Livestock Weekly
April 21, 2011

Attorney Discusses Emerging Fracking, Groundwater Issues
By Colleen Schreiber

SAN ANTONIO — In Texas oil and gas is definitely still king, and nowhere is that more evident than in South Texas, where the Eagle Ford shale play is making money hand over fist for many fortunate landowners. However, as wonderful as that income may be, rarely do such treasures come without at least some give and take, and mostly it's give on the part of the landowners.

For example, in the case of groundwater, the oil and gas companies have the upper hand because in Texas the holder of the oil and gas lease is considered to be the dominant estate.

"One of the principals that the courts in Texas have applied is that, in the absence of some contractual agreement between the parties in the lease specifying otherwise, the oil and gas company is entitled to use as much of the surface, and this includes the groundwater beneath the surface, as they reasonably need to develop the oil and gas," says attorney Ed McCarthy, principal in Jackson Sjoberg, McCarthy & Wilson LLP.

McCarthy, a long-time water attorney who almost invariably defends the landowners in such cases, was one of the faculty members at the recent CLE International Texas Water Law conference here. McCarthy went on to explain that if Texas wants to maximize the use of its valuable oil and gas resources, water is a must-have, and where it's available, that invariably means groundwater.

Groundwater law in Texas is such that in those areas where a local groundwater district (today nearing 100 such districts) has been established, surface owners must now have a permit or must be eligible for an exemption to use the groundwater beneath their land. Not only that, there are limitations on the amount of water available by use, and those limits are set by the local districts. The ongoing debates about desired future conditions and managed available groundwater will ultimately impact such decisions within a local district.

When SB 1 was written, lawmakers included a couple of exemptions. One exemption was for the individual landowner, who is allowed to pump on average 25,000 gallons of water daily for their well for domestic and livestock purposes. Some districts have gone as high as 50,000 gallons. The other exemption is for oil and gas development and minerals and mining.

Section 36.117(b)(2) of the Texas Water Code deals specifically with oil and gas. This exemption "authorizes drilling of wells to be used solely to supply water for a rig that is actively engaged in drilling or exploration operations for an oil and gas well permitted by the Railroad Commission of Texas."

McCarthy noted that while oil and gas companies are exempt from permitting, there are still certain rules that these companies must follow. For example, they have to register the well, and they have to file drilling logs and production reports.

"These are really good things," McCarthy insisted. "The more data the local districts have, the better able they are to create an inventory and the better able they are to support development of the science. All of these things are reasonable requirements and ones that should be strictly adhered to."

It's also important to note that the exemption doesn't authorize waste. Additionally, the oil and gas operator is required to pay the out of district transport/export fees if water from the exempt well is transported outside the district. They are not exempt from such fees.

McCarthy also pointed to a provision at the end of 36.117 which essentially says that if an oil and gas operator files an application for a permit and they comply with all the rules, the district is required to give them a permit.

"I point this out because this is really the only provision in Chapter 36 that says if you followed all the rules you have to get a permit," McCarthy noted.

The problem that McCarthy largely focused on for the purposes of his presentation was the phrasing of the exemption itself. That phrasing, McCarthy told listeners, is open to a lot of interpretation by the various GCDs. For example, the phrase "water used solely to supply the rig" is interpreted differently by different districts. Some districts, McCarthy said, are of the opinion that the same well can be used by both the landowner and the oil and gas developer. Other districts, however, strictly interpret the language as meaning a specific well has to be dedicated to an oil and gas operation, and if it's used for any other purpose, even another exempt purpose, it could lose the exemption.

"In other words, you can't take an existing well and convert the use to oil and gas development," he reiterated.

Another strict interpretation used by some GCDs is that the well has to be drilled and operated by the same entity who has the permit for the oil and gas operation and the water well must be located on the same lease or field associated with the oil and gas drilling rig.

"There may be multiple drillers, multiple operators in an oil and gas field," remarked McCarthy. "So the language has all kinds of potential flies in the ointment, and what it really comes down to is how the local groundwater district interprets the statute," he reiterated.

One more strict interpretation that could be applied has to do with drilling versus exploration. The statute could be read to mean that the oil and gas company is only exempt through the drilling phase but once production begins, that exemption is no longer available. Some districts are trying to say that fracking, or reworking a once producing well that has now gone dry, doesn't qualify for the exemption because that's not exploration.

"We've got folks trying to resolve that. Nobody has gone to the courthouse yet, but that's another issue that is a possibility," McCarthy told listeners.

To date, the vast majority of the problems that have arisen because of such interpretations have been worked out individually by the landowner and the GCD, but the proliferation of groundwater usage, particularly in South Texas in the Eagle Ford shale play, where a typical frack job utilizes between six and eight million gallons of water, is causing some additional strain. Hydraulic fracturing is the process used to widen or deepen the cracks in the formation to allow the oil and gas, which is otherwise trapped, to more freely flow to the well bore so it can be produced. A mixture of water mixed with solvents or drilling mud is typically used for fracking.

Without a doubt, when the oil and gas exemption was put in place, the amount of water being used for oil and gas operations was significantly less than today. That's because in 1993 only a few fracking permits were issued annually in the state, but by 2008 that number was well over 4000 permits filed annually. In the Eagle Ford in 2008 there were only 33 permits. Last year that number, McCarthy said, topped 1200 permits and it continues to grow.

"There are people moving machinery and men into South Texas as fast as they can and spending big bucks to do it and looking for water anywhere they can find it," remarked McCarthy.

Gas production in the Eagle Ford alone went from 16 billion cubic feet in 2009 to 64 billion cubic feet in 2011 while oil production went from 307,000 barrels to almost 2.6 million barrels over that same time period.

"I'm familiar with some of the deals, and I am just astounded by the prices offered and/or paid for water resources, ground and surface water."

One surface water deal he knows of was for a very junior water right issued in the 1980s which has high summer low-flow restrictions, and the amount of money offered for it, McCarthy said, was astronomical.

"This is one we all could have retired on."

The other big play in the state is the Barnett Shale, which encompasses approximately 5000 square miles within 18 counties around the Dallas-Fort Worth Metroplex. In 1993 only about 150 wells were permitted in the Barnett Shale, but by 2010 that number had grown to almost 14,000. Similarly, gas production went from 11 billion cubic feet in 1993 to almost seven trillion cubic feet by 2010.

Though natural gas is a great boon for the state in that it potentially offers relief from foreign oil dependency, it does not come without challenges, particularly when that natural gas underlies a large metropolitan area. The first headlines really hit in a big way about five years ago. There were a lot of complaints in the Fort Worth area about odor from the gas. In 2009 the headlines moved to the courtroom after Range Resources drilled two wells southwest of Fort Worth. In December 2010 the EPA filed an "Emergency Administrative Order" alleging that Range Resources' well had contaminated two domestic drinking water wells.

The Railroad Commission investigated the complaint in August 2009 and basically found no connection but continued to monitor the situation. EPA, however, accused the Railroad Commission of putting its head in the sand and thus filed the emergency order to cease and desist.

In a Railroad Commission press release dated March 22, 2011, the commissioners found that "Range Resources' natural gas wells be allowed to continue to produce as the wells are not causing or contributing to contamination of any Parker County domestic water wells."

The release went on to say that "evidence presented during a January hearing included geochemical gas fingerprinting that demonstrated the gas in the domestic water wells came from the shallower Strawn gas field, which begins about 200 to 400 feet below the surface. The natural gas tested did not match the gas produced by Range from the much deeper Barnett Shale field, which is more than 5000 feet below the surface in that area. Range also presented information to demonstrate that the two Range gas wells were mechanically sound, without any leaks. Evidence presented at the hearing showed that hydraulic fracturing of gas wells in the area could not result in communication between the Barnett Shale gas field and shallow aquifers from which water wells in the area produce.

"… The Commission invited the EPA and the two domestic water well owners to present their evidence at the hearing. However, no EPA officials or water well owners appeared to testify."

In February EPA published a draft plan to study the potential impacts of hydraulic fracturing on drinking water resources. The overarching goal of the study, McCarthy said, is to answer two questions: "Can fracking impact the water resources, and if it can, what conditions associated with potential impacts are due to hydraulic fracturing activities?"

He added that the study, which is ongoing, is much broader than just groundwater. It impacts surface water and reuse as well.

McCarthy points out that fracking is not a new process. In fact, it's been commonplace in the oil and gas industry for more than 60 years, yet he admitted that when he first started working in this area of the law he was surprised to learn that Texas really doesn't have any rules and regulations with respect to fracking.

"The Railroad Commission regulates the heck out of the oil and gas industry, but they don't have any real rules for fracking, and the Supreme Court has noted that in the Garza case," he told listeners. "But, it's coming."

On the state level, Senator Wendy Davis has filed two frack-related bills this session. SB 772 would require tracer substance to be put in the frack fluid to be used as an identification tool of sorts.

"It's an interesting idea, but there's a debate within the industry about whether this bill is designed to help," McCarthy said. "There are certainly lots of practical problems that have to be solved. For example, how many different tracers can be created? One operator may have 12,000 wells in one year. How are you going to mark each of these wells?"

The second piece of legislation is SB 1049, which McCarthy described as "superfund inventory law." It relates to the disclosure of information regarding hydraulic fracturing treatment operations.

Both of these bills have been referred to the Senate Natural Resources Committee.

Senator Craig Estes also filed SB 692, which would essentially require exempt wells for oil and gas operators to be subject to spacing rules. This bill has also been referred to the Natural Resource Committee.

McCarthy wrapped up by telling listeners that he is a proponent of more clarification with respect to groundwater use for oil and gas operations.

"I strongly believe there should be more reporting requirements and I also think meters should be put on domestic wells.

"On the quality side I don't really think that it's a groundwater regulation issue, but rather, we need some clarification on the Underground Injection Control Program."

The UIC is responsible for regulating the construction, operation, permitting, and closure of injection wells that place fluids underground for storage or disposal.

"If there is a true threat to water quality from frack fluids, we need to identify it," McCarthy said.

On taxes, the attorney opined that taxing of the land based on the valuation of the water, much like what is done with oil and gas, is something that will likely be considered in the future. The State Water Plan, he pointed out, predicts that unless new water supplies are developed by 2060, the state will face a nine million acre-foot shortfall. A tax valuation on water, he said, could help finance some of the water infrastructure desperately needed in the state.

He wrapped up with a quote from the late President John F. Kennedy, who said, "Anyone who can solve the problem of water is worthy of two Nobel prizes."

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