Oil and gas regulation in the United States: overview
A Q&A guide to oil and gas regulation in the United States.
The Q&A gives a high level overview of the domestic oil and gas sector, rights to oil and gas, health safety and the environment, sale and trade in oil and gas, tax and enforcement of regulation. It covers transfer of rights; transportation by pipeline; environmental impact assessments; decommissioning; waste regulations and proposals for reform.
To compare answers across multiple jurisdictions, visit the energy and natural resources Oil and gas regulation Country Q&A tool.
This Q&A is part of the global guide to energy and natural resources. For a full list of content visit www.practicallaw.com/energy-guide.
The US is now the largest producer of oil and natural gas in the world. It is also the second-largest producer of liquefied natural gas (LNG) and is expected to become the top producer within the next decade. As a result of increasing production rates driven by the technological advances in onshore horizontal drilling and high-volume hydraulic fracturing, the US now produces nearly 10,000,000 barrels per day (Bpd) of crude oil, up from an average of just over 5,000,000 Bpd during the period 2005 to 2010. The oil and natural gas production sector is a staple of the US economy, employing approximately 200,000 people in 2014.
Oil imports/exports market
The Energy Policy and Conservation Act of 1975 banned the export of crude oil produced from the US. Limited exceptions were granted by the Department of Commerce, resulting in between 50,000,000 and 100,000,000 barrels being exported annually. On 18 December 2015, amid an historic downturn in global oil prices, the US Congress finally lifted the crude oil ban, allowing US oil producers to sell in global oil markets.
Domestic market structure
Oil and gas resources in the US are generally privately owned, unlike countries where natural resources are owned by the government. Therefore, mineral interests like oil and gas are owned by individuals, corporations or governmental entities that own the surface of the land. For example, individual landowners own and control the right to access upon the land, and the rights to explore for, drill, develop, produce and sell the oil and gas underlying their property. As a private property right, individuals can sever their rights to own the surface of the land from their ownership of the minerals and sell their oil and gas development rights; they can also lease those rights to third parties who will produce the oil and pay the landowner fees and/or royalties. Finally, landowners have the option to simply abstain from development of their mineral rights. Importantly, the domestic market structure for developing oil and gas resources is driven largely by private contracts rather than government regulation, as it would be in countries where the government owned the minerals.
Finally, where the local, state or federal government owns the land, the government owns the oil and gas rights and manages those rights for the public benefit.
Government policy objectives
The US Government does not have a national energy policy. However, the oil and gas industry can be affected by tangential government energy and environmental policies, such as automotive fuel efficiency standards.
Individual states within the US have developed specific policy objectives, most commonly stated as a policy to prevent waste and protect the environment while promoting the greatest ultimate recovery of indigenous oil and gas from within the state.
Current market trends
The US benchmark West Texas Intermediate (WTI) crude oil prices have fallen in step with global crude oil prices by more than 70%, from over US$100 per barrel (Bbl) in mid-2014 to a low of less than US$30 Bbl before a slight recovery at the end of the first quarter of 2016. Exploration and production, and the oilfield services sectors, are engaged in extensive cost-cutting operations, including workforce reductions and financial restructuring. Cost-cutting measures are reducing capital budgets for new drilling operations, and production curves are beginning to show declining production through the end of 2016. Crude oil production in December 2015 was down 166,000 Bbl/day from December 2014 production levels, marking the first year-over-year decline in monthly US oil production since September 2011.
US gas consumption averaged approximately 22,000,000 million cubic feet (Mcf) per year from 1970 through 2009, reaching lows of approximately 16,500,000 Mcf in the mid-1980s. Increased production from shale gas, resulting from the combination of horizontal drilling and high volume hydraulic fracturing, has produced steady increases in domestic production and consumption, reaching approximately 27,500,000 Mcf for 2015. Power generation from gas is continuing to displace power generation from coal-fired power plants, as gas prices remain low and the US continues to place greater regulatory restrictions on coal-fired power plants as a measure to combat climate change.
Natural gas imports/exports
Although the US is the world's largest producer of gas, it has historically not been a major importer or exporter. Several liquefied natural gas (LNG) terminals have been permitted in recent years, and Cheniere Energy exported its first cargo of LNG out of its Sabine Pass LNG facility in March 2016. Global demand for gas has not kept pace with supply, resulting in a global glut of gas. Platts unit Eclipse Energy Group suggests that global gas demand growth was insignificant in 2015, rising by 700 million cubic feet per day (MMcf/d), while approximately 2.2 billion cubic feet per day (Bcf/d) of new export capacity has been brought online. Five-year projections suggest that global export capacity is expected to grow by approximately 44%, to 17.8 Bcf/d.
Domestic market structure
Ownership of the right to explore for, drill and produce gas is the same as that for crude oil. The US recognises the private ownership of, and right to explore for, drill, produce and sell gas for private gain. In those instances where a local, state or federal government owns the land and the rights to the oil and gas underlying the surface, the governmental entity manages the gas development rights for the concurrent purposes of protecting human health and the environment while managing the economic resources for the best interest of the public.
Government policy objectives
The US has both federal and individual state agencies that regulate certain aspects of oil and gas production. Neither the US Federal Government nor the individual states have established a comprehensive energy policy to manage their energy resources. For example, domestic onshore oil and gas development is regulated by the individual states under mandates to prevent waste and protect human health and the environment, while encouraging the greatest ultimate use of domestic oil and gas production. Oil and gas production occurring offshore in the Gulf of Mexico is managed by various US Federal Government agencies to ensure safe and environmentally responsible development, and the payment of production royalties and taxes for the public benefit.
Current market trends
Like crude oil prices, gas prices have fallen in response to production growth rates and supply gluts domestically and globally. As capital expenditures to drill new wells decline, the rate of production increases will begin to fall. Modest price increases from a low of approximately US$2.30 per 1,000 cubic feet (Mcf) to approximately US$4.18 per Mcf are forecast from 2016 through to 2020. The gas exploration and production sector will remain focused on spending reductions and capital conservation. Increased pipeline construction to alleviate offtake constraints in key production areas (such as the Marcellus and Utica shales in the Appalachian Basin of the eastern US) is expected to continue, providing some upward price pressure as pipeline capacity becomes available to supply the large consumer markets of the US East Coast.
The US is the world's largest petroleum consumer, consuming about 19 million barrels per day (MMbbl/d) of petroleum products in 2014. While the US is the third largest crude oil producer, it still imported 7.3 MMbbl/d of crude oil and 1.9 MMbbl/d of refined petroleum liquids in 2014. The US also exported 3.8 MMbbl/d of crude oil and petroleum products (of that only 0.3 MMbbl/d was crude oil), which made the US a net exporter of petroleum liquids and refined products. Net imports of crude oil and refined petroleum products averaged 5.2 MMbbl/d and accounted for 27% of US total petroleum consumption in 2014.
Natural gas requirements
Although most of the gas consumed in the US is domestically produced, the US does consume more gas than it produces, and is a net importer of gas. Net imports of gas (imports minus exports) accounted for 4% of US gas consumption in 2014, compared to imports of 16% in 2001, 2005 and 2007.
Most gas is imported and exported by pipeline as a gas, and by ship as liquefied natural gas (LNG). Small amounts of gas are also exported on trucks as LNG and as compressed natural gas (CNG). In 2014, 96% of US net imports of gas came by pipeline, mostly from Canada, with a small amount from Mexico. Most US gas exports go to Canada and Mexico by pipeline.
In 2014, net imports of LNG totaled approximately 43 billion cubic feet (Bcf), equal to less than 1% of total US gas consumption. The countries where LNG was imported from were as follows:
About 72% of the LNG imports were from Trinidad and Tobago.
About 14% were from Yemen.
About 9% were from Norway.
The remaining LNG imports came from various other countries.
US exports of gas peaked in 2012, largely because of expanded pipeline exports to Canada and Mexico. In 2014, Canada received 52% of US pipeline gas exports, with Mexico receiving 48%. US exports of gas include domestically produced gas shipped to other countries as LNG beginning in March 2016, and CNG. US exports of LNG and CNG accounted for about 1% of total US exports of gas in 2014.
The US domestic gas (and oil) exploration and production sectors operate in a free market subject to government health, safety and environmental regulations. While domestic production is encouraged to meet US energy needs and enhance its national security, there are no specific government policies promoting unconventional oil or gas production. Capital investments are encouraged by market forces during a rise in commodity prices, and concurrently fall during commodity price slumps in the wake of excess supply. There are certain tax advantages associated with oil and gas exploration and production, such as the ability to deduct intangible drilling costs as a current business expense. The tax treatment of oil and gas production expenses is the same for conventional and unconventional development.
Domestic onshore oil and gas development is regulated by the individual state in which the activity will take place. Each state has its own regulatory agency or agencies that control things such as:
The distance between oil wells and property lines to protect the rights of adjacent landowners.
Prevention of waste.
Health and safety issues.
However, local government control over oil and gas production is generally not permitted by state law, except for local zoning input that in some states allows local government control over where and when oil and gas production activities can take place (to prevent, for example, residential neighbourhoods from noise pollution, industrial traffic, or perceived health hazards).
Individual states also have authority over the taxation of oil and gas production that occurs within the state. Oil and/or gas were produced in 33 of the 50 states within the US in 2014. Additionally, various agencies of the US Federal Government regulate oil and gas production in the waters of the Gulf of Mexico, as well as the exploration of oil and gas on federal lands, for example:
The Department of the Interior regulates the extraction of oil and gas from federal lands.
The Bureau of Land Management regulates oil development, exploration and production on federal onshore properties.
The Office of Natural Resources Revenue collects royalties owed to the government for onshore and offshore production.
The regulatory regime
See Question 5.
Rights to oil and gas
The US recognises that oil and gas rights to a particular parcel are usually owned by private individuals, corporate entities and Native American tribes. However, local, state or federal governments can also own surface rights and subsurface oil and gas rights. Unless explicitly severed by deed or other instrument, oil and gas rights are owned by the surface landowner.
Oil and gas rights in the offshore waters of the Gulf of Mexico are owned by either the state or federal government (depending on distance from shore) and leased to oil and gas companies for development.
Subject to minor variations among states, the owner of real estate also owns the oil, gas and minerals underneath the surface, unless the minerals are severed under a previous deed or agreement.
There are generally two conflicting legal doctrines covering the private ownership of extracted oil and gas:
The law of capture.
The doctrine of correlative rights.
Which of the doctrines applies depends on state law, which varies from state to state (or, in the case of the federal offshore zone, on US federal law). It is possible for different states (and different federal circuits) to have different laws on individual rights for the production or exploration of minerals. However, generally the legal schemes tend to be fairly consistent across the US.
The rule of capture provides that the producer with a wellbore on property owned or leased to it is allowed to produce and keep for itself all of the oil and gas produced from the well drilled on its own land or lease. In jurisdictions where the law of capture applies, ownership of the oil or gas is not determined until it is produced and reduced to possession at the surface, such that oil and gas originating from a neighbour's land and migrating to the oil producer's land through geologic forces or drainage is owned by the party that reduces it to possession.
Under the doctrine of correlative rights, state law limits the rule of capture to prevent waste and protect the rights of all the owners of oil and gas that can be produced by a single well. State laws accomplish this balancing of rights by restricting the number of wells in a given area to the minimum number capable of the common source of supply, the reservoir. Each owner of oil or gas rights shares ratably in the production from the wells permitted to be drilled in the common source of supply.
Oil and gas development rights can be severed by a deed from the surface rights, resulting in a split surface and oil or gas estate. The right to produce oil can be separately severed from the right to produce gas, and further separations can be made to sever individually producing horizons from other potentially or actually producing horizons.
Once severed from surface ownership, oil and gas rights can be bought, sold or transferred, like other estate in real property. In most states, the owner of the oil and gas interest is presumed to have the right to occupy as much of the surface property as is reasonably necessary to conduct exploration, drilling and production activities to extract the oil and gas (subject to state and sometimes local regulations, such as minimum distances from homes or buildings). Throughout the US, a split subsurface estate in oil and/or gas is deemed the dominant estate in real property, giving greater property rights to the owner of the severed oil and/or gas estate than to the surface owner.
The development of domestic onshore unconventional oil and gas using the combination of horizontal drilling and high volume hydraulic fracturing has predominantly occurred on private property or Native American tribal lands. Development of the Marcellus and Utica shales of the Appalachian Basin states of Pennsylvania, West Virginia and Ohio has occurred on either private property or lands leased from those states.
Crude oil produced from the unconventional Bakken Formation has occurred predominantly on either private property or lands of the Fort Berthold Native American reservation.
The unconventional Barnett Shale formation underlies much of the metro and suburban Dallas-Fort Worth area of Texas and is almost completely privately owned land.
Development of the unconventional oil and gas resources of the Western Gulf Basin, more commonly known as the Eagle Ford Shale, almost exclusively underlies large private ranches in the state of Texas.
Nature of oil and gas rights
Oil and gas development rights in the US are typically conveyed by private contracts such as a lease (between the owner of the minerals and the entity that will explore for oil and gas and/or develop it) or a joint operating agreement (a separate contract between the exploration company and other working interest owners). Leases can be granted by the actual owner of the oil and/or gas rights, whether it's an individual, a corporation, a Native American tribe, or a local, state or federal government owner, to the operating entity. Leases to privately held oil and gas rights are typically subject to private and confidential negotiation. Public land leases are typically conveyed based on a public and competitive bidding process, and awarded to demonstrably responsible entities on the basis of the highest and best terms offered for the property. Oil and gas lessees can, and often do, convey development rights among themselves by sale, swap, farm-out or joint development agreements. Oil and gas leases are generally considered as hybrid instruments in real property and contract, and are generally alienable unless limited by private contract.
Oil and gas leases in the US are usually subject to two separate durations:
A term of years during which the lessee can explore and develop the property without paying royalties on production.
If and when oil and/or gas is discovered in producible quantities sufficient to generate royalty payments to the lessor/owner (known as producing in paying quantities), the lease will continue for so long as oil and/or gas is produced from the leased property.
Most oil and gas leases awarded in the US, whether from private parties or on local, state or federal lands, are subject to an initial fee (called a lease-signing bonus) for the lessor to secure the lease for potential drilling during the initial term of years, and thereafter for the lessor to receive royalties from production.
Lease-signing bonuses can range from a few dollars per acre of land leased to tens of thousands of dollars per acre leased, depending on the location of the property, competition for the lease, and the surrounding production history of offset property.
Production royalties are also separately negotiable and vary from lease to lease and region to region. The most common production royalty is 12.5% of production, though royalties up to, and even in excess of, 25% do occur. Many states have adopted minimum royalty laws that require the lessee of an oil and gas lease to pay at least 12.5% royalty or risk the lease being declared null and void from the beginning.
Royalties are calculated either on gross production (that is, the gross price received for the oil and/or gas sold from the property) or after the deduction of post-production costs (PPCs). Typical PPCs include the cost associated with:
Oil and/or gas gathering.
State law varies on whether PPCs can be lawfully deducted from oil and gas production royalties. Where allowed, leases from local, state or federal governments are frequently subject to PPC audits and royalty disputes.
The US has comprehensive local, state and federal laws, rules and regulations relating to the use, development and responsibility associated with commercial activity, including domestic oil and gas production. Domestic onshore exploration and production activity is regulated by individual states, and the owner/operator of oil and gas wells bears the responsibility for safe and responsible development, operations, well plugging and abandonment, and wellsite reclamation. State regulatory agencies require well plugging and abandonment bonds to ensure that depleted wells are properly plugged and abandoned at the end of production.
Offshore oil and gas production operations in the Gulf of Mexico are regulated by several different federal agencies, including the:
United States Coast Guard.
Bureau of Safety and Environmental Enforcement.
Bureau of Ocean Energy Management.
The Environmental Protection Agency (EPA) does not have a direct role in the regulation of oil and gas extraction, but it does have regulatory jurisdiction over the release, or threatened release, of hazardous and toxic substances, such that once a release or threatened release occurs, EPA has remedial enforcement powers under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). CERCLA provides for strict joint and several liability to:
The current owner or operator of the site.
The owner or operator of a site at the time that disposal of a hazardous substance, pollutant or contaminant occurred.
The person who arranged for the disposal of a hazardous substance, pollutant or contaminant at a site.
A person who transported a hazardous substance, pollutant or contaminant to a site, who also has selected that site for the disposal of the hazardous substances, pollutants or contaminants.
Individual property owners who lease oil and gas rights for development are not liable for the acts or omissions of the lessee owner/operator of oil and gas exploration, drilling and production operations. Individual lessors do have private property rights and can assert personal claims for liability and damages associated with the adverse consequences of oil and gas operations conducted on the leasehold.
An oil and/or gas lease on private property is a creature of both contract and real property law. Private property leases are negotiated between the mineral rights-owning lessor and the lessee oil and gas operator. The scope and breadth of rights conveyed are solely the product of private contract rights, duties and obligations negotiated between the parties. Any restrictions found in the lease will be the product of those private negotiations. Common restrictions include:
Horizontal and vertical drilling exclusions.
Limitations on the use of the leasehold surface estate (such as a negotiated no-surface entry lease).
Time limitations on the initial term of years.
Leases awarded on local, state or federal government-owned lands are often more complex, and subject to a competitive bidding process and often numerous restrictions. Restrictions can be imposed on the use of surface property and the location of wells or other operating activities, geologic formations conveyed by the lease, the calculation of royalties (including exclusions on the deduction of PPCs), and virtually any other issue. Mandatory exclusions will often be described in the public bid package, and final lease terms are subject to the bid conditions proposed by the bidding parties.
Leases covering privately owned property are negotiated personal contracts. They are subject to individual, and often confidential, negotiations between the property owner/lessor and the owner/operator/lessee. The final terms and conditions of the lease can be publicly recorded in the Office of the County Clerk, or remain confidential and evidenced only by a publicly recorded Memorandum of Lease.
Leases covering local, state or federal property (analogous to a concession in other countries) are subject to competitive bidding procedures, public notice and disclosure. The terms and conditions of public land leases are open records subject to inspection.
Transfer of rights
Transfer of rights
Oil and gas development rights are transferred by private contracts, called leases, which convey the right to develop the minerals in exchange for money (for example, royalty payments) or a share of production. Transfers of the rights to explore, develop and own oil or gas are usually evidenced by recording an assignment of the underlying oil and/or gas lease that is placed on public record. The assignment will reference the transfer agreement, such as a purchase and sale agreement, putting interested parties on public notice of the ownership, transfer record and any agreements which might affect the oil and/or gas estate. Once potentially interested parties are on public notice of the transfer and ownership of the oil and/or gas rights, it becomes the obligation of the interested party to seek out further information from the present owner of the estate.
Common lease terms include:
The property interests at issue in identified leases and lands (Contract Area).
A commitment that the parties participate in operations in a Contract Area.
Limitations to a party's rights on transfer and acquisition of interests in a Contract Area.
Procedures for dealing with disagreements about operations.
Designation of an operator to conduct, direct and have full control of operations.
Outline of operator duties and obligations.
Detailed provisions for drilling, operation and production of oil and gas wells.
Outline of expense and liability allocation.
Remedies for a party's failure to pay its share.
Restrictions on transfer
Restrictions on the transfer of oil and/or gas rights from private party lessors to a lessee are governed by the contractual negotiations of the parties. Public land leases are usually subject to open records disclosure and available for inspection. Conditions and limitations on transfer, such as a consent right, or the right or restrictions to encumber the property, will be identified in the public bid package.
Mortgages on the real property and Uniform Commercial Code filings securing the oil and/or gas as personal property once reduced to possession at the surface are common. Mortgages securing indebtedness are recognised in every state where oil and gas extraction takes place, and the mortgage indenture sets out the terms and conditions of foreclosure. Consent to transfer the oil and gas rights from party to party is common, often requiring a demonstration of both:
The financial ability to own and operate the oil or gas well(s) at issue.
The maintenance of adequate plugging, abandonment and reclamation funds to meet future obligations.
Individual states can, or can choose not to, place a tax on the extraction of oil and/or gas produced within the state. State taxes on production are most often levied as ad valorem (that is, property taxes) on the value of the oil and/or gas produced and sold from the property within the state. Companies profiting from the extraction and sale of oil and/or gas are also subject to local, state and/or federal income taxes on production revenue. The US does not have a national tax on the production of oil and/or gas.
The government's right to economic benefits is generally similar to that of individuals: it is the subject of contract, not law. This is a unique feature of the US system and is unlike that of other countries, where the government can gain an economic benefit from, for example, tariffs on production.
In those instances where a US local, state or federal government entity is the owner of the oil and/or gas rights, and leases those rights for development, the lease conveying the rights to an operator will include a production royalty payable to the property owner entity. Local, state and federal government entities can therefore derive direct economic benefits from the ownership and development of the oil and gas estates through specific and general taxes, as well as royalties derived from production on government-owned lands.
Tariffs on the import or export of oil and gas depend on the country of origin or expert. Canada and Mexico are the largest importers and expert destinations for gas, combining for 96% of all gas imports, and 100% of all gas exports. On 1 January 1994, the North American Free Trade agreement eliminated all fees and tariffs on oil and gas trade between the US, Canada and Mexico. Gas imported from Trinidad and Tobago, Algeria and other sources must still pay a small merchandise processing fee to the US Customs Service. Oil import tariffs range from US$0.0525 to US$0.525/Bbl depending on type and country of origin. Trade agreements with the US also impact commodity tariffs. The Oil Pollution Act of 1990, as extended by the Energy Improvement and Extension Act of 2008, imposes a US$0.08/Bbl excise tax on all domestic and imported crude to fund the Oil Spill Liability Trust Fund.
Transportation by pipeline
The majority of oil and gas produced within the US is transported by pipeline, though some quantities are transported by tanker trucks or rail. There is separate regulatory jurisdiction depending on whether the pipeline is located wholly within a state, or the pipeline crosses a state line.
Pipelines located wholly within a state are regulated by the state, typically in the form of a public utility commission. Public utility commissions regulate pipeline location, construction, maintenance and safety standards, and set rates based on a demonstration of public use and necessity.
Pipelines designed and built solely to transport oil or gas from a well to the first point of interconnect with a public utility pipeline, and that do not carry oil or gas produced by third parties, are usually subject to relaxed regulatory standards (except for health and safety).
Pipelines that are constructed solely within a state, and that do not transport third-party oil or gas, do not enjoy public benefit status and the right of eminent domain. That is, the pipeline owner/operator must acquire the right to build and maintain the pipeline from the property owners based on privately negotiated terms and conditions. The state will not step in and force the property owner to allow construction of the pipeline.
Tariff rates for pipelines operated entirely within a state and used for third-party transport of oil or gas are set by the applicable state public utility commission, based on the volume of transport and a reasonable rate of return.
Pipelines that cross states lines and are therefore deemed to be involved in interstate commerce are regulated by the Federal Energy Regulatory Committee (FERC). FERC regulates interstate pipeline construction by determining the public use and necessity of the pipeline (that is, to make sure it is not a redundant or unnecessary pipeline, and to assure that pipeline construction will not pose undue health, state or environmental risks during construction and operation). FERC does have the ability to condemn property and allow the pipeline to cross private property, provided that the pipeline owner/operator compensates the property owner for the fair market value of the property used to construct, operate and maintain the pipeline. FERC holds rate hearings and sets the rates for regulated pipelines.
The US has an extensive infrastructure of interconnecting local gathering lines, statewide transportation and distribution lines, and federally regulated interstate oil or gas transmission lines. There is often concurrent jurisdiction over pipeline access based on capacity, necessity and rates. Local gathering systems connect to intrastate pipelines by negotiated pipeline tap agreements and fees based on available capacity and intended volume. The rate for that pipeline will be set by its certificate of public use and necessity. Similarly, intrastate pipelines that connect to interstate transmission lines are subject to negotiated tap agreements and fees based on the capacity of the interstate line to accept more oil or gas for transport, and the rate set in its FERC certificate of public use and necessity.
As discussed in Question 14, if a pipeline has been built based on a showing of public use and necessity, third parties can be given access to transport their products in that pipeline, provided that their additional product in the pipeline will not interrupt the transportation of product for existing customers. However, not all pipelines are built based on "public use and necessity", and private gathering systems, some of which can be substantial in size, are not required to give third parties access rights to transport their products.
Health, safety and the environment
Health and safety
The Occupational Health and Safety Administration (OSHA) and comparable state agencies regulate workplace health and safety, regardless of industry. OSHA mandates comprehensive recordkeeping and reporting requirements to gather and assess workplace hazards and promote regulatory safeguards. OSHA also has investigative and enforcement authority over workplace health and safety violations.
Various state and federal oil and gas exploration, production and pipeline regulatory bodies can also establish specific health and safety protocols for issues unique to their regulatory jurisdiction, such as FERC-prescribed safety measures for pipelines or the Bureau of Safety and Environmental Enforcement regulations relating to the unique attributes of operating an offshore drilling or production platform.
Environmental impact assessments (EIAs)
The requirements to conduct, and the scope of, environmental impact assessments (EIAs) vary between activities conducted on private property, local, state or federally owned property, Native American tribal lands, and offshore production in the Gulf of Mexico. Similarly, the scope of review varies between the type of pipeline and whether it is an exempt gathering system, intrastate or interstate pipeline.
Drilling operations on private property conducted under privately negotiated contracts (for example, leases or pipeline right-of-way agreements) are subject to the lowest level of EIA scrutiny, typically based on a finding in a statewide generic environmental impact statement (EIS) that oil and/or gas exploration, drilling and production activities do not constitute a generally adverse environmental impact activity. Where a generic EIS exists, well- or pipeline-specific EIAs, submitted on a standardised form and demonstrating compliance with the generic EIA, suffice for the project.
An EIA is an environmental review and analysis of a proposed project. An EIA is a concise public document that:
Briefly provides evidence and analysis for determining whether no impact will result or an impact will exist such that a complete environmental impact statement (EIS) is required.
Demonstrates compliance with applicable federal or state law when an EIS is not required.
Facilitates the preparation of a comprehensive EIS if needed.
Largely creations of federal law under the National Environmental Policy Act 1970, EIAs have been adopted at the state level by numerous states as part of industry- or project-specific regulations. EIAs are conducted to determine whether a proposed action could significantly affect the environment. An EIA results in either a finding of no significant impact, or the need for a more comprehensive EIS.
An EIA is a public process requiring public notice and the opportunity to be heard. The basic structure of an EIA process is:
Introduction and background.
Alternatives, including the proposed action alternatives:
mitigation common to all alternatives;
comparison of alternatives.
Consultation and co-ordination.
An EIA becomes a draft public document once it has been published. Publication usually occurs in a general circulation newspaper in the potentially affected area. The public and interested stakeholders are given an opportunity to comment, and public hearings for verbal comments are sometimes allowed, though they are not usually a requirement of the EIA process. Following the public comment period, the lead regulatory agency responds to any comments, and determines either no significant impact will result or issues notice of its intent to conduct a full EIS.
An EIS generates a similar but more complex, involved, lengthy and expensive process. A final decision on an EIS is subject to challenge and review in the applicable state or federal court of proper venue and jurisdiction.
The process of permitting oil and gas wells varies among the states and federal governments, most of which are designed in some form to protect human health and the environment. Permits are typically required for:
Use of local roads.
Drilling (subject to imposed drill site conditions).
Operating the well (subject to ongoing reporting requirements).
Sediment discharge and erosion control.
The potential discharge of toxic substances into the air.
Protection of endangered species.
Wells drilled in the waters of the Gulf of Mexico require an extensive permitting process overseen by the Bureau of Safety and Environmental Enforcement.
Government policy and priorities change over time. The expansion of unconventional oil and gas development has focused government (and public) attention on:
The process of high-volume hydraulic fracturing.
Air emissions from oil and gas processing facilities and transportation compression systems.
The venting and flaring of gas produced in association with oil in remote locations where gas pipeline infrastructure is not available or economically feasible.
The increased demand placed on existing local infrastructure in areas of rapid development.
Recent initiatives include the following:
The State of New York undertook a comprehensive multiyear (2008 to 2014) assessment of the potential impacts of high-volume hydraulic fracturing, and although its own studies did not find scientific evidence of adverse health or environmental consequences, the state banned high-volume hydraulic fracturing in response to citizen concerns.
The Bureau of Land Management is proposing to update its regulations associated with gas flaring, venting and leaks from oil and gas production operations on public and Native American lands predominantly located in the western US.
The Environmental Protection Agency has been stepping up enforcement actions under the Clean Air Act 1963 by regulating, or attempting to establish regulatory jurisdiction over, oil and gas processing, treatment and transportation facilities by aggregating multiple facilities together to establish regulatory thresholds.
The typical waste products generated from oil or gas extraction and processing include:
Flowback fluid from high-volume hydraulic fracturing.
Produced water (generally hypersaline).
Flowback fluid from high-volume hydraulic fracturing is routinely recycled for reuse in future operations. Produced water is most commonly disposed into Underground Injection Control Class IID wells permitted and regulated by the Environmental Protection Agency. Solid waste in the form of drill cutting and precipitates from recycled flowback fluid are, where allowed, land-farmed or disposed of into permitted landfills. The occurrence of low levels of naturally occurring radioactive materials in shale formations may require drill cuttings to be disposed into Environmental Protection Agency-permitted hazardous waste landfills.
Flares and vents
In January 2016, the Department of the Interior instructed the Bureau of Land Management to promulgate new rules limiting the venting and flaring of gas on public and Native American lands predominantly located in the western US. The proposed rules would:
Limit gas flaring as follows:
year one limit: 7,200 thousand cubic feet (Mcf)/month/well;
year two limit: 3,600 Mcf/month/well; and
year three limit (and thereafter): 1,800 Mcf/month/well.
Apply to production wells, not flaring from exploration wells or during emergencies.
Provide an exemption if meeting the limit would cause an operator to cease production and abandon significant recoverable oil reserves under a lease.
Require metering when flared volumes reach 50 Mcf/day.
Prepare a waste minimisation plan to be submitted with new "application for permit to drill".
Require operators to use an instrument-based leak detection programme.
Prohibit operators from venting gas.
Replace certain pneumatic pumps with solar pumps.
Capture, flare, use or re-inject gas released during well completions.
Individual states implement their own venting and flaring rules associated with wells drilled and operated on private or state property. For example, Texas Railroad Commission Rule 32 allows an operator to flare gas while drilling a well and for up to ten days after a well's completion, for operators to conduct well potential testing.
As a condition of obtaining a permit to explore for and develop oil or gas, the operating entity (and any owner of a working interest in the production of an oil or gas well) must plug and abandon wells at the end of commercial production, and conduct restoration operations at the wellsite, regardless of which regulatory entity issues the permit.
Given the breadth of possible wellsite and production operations, ranging from small onshore wells that disturb only a fraction of an acre of property, to immense offshore platforms that serve as the operations point for multiple long, lateral wells extracting oil and gas from the outer continental shelf of the Gulf of Mexico, and virtually every type and condition of well in between, a detailed treatment of plugging, abandonment and reclamation obligations and liabilities is beyond this article, as there is no single answer. Importantly, it is a condition of every permit issued to drill a well in the US that the permitted operator (and in many instances every working interest owner in the well) have a joint and several obligation to:
Properly plug and abandon wells no longer capable of commercial production.
Reclaim the drilling and production location to as near original condition as is feasible.
Plugging, abandonment and reclamation liability can be contractually passed among successive permitted operators, but it is nearly universal across the regulatory bodies that parties in the chain of title to the permitted operation will be held responsible for plugging, abandonment and reclamation activities at wellsites and production locations if the current permitted operator is unable to meet those obligations.
Sale and trade
Oil and gas is sold on open market as futures contracts, or traded on regulated commodity exchanges such as the Chicago Mercantile Exchange or the New York Mercantile Exchange. A robust hedging market exists within the US financial sector for commodities contracts. Domestic onshore oil producers are also able to sell directly to refiners located throughout the US. The midstream pipeline sector has expanded to service unconventional shale development, and both oil and gas are now routinely sold from the operators to a midstream provider who makes arrangements for third party sale. Oil and gas producers can also sell directly to commercial and residential end users. Direct to end-user sales remain common in the historic producing areas of the US Northeast where oil and gas were first discovered in the 1800s.
Enforcement of regulation
Regulation of the exploration and development of oil and gas is governed state by state by administrative agencies (for example, the Texas Railroad Commission). Each state has its own regulations, and its agencies have the broad powers to, for example, issue citations, order remedial actions, or revoke permits for operations.
Each state's regulatory agency is considered an administrative proceeding. Any substantive orders can first be appealed within the administrative agency, and then a de novo appeal can be made to the court having jurisdiction in that area (for example, state trial court, if the appeal is from a state agency decision, or federal district court to appeal a decision of a federal agency).
The regulation of oil and gas exploration, drilling, production, transportation, sale, and import and export are subject to myriad, often overlapping, local, state and federal laws, rules and regulations. In addition to regulatory changes, the body of common law changes from state to state and within the federal system as new disputes arise and are adjudicated. While the body of law and regulation is relatively stable at any given point in time across the entire US, rules and regulations in any given state, or concerning any given area of technical innovation, are always subject to change and modification to meet the competing demands of protecting health, safety and the environment while also encouraging the safe and responsible development of domestic US natural and energy resources.
The regulatory authorities
Environmental Protection Agency (EPA)
Address. Ariel Rios Building
1200 Pennsylvania Avenue NW
Washington DC 20460
T +1 202 272 0167
Main responsibilities. The EPA has primary responsibility for enforcing many of the environmental statutes and regulations of the US.
Bureau of Land Management (BLM)
Address. 1849 C Street NW
Washington DC 20240
T + l 202 208 3801
F + 1 202 208 5242
Main responsibilities. The BLM manages vast stretches of public lands that have the potential to make significant contributions to the US's renewable energy portfolio. The BLM also manages federal onshore oil, gas and coal operations that make significant contributions to the domestic energy supply as the US transitions to a clean energy future.
Bureau of Safety and Environmental Enforcement (BSEE)
Address. 1849 C Street NW
Washington DC 20240
Main responsibilities. BSEE works to promote safety, protect the environment, and conserve offshore resources through regulatory oversight and enforcement.
Bureau of Ocean Energy Management (BOEM)
Address. 1849 C Street NW
Washington DC 20240
T + l 202 208 6474
Main responsibilities. The BOEM manages the exploration and development of the nation's offshore resources. It seeks to appropriately balance economic development, energy independence, and environmental protection through oil and gas leases, renewable energy development and environmental reviews and studies.
Federal Energy Regulatory Commission (FERC)
Address. 888 First Street NE
Washington DC 20426
T + 1 202 502 6088 (Toll-free: +1 866 208 3372)
Main responsibilities. FERC is an independent agency that regulates the interstate transmission of electricity, natural gas and oil. FERC also reviews proposals to build LNG terminals and interstate natural gas pipelines as well as licensing hydropower projects.
Pipeline and Hazardous Materials Safety Administration (PHMSA)
Address. East Building
1200 New Jersey Ave SE
Washington DC 20590
T + 1 202 366 4433
F + 1 202 366 3666
Main responsibilities. PHMSA's mission is to protect people and the environment from the risks inherent in the transportation of hazardous materials, including oil and gas.
Description. EPA's website provides official, up-to-date information and links to the laws and regulations falling under the EPA's authority.
Description. FERC's website provides official, up-to-date information and links to the statutes covering environmental reviews and protection, financial reporting, information technology reporting, and historic preservation.
Description. This official, up-to-date website identifies and gives links to the statutes and regulations that PHMSA enforces.
Michael P Joy, Partner
Professional qualifications. Admitted to practice law:
- US District Court, Western District of New York.
- US Bankruptcy Court, Western District of New York.
- US Tax Court.
- New York.
Areas of practice. Energy industry; shale.
- JD, Real Estate Development and Environmental Law, State University of New York at Buffalo School of Law, 2002, cum laude, Charles Dautch Award (Real Property), Harry A. Rachlin Prize in Property & Real Estate Law, Moot Court Evidence Award.
- Ph.D Geology, State University of New York, 2002; Doctoral Dissertation titled "Chronostratigraphy and the sequence hierarchy of the late Turinian through early Edenian (Ordovician) Taconic foreland in New York and Central Pennsylvania: Implications for active margin basin evolution".
- MA, Geology, State University of New York, 1998.
- BA, Geology, State University of New York, 1995.
- Advised joint venture operating group on the acquisition by lease of 100,000 acre landowner coalition group.
- Advised midmarket lender and operating company on US$100 million credit facility in support of shale-gas drilling programme.
- Advised start-up subsidiary of publicly traded parent company on acquisition of producing and non-producing properties using a combination of cash, stock, participation rights, and overriding royalty interest (ORRI) as consideration.
- Advising non-operating working interest owners group in appeal of administrative order relating to multiple well spacing and compulsory integrating proceedings pending in New York State Supreme Court.
- Independent Oil and Gas Association of New York.
- Pennsylvania Independent Oil and Gas Association.
- Pennsylvania Bar Institute.
- Joy, Leggette and Thomas, "Discuss Cuomo Ban on Fracking".
- Impact of New York Ruling Examined, "Energy in Depth".
- Joy Examines section 34.1 and The Rule of Apportionment, "The Legal Intelligencer".
- Hopes For Opinion of EQT Production v Opatkiewicz, "The Legal Intelligencer".
Sashe D Dimitroff, Partner
Professional qualifications. Admitted to practice law:
- US Supreme Court.
- US Court of Appeals, Fifth Circuit.
- US Court of Appeals, Sixth Circuit.
- US Court of Appeals, Ninth Circuit.
- US Court of Appeals, Eleventh Circuit.
- US District Court, Southern District of Texas.
- US District Court, Eastern District of Texas.
- US District Court, Northern District of Texas.
- US District Court, Middle District of Florida.
Areas of practice.
- International Arbitration and Litigation.
- International Asset Tracing and Recovery.
- Complex Commercial Litigation.
- Energy Industry.
- JD, University of Houston Law Center, 1992, magna cum laude.
- MBA, University of Houston, 1992, with full honours.
- BBA, University of Texas at Austin, 1985.
- Represented a major oil company in royalty and lease disputes throughout Texas.
- Defended a large oil and gas equipment manufacturing company from claims of fraud, breach of contract, breach of warranty, and negligence resulting from a broken deep water riser while the claimants were conducting drilling operations in the South China Sea. Case settled on terms favourable to the client.
- Defended a major pipeline company in a class action arising from an oil spill in Louisiana. Defeated class certification and settled remaining claims on favourable terms. Prosecuted contractual indemnity and negligence claims in federal court against the marine contractor who caused the pipeline rupture.
Languages. English, Macedonian
- State Bar of Texas:
International Law Section: Executive Council (2015).
Standing Committee on Court Rules: Appointed Member (2008 to 2011); committee is responsible for revisions of the rules of practice in civil actions and the related statutes of Texas.
- Institute for Transnational Arbitration (ITA): Advisory Board of Directors (2013 to present).
- University of Houston Law Review Alumni Association: Board of Directors:
President (2003 to 2004).
Vice President (2002 to 2003).
Secretary (2000 to 2001).
- Dimitroff & Douglas-Henry, "De-Risking International Energy Deals", Petroleum Economist, November 2010.
- Dimitroff & Douglas-Henry, "Unexpected Killers of Your International Energy Deal", Oil & Gas Financial Journal, October 2010.
- Bishop, Dimitroff & Miles, "Strategic Options Available When Catastrophe Strikes the International Energy Project", Texas International Law Journal, No 635, Summer 2001.