TAKE 5: MEC member: As fracking moves ahead, protections, education are key

May. 31, 2014 @ 05:01 AM

Today, in the first of two parts of an extended Take 5, we talk with Sanford native and Lee County property owner Ray Covington, who’s a member of the N.C. Mining and Energy Commission, about issues related to hydraulic fracturing in North Carolina. Part two will be published in Sunday’s Herald. Covington resides in Guilford County with his wife and daugthers.

What is happening with Senate Bill 786 and other legislation in the General Assembly this session relating to oil and gas development in North Carolina?

Senate Bill 786, titled The Energy Modernization Act, is the main bill on oil and gas being considered by the General Assembly in this session. It was ratified on Thursday, May 29, and has been sent to the governor, who is expected to sign it soon. It reflects a compromise among various goals and concerns, but it has a number of provisions that are a step forward in strengthening regulation of oil and gas development and will improve protections for landowners, communities and the environment.

What are the main provisions of Senate Bill 786?

It affirms that there will be no exceptions from North Carolina's trade secret laws for the oil and gas industry. For a chemical or process to receive trade secret protection from disclosure to the public, an oil and gas operator will have to meet the same requirements as other industries. The trade secret information will be kept by DENR (the N.C. Dept. of Energy and Natural Resources), which must disclose it immediately to medical personnel or first responders if requested in an emergency.

In addition, the bill:

* Allows DENR to set more stringent requirements for oil and gas operations than the federal government does.

* Changes the way that a court would determine liability for contamination. It reduces the area of an operator's presumed liability from 5,000 feet to 2,640 feet from the wellhead, but landowners still may prove an operator is liable outside that radius. Any person with control over activities causing contamination, not just the operator, would be liable for all damages, reducing the chance a landowner would be left with no party able to pay damages.

* Requires that all compressor stations be placed inside baffled buildings.

* Prohibits the injection of waste into the subsurface or groundwater.

* Makes entering private property without permission to conduct seismic testing a Class 1 misdemeanor.

* Authorizes DENR to reject any application for a drilling permit if the applicant has a poor history of compliance with environmental rules.

* Affirms that all generally applicable local zoning or land-use ordinances are valid but gives the Mining and Energy Commission the authority to preempt a local ordinance that would prohibit oil and gas development.

* Establishes a severance tax on all oil or gas produced in the state to be paid by the operator at the point of sale.

* Extends period that the Mining and Energy Commission has to complete its initial rule-making process by three months to Jan. 1, 2015, to ensure that we have enough time to receive public comment and to complete our work.

* Establishes several studies including one directing DENR to review the Compulsory Pooling Study Group report and recommend consumer protections related to split estates and to compulsory pooling.

* Sets up a mechanism for the rules proposed by the MEC to go into effect if the legislature takes no action in early 2015 to change them.

* Allows DENR to issue drilling permits 61 days after the approval of the MEC’s rules by the legislature.

When will the rules that the legislature required the Mining and Energy Commission to write be completed, and when will the public have the opportunity to comment on them?

Senate Bill 786 would extend the time that the MEC has to complete the required rules until Jan. 1, 2015, but we probably will finish them by the original deadline of Oct. 1. We have completed a draft rule set, and we are now working through legal language to ensure each provision does what we intend it to do: protect the land, water and air of North Carolina while still providing a modern regulatory process for oil and gas exploration.

The plan calls for us to release the rules to the public on June 23, 2014. The period for the public to make written comments will be from July 15 to Sept. 15. There also will be three public hearings in August. These currently are scheduled for Raleigh on Aug. 19, for Sanford on Aug. 22 and for Rockingham County (location of the Dan River shale basin) on Aug. 25.

There already has been much public comment and engagement during the Commission’s rulemaking process over the past 20 months. In addition to more than 24 public meetings by the commission and its committees, there have been dozens of meetings by various study groups and substantial input from stakeholders and the public on proposed rules as they were drafted.

However, the upcoming public comment period and public hearings are critical parts of the process for public input into the proposed rules. I strongly encourage people to participate in the hearings and to submit written comments to make sure that their views on the rules are heard. The commission will consider and respond to each question or concern that is raised, and we will adjust the rules where we think the comments point to areas for improvement. This comment process is essential for ensuring that our proposed rules are on target.

What additional protections beyond those requested by the legislature do you think should be put in place to protect landowners in the leasing and shale gas development process?

In addition to the critical rules establishing criteria for operating wells, the current statutes and the MEC’s draft rules also establish many protections for landowners — including setbacks from buildings and streams, water testing requirements, and consumer protection warnings to landowners and home buyers.

However, I think that more protections are needed. Surface use agreements should be required. Indemnification protections should be improved. Minimum property sizes ... should be established. Special protections for owners of split estates need to be put into place. Until statutes and rules are set and include good landowner protections, people thinking about leasing their land should continue to wait and focus on educating themselves about the process.

I’m also a firm believer that for landowners who decide to lease their mineral rights, the best protection is a good lease contract and a surface use agreement that clearly spell out the landowner’s rights. However good the state’s rules are, ultimately many of the things landowners will care most about — where drilling activities can take place, what the compensation will be, detailed plans for how their land will be reclaimed after drilling and production are complete, adequate bonding to ensure the process will be completed — can be addressed effectively only in a well thought-out lease contract and surface use agreement.

That’s one of the reasons I think we need to require that operators negotiate surface use agreements for all landowners, whether or not the landowners own the oil and gas rights underneath. Operators are likely to avoid development on property where ... the surface is severed from the rights to oil and gas below.

However, in cases where they don't, requiring an operator to negotiate a surface use is the best way to ensure that surface owners are fairly compensated, the surface activities minimize impacts, farming and other activities can continue and the land will be properly reclaimed. More protections for surface owners of severed estates are needed, too, but mandating surface use agreements is critical.

Another significant way that landowners can protect themselves is to not go it alone. Landowners who work together with other landowners to lease their property will have much better negotiating power to get what they want than those who go it alone. They'll also be able to pool their resources to obtain better advice.

What is happening with compulsory pooling and the recommendations of the Mining and Energy Commission's Compulsory Pooling Study Group?

Since 1945, North Carolina has had a law allowing oil and gas operators and owners of oil and gas rights to compel adjoining landowners into a drilling unit. The legislature recognized two years ago that we needed to write rules that would protect the rights of landowners when this occurred. The legislature directed DENR and the Mining and Energy Commission to establish a Compulsory Pooling Study Group to look at these issues and for DENR to report back to the legislature.

I chaired that study group. We brought together 15 legal experts and representatives of a wide range of interests, including landowners, environmental groups, industry representatives, the Department of Justice Consumer Protection Division, agricultural groups, and the banking and insurance industries. We held 10 meetings, all open to the public, including five in Sanford and two in Pittsboro. We heard expert presentations on a wide range of issues and studied rules governing compulsory pooling from states across the country. Throughout this process, our goal was to identify ways to protect landowners in situations where the gas operators exercise their right to join other landowners with them to create an oil and gas production unit.

Last September, we made recommendations to establish broad protections for landowners when other landowners or oil and gas operators sought to compel them to join a production unit for oil and gas. The full report — and the agendas, presentations and audio recordings of each meeting — are available on the MEC website at http://portal.ncdenr.org/web/mining-and-energy-commission/compulsory-pooling-agendas.

Our report has been reviewed by DENR, but DENR has not yet made any recommendations because it wanted to wait until other related rules were completed to comment. Senate Bill 786 extends until next year the period of time DENR has to respond to our report and its own recommendations to the legislature.

What does the recent expiration of many of Whitmar’s oil and gas leases in Lee County mean for the future of oil and gas development here?

It means there’s still a lot of uncertainty about the direction that oil and gas development in North Carolina will take and when it will happen.

In the fall of 2013, Whitmar released several thousand acres in Lee County that it had under lease for several years to concentrate its resources on areas where it is actively producing oil and gas. Whitmar and other operators with oil and gas leases in Lee County have been very quiet about whether they will release other rights as well, but it certainly indicates that the strength of other oil and gas plays has made the market for leases in North Carolina fairly soft.

In addition to the concern that the rules and other protections for landowners are not yet in place, those market conditions are another reason why it’s not a good time from an economic perspective for landowners in Lee County to be leasing out their oil and gas rights. There simply isn’t enough interest in North Carolina at the moment among operators for landowners to get a price that is competitive with other regions of the country. I think that will change at some point, but when that change will happen is being driven by very large global market forces that are hard to predict.

To be ready for the change, there are a number of things that we need to do.

First, it is critical that we bring our regulatory program up to date to ensure that any production that does occur will not adversely affect our water, land and air. We need to make certain that the rules protect landowners, communities, and the environment and enable us to continue to enjoy our quality of life while also directing a fair share of the benefits of oil and gas development to local communities and the state. Rules necessarily balance competing interests and values. However, I believe that the rules that we have drafted already, along with additional ones that we will propose later in the year to protect landowners, will be sufficient to provide the protections that we need.

The second thing that we need is more technical information about exactly what resources exist and where they are located. Now we have a general sense of what lies beneath the surface of Lee County, but we need substantially more and more detailed information to know the mix of materials and exactly where they exist. Having that information will help us plan better and provide landowners better information as they negotiate leases with gas operators.

Finally, we all need to continue to educate ourselves about oil and gas development and not believe what we hear from any one side of the debate. In any debate, the truth is typically somewhere in the middle, and each of us needs to take responsibility for learning all we can, reaching our own conclusions, and ensuring that whatever development that does happen occurs in a way that benefits our community and protects our families, land and environment.