Loopholes, End-Runs and Planning Ahead: EPA Initiatives to Narrow E&P Environmental Exemptions

1. Loopholes, End-Runs and Planning Ahead: EPA Initiatives to Narrow E&P Environmental Exemptions Pat Larkin Strasburger & Price, LLP Gulf Coast Environmental Affairs Group January 12, 2012

2. Overview: Loopholes, End Runs and Planning Ahead • “Loopholes for Polluters" (as characterized by in testimony at DOE hearings) • EPA's strategies to narrow/end-run E&P industry exemptions • Practical considerations for EHS Management in context of enforcement and transactions.

3. “Loopholes for Polluters” (Earthworks Oil & Gas Accountability Project) “Loopholes: The oil and gas industry is exempt from key provisions of seven major federal environmental laws — allowing practices that would otherwise be illegal. [I]t’s essential to reverse these federal loopholes.” EOGAP testimony before the Secretary of Energy Advisory Board (SEAB) Natural Gas Subcommittee.

4. “Loopholes for Polluters” 1. The Safe Drinking Water Act – SDWA The Energy Policy Act of 2005 exempted fracking from the SDWA, leaving drinking water sources in oil and gas producing states unprotected from the toxic chemicals used during fracking. Congress qualified this exemption to regulate diesel fuel additives used during fracking, which requires industry to apply for a SDWA permit if they are using diesel fuel to hydraulically fracture a well. 2. The Clean Air Act – CAA • Major air sources must meet NESHAPS by installing the Maximum Achievable Control Technology (MACT) for each source. • The CAA exempts oil and gas wells, and some pipeline compressors and pump stations, from aggregation. This exemption allows the oil and gas industry—which often operates many small facilities, to avoid regulation as a cumulative source. • In addition, in 1991 hydrogen sulfide (H2S) was removed from the CAA list of Hazardous Air Pollutants. 3.Clean Water Act – CWA • In 1987, Congress amended the CWA to require EPA to develop a permitting program for stormwater runoff — but exempted oil and gas production. 4. Resource Conservation and Recovery Act – RCRA • In 1980, Congress exempted oil field wastes (which includes waste from natural gas production) from RCRA. EPA ceded authority to regulate these wastes to the states. • This allows unsafe handling of toxic substances, including their conventional transport on roads and treatment in municipal rather than specialized facilities.

5. “Loopholes for Polluters” 5. Comprehensive Environmental Response, Compensation, and Liability Act – CERCLA • CERCLA excludes oil and natural gas from the term “hazardous substance.” Consequently, industry has little incentive to clean up its hazardous waste, or to minimize leaks and spills, in part because the exemption allows companies to escape liability when these problems occur. 6. National Environmental Policy Act – NEPA • The Energy Policy Act of 2005 established “Categorical Exclusions” exempting certain oil & gas activities from Environmental Assessment (EA) or Environmental Impact Statement (EIS) under NEPA. In addition, a CE does not allow for any public comment. In 2006 and 2007, the BLM granted CE’s for about 25 percent of oil and gas wells approved on public land in the West. 7. The Toxic Release Inventory of EPCRA • The Toxic Release Inventory17 (TRI) regulations require most industries to report significant uses and releases of toxic substances to the EPA, which then aggregates and disseminates the information to the public. • But despite their use of toxic chemicals throughout production, oil and gas facilities are not required to report to the TRI. This exemption leaves communities in oil and gas producing areas in the dark about what chemicals are being released—making it difficult to attribute responsibility and seek remedy for resulting health and environmental problems.

6. Range Resources v. EPA: • Range and the Sackett Supreme Court cases are important because they will decide whether Defendants’ can challenge EPA Unilateral Orders. • The Range SDWA Order is important because it reflects EPA’s strategy to regulate SDWA-exempt underground injection and RCRA-exempt E&P wastes. • Even if the Courts allow some pre-enforcement review, EPA has made it clear that emergency orders will be a key tool in EPA regulation of the E&P industry.

7. EPA Front-Line Strategy to Limit E&P Exemptions – Statutory ISE Orders (May, 2011 Briefing to SEAB)

8. EPA Strategies to Narrow SDWA Exemption • Emergency Orders to protect Drinking Water Resources • Range Resources scenario: if contaminated water wells are discovered, EPA will consider fracking operations as a source. • Guidance to define UIC permitting for Diesel Fracking • EPA stakeholder Q&A documents point to a broad, rulemaking-type EPA action: • What should the permit duration be, considering the intermittent nature of HF and Class II plugging and abandonment provisions?”  • What well construction requirements should apply to HF wells using diesel fluids?” • What well operation and mechanical integrity requirements should apply to HF wells using diesel fuels?” • What well monitoring and reporting requirements should apply to HF wells using diesel fuels?” • How do Class II financial responsibility (FR) requirements apply to wells using diesel fuels for hydraulic fracturing? • What information should be submitted with the permit application? • Diesel Fracking Guidance stakeholder discussions have not addressed key issues • How/will EPA further define “Diesel” in the Guidance? • Will State UIC programs develop a new permit Class? • Will past Diesel frack sites have to obtain permits?

9. CWA Storm Water Permitting -Oil and Gas Operations Exemption • The Administrator shall not require a permit under this section for discharges of stormwater runoff from . . . oil and gas exploration, production, processing, or treatment operations or transmission facilities, composed entirely of flows which are from conveyances or systems of conveyances used for collecting and conveying precipitation runoff and which are not contaminated by contact with, or do not come into contact with, any overburden, raw material, intermediate products, finished product, byproduct, or waste products located on the site of such operations. Section 402(l)(2) of the Clean Water Act • Two Part Exemption: • Discharges from “operations” • That are “not contaminated”

10. CWA Storm Water Permitting -Oil and Gas Operations Exemption Phase I & II Storm Water Rules • In 1990, EPA issues its Phase I Storm Water rule • Phase I rule applied to storm water run off from construction sites over 5 acres in size • EPA finds that construction activities are not includedin the “oil and gas operations exemption” from permitting 55 Federal Register at 48,033-34. • 1999 Phase II Rules – an estimated 30,000 E&P construction sites of 1 - 5 acres became subject to CWA permitting. Energy Policy Act of 2005 • Clarifies oil and gas exemption and explicitly includes oil and gas construction activities within the definition of “operations” covered by the exemption.

11. CWA Storm Water Permitting -Oil and Gas Operations Exemption EPA 2006 Storm Water Rule-Making • Implements changes in the Energy Policy Act, • EPA proposes to amend the federal rules to specifically exempt discharges of sediment at oil and gas operations from any permitting requirements, whether they resulted in a violation of water quality standards or not. 2006 - NRDC Sues EPA – Ruling in NRDC v. EPA • May 2008, the 9th Circuit Court of Appeals rules that the 2005 CWA amendments contained in the Energy Policy Act did not exempt sediment contaminated storm water from permitting. Current Rule? Return to CWA Statutory Exemption if Storm Water “ not contaminated” EPA Definition of “Uncontaminated Storm Water” The operator . . . is not required to submit a permit application . . . unless the facility: • Has had a discharge of storm water resulting in the discharge of a reportable quantity for which notification is or was required pursuant since November 16, 1987; or • Contributes to a violation of a water quality standard (WQS). 40 Code of Federal Regulations § 122.26(c)(1)(iii).

12. CWA Storm Water Permitting -Oil and Gas Operations Exemption EPA 2008 Interpretation of E&P Exemption • “EPA presumes that operators who select, install, and maintain control measures that minimize pollutant dischargeswill be able to meet applicable water quality standards in most instances.” • “minimize,” in the context of storm water controls means “to reduce and/or eliminate to the extent achievable …(including best management practices) …in light of best industry practice.”

13. EPA Strategies to Narrow CWA/Storm Water Exemption • Under EPA’s 2008 interpretation, E&P operators must meet industry “best practices” to control sediment: • Uncontrolled sediment discharges at E&P sites would trigger permit duty • Storm Water Permit required if Discharges “Contribute to a Water Quality Standard Violation” • Any sediment discharge to impaired waters, esp. if a TMDL is in effect, would risk WQS violation • E.g., several Pennsylvania rivers have Chlorides/TDS-related TMDLs • State & Local Government Regulation and SW Permitting • EPA is actively supporting local regulation, e.g.,: • In 2005, the Environmental Protection Agency awarded a grant to the City of Denton, Texas, to monitor and assess the impact of gas well drilling on stormwater runoff, and to provide, if necessary, regulatory and management strategies for these activities. • Region 6 CWA Direct Discharge (Brine Spill) Initiative • Few cases to date • Cases seem to focus on sites with measurable surface water impacts

14. Expansion of CWA Regulation –Pretreatment Standards for Flowback Water • Critics have voiced concerns about the potential for drilling wastewater to overwhelm treatment plants and adversely affect their treatment systems. • Concern over POTW/municipal plant’s ability to manage salinity and potential radioactivity of flowback water was reported by the New York Times in Spring 2011 • In April 2011, PA DEP directed several POTWs to cease disposal of flowback water. • The following month EPA issued information requests to PA E&P companies to disclose flowback disposal and recycling practices. • EPA announced on October 20, 2011, that, by 2014, it will impose federal pre-treatment standards for all operations disposing of wastewater from shale gas fracking operations. 76 Fed. Reg. 66286 (10/26/2011). • Pretreatment standards will focus on Total Dissolved Solids/Chlorides and Radionuclides.

15. Expansion of CWA Jurisdiction – EPA Guidance on “Waters of The US” • Guidance issued by EPA and Corps in response to Supreme Court “Split Decision” in U.S. v. Rapanos •  The following waters are protected by the Clean Water Act: • Traditional navigable waters • Interstate waters • Adjacent Wetlands • Non-navigable tributaries of traditional navigable waters • Wetlands that directly abut relatively permanent waters • Other waters are protected by the Clean Water Act if a fact-specific analysis determines they have a "significant nexus" to a traditional navigable water or interstate water. • Including Waters that are not proximate to jurisdictional waters if similar waters have a“cumulative impact” creating such nexus.

16. Expansion of CWA Jurisdiction – EPA Guidance on “Waters of The US” • EPA Rapanos Guidance challenged as an illegal rulemaking • Courts may void Guidance if it imposes “unequivocal requirements” • Two-part criteria in Guidance tracks the two approaches in Rapanos: • Uninterrupted surface water connections – clear jurisdiction • “other significant nexus” exists where subject wetlands or waterways affect the chemical, physical, and biological integrity of downstream waters. • EPA actions using these criteria have been upheld in post-Rapanos enforcement cases. • “Cumulative Impacts” findings creates great risk of unexpected jurisdiction and permit obligation • Corp/EPA may have made a nexus determination regarding “similar” but distant waters in the watershed, or even for the entire watershed.

17. Expanded Regulation of E&P Air Emissions • Region 6 - General Duty Clause Enforcement Initiative • Compliance Orders issued under Section 112(r)(1) of the CAA for "failing to maintain a safe facility and taking such steps as are necessary to prevent releases of an extremely hazardoussubstance - methane." • Vent and Connection Leaks – InfraRed Camera Inspections • 20+ Cases Listed on Region 6 website in past 18 months • In Re: American Acryl • Explosion and fire at American Acryl’s Harris County, Texas plant destroying a tank storing toluene and  sending two employees to the hospital for observation.  • EPA issued an Administrative penalty order on December 8, 2010 alleging that Respondent failed to comply with the "general duty clause" of Section 112(r)(1) of the CAA by "failing to maintain a safe facility and taking such steps as are necessary to prevent releases of an extremely hazardous substance." • Acryl denied it violated the general duty clause, stating that toluene is not an “extremely hazardous substances”, and that the accidental release of this chemical was a result of an explosion, not the cause of it.  • A $37,500 penalty was proposed. • American Acryl challenged “General Duty” as unconstitutionally vague and moved to dismiss the penalty Order. • EPA Chief ALJ rejected motion. Sets stage for ALJ hearing on facts, probable appeals.

18. Expanded Regulation of E&P Air Emissions • Proposed Repeal of HAP Aggregation and H2S Exemptions (H.R. 1204, 3/17/11) • Current CAA exemption from aggregation of toxics from E&P drill sites • Various efforts to force aggregation for NSR permit triggers • EPA revises Bush Admin. guidance on aggregation • August 2011, HAP and NSPS Standards Proposed for E&P Air Sources • Despite the complexity of the rules, EPA projects a final rule to be issued by April of 2012. • Significantly expands the universe of currently covered affected facilities and equipment and  add requirements specific to hydraulic fracturing. • Emissions reductions under the proposal would be achieved by controlling volatile organic compounds (VOC’s), sulfur dioxide, and other toxic pollutants, largely through green completions (new technologies and processes for enhanced gas recovery) and pit flaring. • New Texas PBR for E&P Facilities – New Non-Barnett Sources Now Covered (1/5/12)

19. Fracking Chemical Disclosures - Rulemaking under TSCA Section 8 • Aug 4th 2011 petition by EarthJustice requested EPA rulemaking under TSCA to require fracking fluid manufacturers to (1) disclose all health effects data and studies related to fracking chemical substances and mixtures; and (2) to intitate health and toxicity studies of impacts of frack fluids in the environment. • On November 23, 2011 EPA granted Earthjustice’s section 8(a) and 8(d) requests. • The section 8(a) component will ultimately require fracking chemical manufacturers and processors to submit broad and detailed reports on all aspects of chemical manufacture and use, including chemical names, molecular structure, category of use, volume, by-products, existing environmental and health effects data, disposal practices, and worker exposure. • Section 8(d) rulemaking requires manufacturers and processors to submit all existing health and safety studies known to, or initiated by, them for subject substances or mixtures. • EPA rejected the Section 4 request to require frack fluid manufacturers to develop environmental toxicity test data. EPA found that Earthjustice had not set forth facts sufficient to establish that testing was needed because oil and gas E&P chemicals present an unreasonable risk of harm through substantial exposure.

20. Practical Implications –Proposed Regulations • Municipal Regulation –track zoning initiatives in other cities & states, frack opponents will do so. • CWA - Flowback Water Effluent Guidelines – • Municipal treatment capacity will shrink even further • Evaluate recycling, commercial treatment and disposal alternatives • Prepare to audit water handlers - beware “miracle” technology and low-ball “brokers” • If waste mis-handled - EPA’s RCRA/CWA ISE Authority can order cleanup of E&P “solid waste” • NSPS & HAPs – • Audit to New Standards • Define Capital Investments • Continue to Develop New Work Practices • TSCA & State Disclosure Laws • Formulators - Prepare for TSCA Frack Fluid Document Disclosures to EPA • Analyze/Prepare CBI Claims - procedures will vary greatly. • Diesel Fracking Guidance – • Difficult for EPA guidance to broadly define “diesel” which would require UIC permit • Guidance is probably less relevant going forward

21. Practical Implications – Enforcement Defense • Document and Defend your exempt processes and waste streams. • SDWA: evaluate non-”diesel” frack fluid options • RCRA/CERCLA: • ensure transport/disposal records clearly show which E&P process generated wastes • Audit to ensure no mixture with non-exempt sources • CWA: • Develop and Document actual use of BMPs • Create a record affirming no reportable releases • Be aware of other contributing sources • Avoid EPA Exercise of ISE Authorities • Audit to Disprove and Prevent ISE Claims

22. Practical Implications – Purchase and Sale Agreements • Plan for Asset Buyer’s to Push EPA’s Proposed Standards • Aggressive reading of regs. reduce price, set up indemnity claim, used to void deals • Buyers may assert wastes are non-exempt unless can document sources • Design Your Buyer Due Diligence to Detect and Prevent triggers of EPA authority: • Pre-existing potential ISE conditions • Unrelated well-water impacts, • Air nuisances • Other sources “contribute to” CWA Water Quality Standard Violations? • Prior reportable releases at site - trigger storm water permit duty? • Design Due Diligence to Detect Expanded CWA Jurisdiction • Monitor Corps & EPA Juris. Determinations in watersheds • Understand connection/impact of on-site waters within watershed • Assess local government permit obligations/operational costs • Track state-wide developments: Cities and Counties are “borrowing” codes used by other in-state governments

23. Q&A? Patrick J. Larkin Partner, Environmental Practice Group Strasburger & Price, L.L.P. 901 Main Street Suite 4400 Dallas, Texas 75202 Patrick.larkin@strasburger.com T: 214-651-2132 • Cell: 214-770-3881 • Fx: 214-659-4075