Global Shale Law Compendium: Shale Governance in North Carolina

Written by Chloe Marie – Research Fellow

The Global Shale Law Compendium series addresses legal developments and other issues related to the governance of shale oil and gas activities in various countries and regions of the world. In this article, we will focus to legal, policy, and governance issues related to shale gas development in the United States, and more specifically in the state of North Carolina.

Although the state of North Carolina does not posses any proven natural gas reserves, the North Carolina Geological Survey found some potential untapped reserves in the Deep River, Dan River, and Cumberland-Marlboro Basins. In anticipation of the potential development of those untapped resources, the North Carolina legislature and administrative agencies have engaged in a major review of the regulations applicable to oil and gas extraction and production activities.

On June 23, 2011, North Carolina Governor Beverly Perdue signed House Bill 242 into law requesting the North Carolina Department of Environment and Natural Resources (DENR), the North Carolina Department of Commerce, and the Consumer Protection Division of the North Carolina Department of Justice to undertake a study on the issue of oil and gas exploration in the state as well as the use of directional and horizontal drilling and hydraulic fracturing for that purpose. The Act required the three state departments to deliver their findings and recommendations no later than May 1, 2012.

During this same time period, DENR commissioned the State Review of Oil & Natural Gas Environmental Regulations (STRONGER) – a non-profit, multi-stakeholder organization formed by U.S. EPA and the Interstate Oil and Gas Compact Commission – to conduct a comprehensive review of North Carolina’s environmental regulations to help in the preparation of the governmental study. STRONGER issued a review report in February 2012 concluding that “DENR environmental programs are mature … however, while the review team recognized strengths in these programs, the review team also has concluded that DENR programs have not been developed in anticipation of the regulation of oil and gas exploration and production activities.” Thus, the organization suggested that some reforms of DENR environmental regulations might be needed in the future.

Taking into consideration these observations, the three state departments jointly released the Draft North Carolina Oil and Gas Study under Session Law 2011-276 on March 16, 2012. In this study, DENR addressed the oil and gas prospects in the Triassic Basins; the available methods of exploration and extraction of oil and gas; the environmental, health and social impacts of the development of oil and gas and use of such methods; and the challenges of developing a proper regulatory program. The Department of Commerce addressed the economic impacts of natural gas exploration and development while the Department of Justice considered the legal issues with regard to the protection of landowners. DENR concluded that “hydraulic fracturing can be done safely as long as the right protections are in place [however] it will be important to have those measures in place before issuing permits for hydraulic fracturing in North Carolina’s shale formations.”

Public hearings were held from October 2011 to April 2012 to discuss the draft report and, the Final Study was released on May 1, 2012, and subsequently approved by the North Carolina General Assembly in June 2012. The Final Study contains a total of twenty-seven recommendations, including, among others, to provide funding for any continued work on the development of a North Carolina regulatory program for the natural gas industry; to collect baseline environmental quality data including groundwater, surface water and air quality information; to require full disclosure of all hydraulic fracturing chemicals and constituents to regulatory agencies and to local government emergency response officials prior to drilling; to develop a modern oil and gas regulatory program, taking into consideration the processes involved in hydraulic fracturing and horizontal drilling technologies, and to prevent physical or economic waste in developing oil and gas resources over the long-term; and to provide additional opportunities for the public to participate in the development of detailed standards to govern gas exploration and development.

Following the issuance of the Final Study, the North Carolina legislators drafted Senate Bill 820 to reestablish the Mining and Energy Commission (MEC) – formerly the Mining Commission – and to require MEC to develop modern regulations for the management of oil and gas exploration and development activities in the state using horizontal drilling and hydraulic fracturing. In addition, the bill provided that issuance of drilling permits was prohibited until such program was adopted. The bill also would create an Energy Policy Oversight Commission for the purpose of monitoring and reviewing the programs, policies and actions established by MEC as well as monitoring federal regulatory changes and court decisions that could affect the state regulations. Governor Beverly Perdue vetoed this bill entitled “Clean Energy and Economic Security Act” on July 1, 2012, but her veto was overridden by the North Carolina General Assembly on the next day.

In February 2013, Senate Bill 76 was introduced in the North Carolina Senate, which, among other things, directed MEC to study the development of a comprehensive environmental permit for oil and gas exploration and development activities using horizontal drilling and hydraulic fracturing treatments, and required MEC to study the establishment of a severance tax in order to cover the costs associated with developing a modern regulatory program. Section 1(c) of the bill recalled that issuance of permits for the use of hydraulic fracturing was prohibited until MEC develops proper regulations. Governor Patrick McCrory signed SB 76 – now entitled Domestic Energy Jobs Act – into law on July 29, 2013.

Approximately one year later, on June 4, 2014, Governor Patrick McCrory also signed into law  Senate Bill 786, named the Energy Modernization Act, extending the deadline for the adoption of a modern regulatory program for the management of oil and gas activities using horizontal drilling and hydraulic fracturing in North Carolina. The bill stated that all rules to be developed by MEC should be adopted no later than January 1, 2015. Furthermore, the bill authorized DENR and MEC to issue permits for oil and gas development using horizontal drilling and hydraulic fracturing on or after the 61^st calendar day after all MEC rules become effective. The bill also terminated the North Carolina Mining and Energy Commission to replace it with the North Carolina Oil and Gas Commission.

MEC issued the new regulations in July 2014, and scheduled public hearings from August to September 2014. MEC regulations were adopted in November 2014 and then reviewed and approved by the Rules Review Commission (RRC) and MEC during December 2014 and January 2015 meetings.

On November 13, 2014, Governor Patrick McCrory, together with two other former Governors of North Carolina James Hunt and James Martin, filed a lawsuit in the Wake County Superior Court challenging the constitutionality of the manner in which legislative appointments were being made to MEC. On March 16, 2015, the Wake County Superior Court found the legislative appointments of MEC members to be in violation of the North Carolina Constitution. This had the effect of preventing DENR and MEC from issuing any permits for oil and gas development activities (see McCrory v. Berger, docket no. 14-CVS-015201). The North Carolina General Assembly filed an appeal to the North Carolina Supreme Court which remains pending.