Signaling concern that sweeping federal regulations could cripple companies using hydraulic fracturing to extract oil and gas from shale in their states, governors from 12 energy states signed an open letter to energy regulators and policymakers in D.C. last week, urging them to “leave regulation in the capable hands of the states.”
This may be heartening news for energy companies and investors. While most of the letter’s signatories were reliable D.C. critics like Republicans Tom Corbett of Pennsylvania (my former boss), Sean Parnell of Alaska, and Rick Perry of Texas, three of the 12 governors were Democrats: John Hickenlooper of Colorado, Steve Beshear of Kentucky, and Steve Bullock of Montana. It turns out that both red and blue states have benefitted from the energy renaissance, which has been a bright spot in an otherwise slowly growing economy, a source of family-sustaining jobs, and an antidote to U.S. over-dependence on foreign sources of oil and gas.
The letter is the kick-off of a political initiative called States First. It’s a partnership of the Interstate Oil and Gas Compact, a multi-state government agency comprised of 39 states (with international state affiliates) dedicated to the responsible development of oil and gas resources, and the Groundwater Protection Council, a national association of state groundwater protection officials.
The governors say hydraulic fracturing has to be carefully regulated. But, they add, that is already being done, and has been for years—by their state regulators. “State regulatory programs have been at the forefront of oil and gas exploration since 1935,” they write. The governors say the states are doing a good job; a one-size-fits-all federal approach won’t work.
Aided by fracturing, the United States is projected to leap past Russia and Saudi Arabia to become the largest oil and gas producer in the world by 2016, according to the International Energy Agency. That will bolster economic growth, and the governors argue that D.C. should leave the regulation of fracturing to them.
The states’ ability to design effective regulations that reflect state-specific needs is a vital element in the resurgence of our nation’s oil and natural gas industry. In fact, thanks to technology and American ingenuity, the United States is on target to become the world’s largest producer of oil and the world’s largest net exporter of natural gas.
In essence, the governors are telling the feds: back off. That is, by the way, exactly what I told Pennsylvania congressman Mike Kelly when he asked me at a congressional hearing a few years ago, “What advice would you give to federal regulators right now [regarding hydraulic fracturing]?” (My response got plenty of media attention.) The governors argue that their states are different in geography, climate, geology, meteorology, and social fabric. State regulators, they explain, are more able to react to changes in technology and more able to design effective regulations that reflect state-specific needs.
The timing of this letter from the group of 12 governors is important. Some environmentalists are clamoring for federalized regulation from inside the D.C. beltway and for the federal government to take away the producing states’ traditional oversight role. And many have called for federal permitting of fracturing projects and thrown their weight behind the Fracturing Responsibility and Awareness of Chemicals Act, or FRAC Act, which is pending in Congress. Basically, it would federalize the regulation of hydraulic fracturing.
That could lead to serious delays. A report from the non-partisan Congressional Research Services issued in March of this year shows that the massive increase in oil and gas production in our country since 2007 comes from state and private lands, whereas production decreased on federal lands. Specifically, natural gas production was up on non-federal lands by 40 percent and down on federal lands by 33 percent. Oil production on federal lands in FY 2011 and FY 2012 was below FY 2007.
Along the way, federal regulators have been caught in some embarrassing missteps on the regulatory front.
In Dimock, Pa., the Environmental Protection Agency (“EPA”) first said the water was safe, then reversed that position, and then reversed it again. The reversals possibly cost taxpayers millions of dollars. In Pavillion, Wyo., the EPA had to abandon its “investigation” due to a laundry list of amateurish scientific errors that was cataloged. In Parker County, Texas, an EPA regional director had to resign after his comments comparing EPA enforcement to the Romans “crucifying” the first five Turkish villagers they saw as a way of making the local population more compliant. The missteps have been ammunition for long-time agency critics like senators James Inhofe and David Vitter, who characterized the EPA as “0 for 3″ when it comes to forays into fracturing.
And just last month, the National Park Service (“NPS”) withdrew a document submitted to Congress objecting to fracturing. It had cited as “scientific evidence” a New York Times op-ed column. Pressed for an explanation, the NPS said that none of its managers had read the document before it was sent to Congress.
What’s an initiative like States First mean? Well, it’s good news for energy sector businesses and investors. Federalizing the regulation of hydraulic fracturing is probably their top business and investment risk. While the federal government has become a black hole for permit applications, the states have been increasing permit review efficiency while providing full environmental protection. For example, in 2012, Pennsylvania launched its comprehensive Permit Decision Guarantee Process, which has increased efficiencies by anywhere from 9 percent to 37 percent, depending on the program, and by 13 percent for the oil and gas program. On the federal side, the average time to process an application for a permit to drill on federal land increased 41 percent from 2006 to 2011—from 218 days in 2006 to 307 in 2011.
Business leaders and investors should pay attention to States First. It appears to be a key bulwark against pressure for the federal government to take an expanded role—one that’s unprecedented, I’m convinced—regulating oil and gas development at the state level.
Michael L. Krancer is Partner & Energy, Petrochemical and Natural Resources Practice Group Leader at Blank Rome LLP and former Secretary of the Pennsylvania Department of Environmental Protection. His blog, Energy Trends Watch, follows developments in energy, petrochemical and natural resources.