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----------------------------------------------------------------| | | | | SENATE COMMITTEE ON NATURAL RESOURCES AND WATER Senator Fran Pavley, Chair 2011-2012 Regular Session ----------------------------------------------------------------| | | | |

BILL NO: AB 972 HEARING DATE: June 26, 2012 AUTHOR: Butler URGENCY: No VERSION: June 13, 2012 CONSULTANT: Katharine Moore DUAL REFERRAL: Environmental QualityFISCAL: Yes SUBJECT: Oil and gas: hydraulic fracturing: moratorium. BACKGROUND AND EXISTING LAW California is the 4th largest oil and gas producing state and natural resources extraction is an important contributor to the state's economy. According to 2009 data provided by the Western States Petroleum Association (WSPA), approximately 100,000 people were directly employed in oil and gas production in California and the state received a combined $5.8 billion in fuel excise, corporate and personal income taxes. The Division of Oil, Gas, and Geothermal Resources (DOGGR) exists within California's Department of Conservation (department). DOGGR's Supervisor (supervisor) has extensive and broad authority to regulate activities associated with the production and removal of hydrocarbons (e.g. oil and gas) from the ground (Public Resources Code (PRC) 3106). This includes the subsurface injection of water and other fluids. The supervisor's authority is granted in order to prevent damage to life, health, property, natural resources, and to underground and surface water suitable for irrigation or domestic purposes. DOGGR issues permits for drilling new wells or re-working old ones (PRC 3203) and has 10 working days to respond to each application. Once a permit is approved, it is valid for one year from the date of issuance. "Hydraulic fracturing" or "fracking" of hydrocarbon wells to enhance oil and gas recovery is an increasingly popular subsurface process/technique. Due to technological innovations, fracking, by itself and in combination with advanced drilling techniques (e.g. directional and horizontal drilling) have allowed companies to develop previously uneconomic oil and gas reserves, such as those located in subsurface shale formations throughout the United States. Once an oil or natural gas well is drilled and its casing properly installed and perforated in the 1

production zone, fluids are pumped down to an isolated portion of the producing zone of the well at pressures high enough to

cause or enlarge cracks in the subsurface geologic formation surrounding the well bore. These cracks or fractures allow oil and natural gas to flow more freely into the well and then to the surface. The pumped fracking fluid is usually - but not always - comprised almost entirely of water with a small fraction of additional substances (less than a few percent by volume) added to enhance the process. In absolute terms the amount of additives may be thousands of pounds as a considerable amount of water - hundreds of thousands to millions of gallons may be needed to frack an individual well. The fluid volume needed, its chemical composition and physical characteristics will vary depending upon the particular conditions of each well. According to industry reports and academic papers, wells have been fracked in California for several decades. Estimates vary, but informal reports suggest that a majority of wells in the state may be fracked. Recently WSPA, based upon voluntary reporting by its members, reported that 628 new and existing oil and gas wells were fracked in California in 2011, considerably less than half the new wells drilled (about 2,300) and much less than half of existing wells (about 50,000 producing oil and 2,000 dry gas wells). Counties where wells have been fracked include Kern, Ventura, Santa Barbara, Los Angeles and Monterey. Recovery of the hydrocarbon reserves in the Monterey shale formation may be an important "unconventional play" in the future, and some fracked wells are producing from the formation already. However, the decline in natural gas prices - current spot prices are less than 25% of the peak reached in July 2008 suggests exploitation in the near term is less likely in favor of conventional reservoirs. Fracking treatments are necessary to achieve unconventional reserves' full potential with current technology. However, fracking has become a highly controversial technique subject to considerable scrutiny. Significant environmental contamination is attributed to fracking in cases in Wyoming, Texas, Colorado, West Virginia and Pennsylvania. New York state established a fracking moratorium until new regulations are developed, due, in part, to the potential risks to New York City's watershed from water contamination, as well as public health concerns. Recent news reports suggest that a partial ban in New York may remain in effect indefinitely. Vermont instituted a ban in May, and bills banning fracking are active in New Jersey. Although their authority to do so is being contested, local governments in New York, Pennsylvania and other states have passed ordinances to 2

ban fracking within their jurisdiction. Other states, including Texas, Colorado, West Virginia, Arkansas and Ohio have revised their laws and regulations to provide for additional safety and protective measures for fracking operations. At the federal level, fracking is largely exempt from the provisions of the Safe Drinking Water Act and the Underground Injection Control

(UIC) well program courtesy of the "Halliburton Loophole," and the Bureau of Land Management is in the process of developing fracking regulations. In California, despite nationwide concern and two years of specific legislative direction, DOGGR has not exercised its acknowledged authority to either regulate or systematically collect data on hydraulic fracturing treatments under PRC 3106. In March, DOGGR finally issued a formal notice to well operators asking for voluntary reporting of fracking data (WSPA's response is reported above). DOGGR is also conducting seven public fracking "workshops" across the state. These started in May and are expected to be completed in July. The department has announced that an independent scientific study on fracking in California will be conducted. The department's director has further committed to a timetable to produce draft fracking regulations towards the end of the summer with the intent of having fracking regulations in place by the end of this year. While some argue that DOGGR already regulates fracking through regulating well integrity, well casing failures are known to occur (comprehensive data are not available from DOGGR). Arguably, it is difficult to specify or regulate design criteria for a well casing when all the conditions the casing is exposed to (e.g. fracking) are not known. PROPOSED LAW This bill would : Define hydraulic fracturing and provide alternate terms for it Bar the supervisor from issuing a permit for an oil and gas well that will be hydraulically fractured until regulations governing its practice are adopted. ARGUMENTS IN SUPPORT According to the author, DOGGR has not responded adequately to the Legislature regarding numerous questions related to the safety and efficacy of the Underground Injection Control Class II well program and hydraulic fracturing. Therefore, Assemblymember Butler continues "in the interest of the environment and public health, AB 972 requires DOGGR to cease authorizing well drilling permits where the process of fracking will be used, until DOGGR 3

adopts hydraulic fracturing "fracking" regulations." ARGUMENTS IN OPPOSITION WSPA argues that "this significant, untimely burden on California's businesses and economy is unnecessary. ?] By obstructing an important means of growing our in-state production capability, AB 972 will necessitate increased oil imports, raising the cost not only of fuel, but of manufacturing, agricultural operations, public transportation and all goods and services which are energy-dependent. This

will, in turn, place our businesses at a competitive disadvantage, impede job growth and suppress property, income and excise tax revenues." COMMENTS The moratorium will take up to a year to take full effect . Well permits are valid for one year from the issue date (PRC 3203). Therefore, any permits issued this year will be valid for at least some portion of next year. Should this bill be chaptered, there may be a significant number of such carry-over permits in effect that would not have any restriction on fracking. The definition of fracking . An oil and gas well must first be drilled before it can be fracked. Fracking itself is considered a well or reservoir stimulation technique that is used to "complete" a well - in other words, make the well ready for hydrocarbon production. As noted above, hydraulic fracturing fluids are intrinsic to the conduct of fracking and the fluids can include a variety of additives to serve different purposes. For example, biocides, oxygen scavengers, enzyme breakers, acids, stabilizers, gels, and rust inhibitors, among others, may all be added to the fracking fluid. In particular, sand and other materials - known as "proppants" - are routinely added to fracking fluids to help keep the fractures open once fracking has been completed. The definition of fracking in this bill should be revised and additional terms added to clarify intent and conform to terminology in use (Amendment 1). "Unconventional shale drilling" and "fracking" are not synonymous . "Conventional" oil and gas reservoirs are located in relatively porous geologic formations. When a well is drilled, oil and gas will flow out due to the pressure of the reservoir within the formation itself (primary production) or with the help of added pressure or temperature applied to the reservoir (secondary and tertiary production). By contrast, "unconventional" oil and gas reservoirs are tightly bound within the geologic formations they are found in. Oil and gas 4

production is difficult because these formations are largely impermeable. Unlike conventional production, applied pressure will not, by itself, lead to viable hydrocarbon production. Discrete fractures are necessary in unconventional resources to spur hydrocarbon production - hence the popularity of fracking to exploit the hydrocarbons bound in unconventional shale formations. However, the drilling of unconventional shales and the subsequent fracking of these wells are two different steps. The alternate terms provided for fracking in the definition should be revised to reflect this (also a part of Amendment 1). The existing well permit process . As noted above, a well owner or operator has to file a notice of intent to drill with DOGGR prior to drilling or re-working a well. The form used does not

currently require that any information be provided specific to hydraulic fracturing treatments. The language of the proposed moratorium should be clarified and incorporated into the existing relevant code section to provide direction to DOGGR (Amendment 2). The regulations must be approved and in effect for the moratorium to be lifted. Impact of the proposed ban on economic activity . As noted above, California is one of the major oil and gas producing states in the country. It is unclear what the impact from the proposed ban on hydraulic fracturing would be given that DOGGR has publicly committed to attempting to have fracking regulations in place by the end of this year and the moratorium will not be fully in place until January 1, 2014 if DOGGR does not. At the least, this will introduce uncertainty to operational planning for well owners and suppliers. It is possible that further exploration and resource exploitation will be delayed with a corresponding impact on both direct and indirect economic activity tied to the oil and gas industry. Previous legislative direction to DOGGR. The Governor's 2010 May Revise budget requested new positions for DOGGR, in part, to regulate fracking. The Legislature approved this request, but DOGGR took no action on fracking. In 2011, budget control language authorized DOGGR to use funding "for the collection and public dissemination of information related to hydraulic fracturing." Again, despite the authorization for further additional positions, DOGGR took no action on fracking. This year, the Assembly and Senate Budget subcommittees for natural resources both expressed significant displeasure to the department's director about DOGGR's inactivity. The recent actions by DOGGR on fracking, noted above, followed these hearings. 5

Is fracking safe ? It is impossible to answer that question for California today given the lack of available information. However, plausible mechanisms exist for significant subsurface fluid and/or gas migration, including breaches of the integrity of the well-casing or reservoir. As noted in an earlier section, there is considerable evidence that suggests the increasing concern about the potential public health and environmental impacts of the practice is warranted. Furthermore, according to a recent congressional report, from 2005 - 2009 oil and gas companies throughout the US used fracking products containing 29 chemicals that are (1) known or possible human carcinogens, (2) regulated under the Safe Drinking Water Act for their risk to human health, or (3) listed as hazardous air pollutants under the Clean Air Act. Additionally, the composition of fluids injected into some wells cannot even be identified by well owners or operators. This is considered proprietary information by the product manufacturer and is not disclosed.

Late-breaking support "if amended" position by numerous parties. Several groups provided "support if amended" position letters to Committee staff too late to be fully incorporated into this analysis. The proposed amendments were not uniform between letters, but, in general, recommended more comprehensive language and environmental review and analysis. The amendments proposed below do not address these concerns. Related legislation AB 591 (Wieckowski, 2011) - would require disclosure of hydraulic fracturing and fracking fluid chemical composition to DOGGR after operations have occurred, among other related provisions. Currently in Senate Appropriations Suspense file. SB 1054 (Pavley, 2012) - would require advance disclosure to the neighbors of hydraulic fracturing activities, among other related provisions. Failed on the Senate floor. SUGGESTED AMENDMENTS: AMENDMENT 1 Delete page 2, lines 3 - 5, inclusive, and page 3, lines 1 - 4, inclusive and replace with 4 new sections: "3017. "Hydraulic fracturing" means a well stimulation treatment used in completing a well that typically involves the pressurized injection of hydraulic fracturing fluid and proppant from the well into an underground geologic formation in order to fracture the formation, thereby 6

causing or enhancing, or intending to cause or enhance, for the purposes of this division, the production of oil or gas from a well. Alternate terms include, but are not limited to "fracking," "hydrofracking," and "hydrofracturing." 3017.1 "Hydraulic fracturing fluid" means a base fluid mixed with physical and chemical additives, including proppants, for the purpose of hydraulic fracturing. Additives may be of any phase. A hydraulic fracturing treatment may include more than one hydraulic fracturing fluid. 3017.2 "Base fluid" is a continuous phase liquid or gas used to transmit pressure to the underground geologic formation. 3017.3 "Proppants" mean materials inserted or injected into the underground geologic formation that are intended to prevent fractures from closing." AMENDMENT 2 Delete page 3, lines 6 - 12, inclusive and replace with: " SEC. 5. Section 3203 of the Public Resources Code is amended to read: 3203. (a) The operator of any well, before commencing the

work of drilling the well, shall file with the supervisor or the district deputy a written notice of intention to commence drilling. Drilling shall not commence until approval is given by the supervisor or the district deputy. If the supervisor or the district deputy fails to give the operator written response to the notice within 10 working days from the date of receipt, that failure shall be considered as an approval of the notice , except as provided for in subdivision (d), and the notice, for the purposes and intents of this chapter, shall be deemed a written report of the supervisor. If operations have not commenced within one year of receipt of the notice, the notice shall be deemed canceled. The notice shall contain the pertinent data the supervisor requires on printed forms supplied by the division or on other forms acceptable to the supervisor and shall indicate if a hydraulic fracturing treatment will be used or is planned to be used in completing the well . The supervisor may require other pertinent information to supplement the notice. (b) After the completion of any well, this section also applies as far as may be, to the deepening or redrilling of the well, any operation involving the plugging of the well, or any operations permanently altering in any manner the casing of the well. The number or designation of any well, and the number or designation specified for any well in a 7

notice filed as required by this section, shall not be changed without first obtaining a written consent of the supervisor. (c) If an operator has failed to comply with an order of the supervisor, the supervisor may deny approval of proposed well operations until the operator brings its existing well operations into compliance with the order. If an operator has failed to pay a civil penalty, remedy a violation that it is required to remedy to the satisfaction of the supervisor pursuant to an order issued under Section 3236.5, or to pay any charges assessed under Article 7 (commencing with Section 3400), the supervisor may deny approval to the operator's proposed well operations until the operator pays the civil penalty, remedies the violation to the satisfaction of the supervisor, or pays the charges assessed under Article 7 (commencing with Section 3400). (d) (1) No notice of intention to commence drilling shall be approved for any well where a hydraulic fracturing treatment will be used or is planned to be used in completing the well until regulations governing hydraulic fracturing treatments are adopted by the division and have taken effect. (2) The hydraulic fracturing treatment regulations shall be comprehensive and ensure that the integrity of the well and well casing are maintained.

SUPPORT California Coastal Protection Network (if amended) California League of Conservation Voters (if amended) Clean Water Action (if amended) Earthworks (if amended) Food and Water Watch (if amended) Natural Resources Defense Council (if amended) Sierra Club California (if amended) Supervisor Mark Ridley-Thomas, County of Los Angeles The Wildlands Conservancy (if amended) OPPOSITION California Chamber of Commerce California Construction Trucking Association California Independent Oil Marketers Association California Manufacturers & Technology Association California Small Business Alliance Coalition of Energy Users Friends for Saving California Jobs Independent Oil Producers Agency Kern County Taxpayers Association

Western States Petroleum Association