The approach in the United States to modernizing energy markets has entailed an “all of the above strategy”—a combination of retiring coal plants and supplanting “dirty” carbon intensive fuels with natural gas and renewable energy sources of power. The advent of horizontal drilling technology together with hydraulic fracturing (referred to here as “fracking”) has transitioned the United States from a massive net energy importer to an energy exporter. As a result, in 2013 the U.S. energy consultancy PIRA reported that the United States had officially outpaced Saudi Arabia as the world’s largest oil producer.
Despite the benefits derived from increased oil production, there are certainly downsides to fracking. The Oklahoma Geological Survey recently released the results of a study concluding that fracking activities were contributing to seismic activities in that state. Similarly, The U.S. Geological Survey recently has noted increased seismic activity in a number of eastern and central U.S. states ranging as far west as Colorado, as far south as Texas and Alabama and as far east as Ohio.
While The Energy Finance Report has not previously addressed fossil fuel developments, it is also true that fracking could impact renewable energy developers in several ways, making it incumbent that they follow recent trends. First and foremost, despite community opposition, fracking will continue being a part of the "all of the above" approach, at least in certain regions and despite opposition, for the foreseeable future. At the same time, in some states, New York being one example, political pressure against fracking is a positive leading indicator for renewables.
Local Fracking Developments
As of the date of publishing, more than 400 cities, towns, counties, districts, and states across the U.S. have attempted to ban fracking or practices associated with fracking, according to advocacy group Food & Water Watch. Other states have taken more permissive approaches to the practice. Below are updates from several of the current "hot" states on both ends of the spectrum that are driving the fracking discussion.
In the Lone Star state, friction between municipalities such as Dallas and Denton on the one hand and drillers on the other have sparked legislative action. Dallas and Denton struck first by issuing bans on fracking within a specific radius of certain land uses. The oil industry fought back, leading to a bill which would preempt local government authority to enact their own fracking legislation. H.B. 40 was overwhelmingly passed by the Senate early in May 2015 after passing the House, ensuring that it will be placed in front of the Governor for signature.
The ability of home rule municipalities to ban fracking already has been upheld in the New York courts. Additionally, in 2014, New York Governor Andrew Cuomo placed a state-wide moratorium on fracking by prohibiting the approvals of required permits. In related litigation, the Court of Appeals recently ruled that the fracking freeze did not extend the life of pre-existing land leases between oil companies and property owners under an unavoidability (force majeure) theory. The effect of this ruling is that oil and gas companies that signed leases with land owners and offered them large signing bonuses will never recoup those costs. Companies now face the option of seeking to renew leases and offer additional signing bonuses to land owners.
The state of Maryland is considering banning hydraulic fracking, and its House passed a bill in April 2015 that would place a moratorium on the activity for three years while the long-term impacts of drilling are investigated. Maryland’s Senate is now considering a bill prohibiting granting or reviewing applications for fracking licenses in the western part of the state until April 30, 2018.
In the typically fracking-friendly Commonwealth, Pennsylvanian Governor Wolf proposed a new five percent severance tax on natural gas extraction. The Governor would like to use these tax revenues to pay for an education fund. The natural gas industry has fought hard against the proposal for fear that it would discourage continued investment in oil and gas exploration.
The Florida House of Representatives approved a bill in late April 2015 that would increase regulations on fracking. Despite opposition from environmental groups, which had been pushing instead for a ban on the extraction technique, H.B. 1205 passed with a large 82-34 majority. The bill would subject oil companies to higher levels of scrutiny and would require them to be clear with their intentions to undertake fracking activities during permitting processes. Currently, they can proceed with fracking extraction utilizing a conventional drilling permit after providing notice.
The Colorado Supreme Court recently ruled that plaintiffs will not be required to produce evidence of an injury before undertaking discovery in fracking-related toxic tort cases. Pundits predict that the ruling will lead to defendants seeking removal in any Colorado-filed fracking suit.
Fracking, while controversial, seems destined to remain a component of the "all of the above" U.S. energy strategy being encouraged at the federal level and managed at the state level. The Energy Finance Report will continue to provide updates on fracking on this page in the future. Anyone interested in additional analysis on fracking developments can contact any member of the Sullivan & Worcester Energy Team for assistance.
Special thanks to Morgan Gerard for her assistance in the preparation of this post.