Explaining the Fracking Bill

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The state Senate voted 29 to 15 Thursday to concur on Senate Bill 820, a bill that would legalize hydraulic fracturing in North Carolina.

The version headed to the Governor’s desk is the House Committee Substitute, the fourth edition of the bill since it was initially filed in the Senate May 17, the second day the General Assembly convened.

The Bill’s Path
Since then, it’s been approved in both chambers of the assembly, after hearings one committee in each chamber. In the Senate, it was heard in the Commerce Committee, which took two meetings. The bill was heard once in the House Environment Committee, where there was no time for the proposal of amendments or public comment.

It was slated for concurrence on the Senate calendar for Tuesday, but pushed back until Thursday. According to Senator Bob Rucho, a Republican representing Mecklenberg, one of the reasons for this delay was to give Gov. Beverly Perdue the opportunity to fully study the bill before it was passed to her.

The Governor has 10 days to either sign the bill into law or veto it. If she neglects to take action, it will become law anyway. If approved, the bill would become effective, at large, Aug. 1, 2012. Sections 4 and 5, dealing largely with landowner and leasing issues, would go into effect in October 2012.

Here’s a closer look at the break down of this bill:

Mining and Energy Commission
Under SB 820, the Mining Commission is reconstituted as the Mining and Energy Commission, and the Division of Land Resources becomes the Division of Energy, Mineral and Land Resources, and is nestled with the Department of Environment and Natural Resources.

This commission is responsible for creating and adopting legislation to regulate the onshore natural gas industry in North Carolina. It is required to submit quarterly written reports of its progress, and its first written report is due on or before Jan. 1, 2013.

The member make-up of this body was one of the most debated issues during the bill’s travels through the House. The final membership is 15 people, three of whom are ex-officio, four of whom are appointed by the governor and eight of whom are appointed by the General Assembly. The ex-oficio members are the chair of the North Carolina State University Minerals Research Laboratory Advisory Committee, the State Geologist, and the Assistant Secretary of Energy for the Department of Commerce.

The members appointed by the General Assembly are: a member of a nongovernmental conservation interest recommended by the Speaker of the House, an elected official of a municipality located in North Carolina’s Triassic Basin, a member of the Environmental Management Commission with knowledge of air and water resource management, a geologist with experience in oil and gas exploration and development, a second person who is a member of a nongovernmental conservation interest (this time recommended by the President Pro Tempore), and a person who is an engineer with experience in oil and gas.

The governor will appoint a representative of a publicly traded natural gas company, a licensed attorney with experience in oil and gas industry legal matters, and two representatives of the mining industry.

No member of the committee is allowed to hear or vote on matters in which they have economic interest.

There is also a requirement for a specific Committee on Mining within the Mining and Energy Commission. This committee is given exclusive authority over issues related to the mining industry in North Carolina.

The commission, in conjunction with DENR, the Department of Transportation, and others, is required to identify levels and sources of funding to support local governments affected by fracking, infrastructure impacts due to the industry, and means of administering an oil and gas regulatory program.

Along with the North Carolina League of Municipalities and the North Carolina Association of County Commissioners, the commission is required to examine the issue of local government involvement in the regulation of gas exploration and development.

The commission, in conjunction with DENR and the Consumer Protection Division of the North Carolina Department of Justice, is also required to study the issue of forced pooling in North Carolina.

These three studies are all due as part of the Commission’s first report on or before Jan. 1, 2013.

Environmental Protections
This version of the bill not only legalizes hydraulic fracturing, it also legalizes the use of wastewater injection wells.

And while the bill requires most hydraulic fracturing fluids to be reported, those considered to be trade secrets are protected as such. This poses a dilemma, as many of the hazardous chemicals associated with fracking are, in fact, considered to be trade secrets.

However, this version requires pre-drilling of water supplies within 5,000 feet of a wellhead at least 30 days before initial drilling activity. It also requires at least two follow-up tests within 24 months after drilling begins.

Landowner and Consumer Protections
Gas developers are required to give 14 days notice via certified mail before entering a property on which non-surface disturbing activity will occur. On properties that will have operations that disturb the surface, the surface owner must be notified at least 30 days in advance.

This bill also requires landmen, who are the people responsible for managing and negotiating leases and gas interests and performing contract functions related to gas exploration, to be registered, and prohibits those who are not registered from acting as such.

This version of the bill specifically re-enacts pooling of property, meaning that landowners who choose not to allow drilling on their own property could be forced to do so anyway if enough of their neighbors agree. Essentially, a unit is established, and if your property is a part of that unit, then you could be required to consent to drilling.

Bill sponsor State Rep. Mitch Gillespie, a Republican representing Burke and McDowell counties, supported the inclusion of this provision, arguing it is necessary to protect landowners from losing out on income related to their mineral property, since gas, once tapped, is free flowing and there is no clear delineation between one person’s shale gas and someone else’s if they are all in the same unit.

Those opposed to forced pooling, such as State Rep. Joe Hackney, a Democrat representing Chatham, Moore, Orange counties, argued it is a breach of private property rights.

There is, however, a protection for landowners, in that they must be indemnified and held harmless for claims against oil and gas developers including, but not limited to: injury or death, damage to infrastructure or water supplies, and violations of legislation.

Also, before beginning the leasing process, developers are required to provide a copy of the Consumer Protection Division’s “Oil & Gas Leases: Landowners’ Rights” publication — a publication created by a later provision.

There’s also a provision for a minimum royalty payment of 12.5 percent of the sale of all gas produced from the lessor’s share, and these payments have to begin within six months of the product first being sold. These payments must all be documented, and if payments aren’t made within the required time frames then the landowner is entitled to to interest on those royalties at the rate of 12.5 percent.

Bonus payments are due within 60 days of signing a lease, and interest is due at a rate of 10 percent for any bonus payments not made.

Leases must clearly state the water source used in drilling operations, whether groundwater or surface water, and that use is not allowed to restrict the domestic uses of the surface owner.

All leases must be recorded within 30 days of execution, and written notice of a gas lease separating surface and mineral rights must also be provided to the lessor within 30 days. If the person leasing the mineral rights and the surface owner of the property are not the same, then the surface owner of the property must also be notified.

There’s also a disclosure that advises surface owners to obtain written approval from their lenders so they don’t find themselves in default on their mortgages.

The time frame for canceling a mineral rights lease in this version of the bill, however, is only three days.

Fees and Penalties
This version of the bill requires a fee of $3,000 per well drilled, and ups the fine for violating hydraulic fracturing legislation from $1,000 to $25,000 a day for each day and each violation.

It also automatically presumes liability of oil and gas developers for contamination of any water source within 5,000 feet of a wellhead, requiring compensation and a replacement water supply for any such contamination. Developers are also held liable for damage to surface, property, livestock, crops or timber, and required to make compensation for these damages.

Surface areas affected by gas industry operations have to be reclaimed, meaning cleaned up and restored as much as possible to their former condition, within two years of operations ceasing in that particular location.

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