environmental impact, long range area planning, and safety considerations.  Id. (citing Red River Waterway Commission v. Fredericks, 566 So. 2d 79, 83 (La. 1990)).  As long as the expropriator gives these factors some consideration, its decision should not be second guessed.  The only limits are that the expropriator may not exercise its discretion in bad faith, or act so capriciously and arbitrarily as to make its decision "unreasoned."  Acadian Gas Pipeline Sys. v. Bourgeois, 04-578 (La. App. 5 Cir. 11/30/04), 890 So. 2d 634, 641.  Of course, the Louisiana Constitution also requires that expropriator provide "just compensation" to the property owner.  La. Const. Art. 1, § 4(B)(4).

Thus, companies planning to construct natural gas pipelines in Louisiana encounter relatively friendly expropriation laws and jurisprudence.  Especially in light of the recent drilling boom and the steps taken by industry to make use of abundant natural gas supplies (some of which have been discussed in previous entries), pipeline expropriators should have little difficulty establishing that their purpose is "public and necessary."  Courts have held that the need to maintain steady supply in light of increased demand and the need to take advantage of abundant resources are "public and necessary" purposes.  See, e.g., Acadian Gas Pipeline Sys. v. Nunley, 46,648 (La. App. 2 Cir. 11/2/11), 77 So. 3d 457, 463 (specifically mentioning the "huge resources" available from the Haynesville Shale formation).  In many cases, necessity will effectively have been established before an expropriation proceeding reaches the courts, as the expropriator will have obtained a certificate from either the Louisiana Commissioner of Conservation or the Federal Power Commission.  See La. R.S. 30:554; 15 U.S.C. § 717f. 

While Louisiana's existing pipeline infrastructure is often cited as a key consideration by energy and chemical companies planning new development in this state, additions to that infrastructure may ramp up, particularly if industry is successful in implementing new and emerging uses for natural gas.  If that comes to pass, expropriations may be among the many results of the ongoing natural gas supply boom.