How will U.S. EPA's oil and gas air rule affect the fracking industry? During today's OnPoint, Jim Pardo, a partner at McDermott Will & Emery, discusses the broader impacts of the rule and the prospects for litigation in the fracking sector. Pardo also explains why he believes the focus of the fracking debate will now shift to water safety, following EPA's release of the air rule.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Jim Pardo, a partner at McDermott Will and Emery. Jim, thanks for coming on the show.
Jim Pardo: Thank you for having me, Monica.
Monica Trauzzi: Jim, EPA recently released its final rule on air emissions for oil and gas. It's dubbed the fracking rule, but it really extends far beyond that. What are the broader impacts of the rule on industry?
Jim Pardo: Well, I think the answer to that is, from a fracking standpoint at least, what it does is it takes the air issues out of the debate. The air issues have been really the focal point of the discussion on fracking since really the start of the year, kind of supplanting the water issues. EPA has taken that issue essentially off the table now. And the real issue is going to be what's EPA going to look to next year to regulate in terms of fracking?
Monica Trauzzi: But is it really off the table? I mean do discussions end on it or are you expecting any form of litigation? What are the next steps on air?
Jim Pardo: I don't anticipate litigation. I think what EPA has done here, and this is really a key point with this regulation I think, it's an example of how the regulatory process can work. EPA issued a draft rule and took comments on it and listened to both those on the side, you know, the environmentalists who wanted to see air emissions regulated and those on the industry side who wanted a regulation that was fair and reasonable. And it took into account really both sides and it came up with a rule that gave something to both. The regulation takes effect in 60 days, 60 days from the date that it will be published. It puts us some time I think probably in the middle of July and what the environmentalists and what the air people wanted was a 95 percent reduction in the emissions of methane and VFCs. And that's what the EPA has done. They've given them that. What they did for industry, industry needed a bit more time to put in place the equipment that the EPA wants industry to use to achieve that 95 percent reduction. So, they asked for an additional three years, they were actually given about two-and-a-half years, to get that equipment in place. So, the air emissions reductions take effect essentially immediately. Industry, in response to its request, is given the time it needs to come into compliance. Both sides get what they want. I don't anticipate there being any litigation over the rule.
Monica Trauzzi: So, because industry got what it wanted, do you anticipate that they'll have any difficulties meeting the standards at this point?
Jim Pardo: I don't. I think API and several other stakeholders on that side asked for the time that they believe they need to come into compliance. API is not in the business of asking for less time than it needs. I expect the industry will be in compliance, actually, they'll be in compliance in six months with the emissions requirements. They will be able to meet the green completions requirement within the 2 1/2 year time period, by January 1, 2015.
Monica Trauzzi: OK, so you alluded to the fact that the shift will now turn to, or the focus will now shift to water. What could EPA do under the Safe Drinking Water Act in terms of fracking?
Jim Pardo: Well, as I think you may know, this has been the subject of a lot of discussion and a lot of debate. Right now EPA can't do anything under the Safe Drinking Water Act with respect to fracking. And the reason they can't do that is because in 2005 Congress exempted hydraulic fracturing from the underground injection control provisions of the Safe Drinking Water Act and essentially turned responsibility for regulating the fracking process back over to the state regulatory authorities where it had always been.
Monica Trauzzi: And so is there any chance that it will be used in the future or this is completely off the table?
Jim Pardo: No, I don't think it's completely off the table. Right now EPA is in the middle of a multiyear study of fracking and its potential effects on groundwater. There are some who believe that that study is going to be used by the EPA as a precursor to come back to Congress and ask Congress to restore EPA's authority to regulate the fracking process under the Safe Drinking Water Act. I don't think that's going to happen and, you know, it's important to keep this in historical context, if I may. Oil and gas development has historically, and by historically I mean for the last not just decades, but really 100 years, been-the process has been regulated by state regulators. And the reason for that is because oil and gas development really is a local activity. We have a very diverse country topographically. We have everything from forest to deserts and the mountains to canyons. It's the same way underground. To develop oil and gas in the most responsible manner you really need to know what's down there. You need to know what the substrata look like. You need to know not only where the gas is, but where the water is. And the regulators, who are in the best position to know that, just put the rules in place to ensure that oil and gas development, including fracking, is done in the safest and most responsible manner, are the state regulators. That's why they historically have always done it and, in fact, when Congress revoked or took away EPA's authority under the Safe Drinking Water Act back in 2005, there are some people who refer to that derisively as the Halliburton Loophole. They think that that was actually done at the behest of former Halliburton CEO and then Vice President Dick Cheney. There is never actually been any evidence of that. I don't disagree with the use of the word loophole, but I actually think it goes the other way. I think the loophole that existed was one that was created as a result of some litigation in the 90s. One that was created that allowed EPA to come in and regulate a process that it had never historically regulated at all. And that is oil and gas development. EPA didn't want to do it. EPA didn't have to do it. EPA was compelled to do it by court order. And in 2005 when Congress acted in the Energy Policy Act and took that authority away, what they did was they closed a loophole that EPA had been really forced into.
Monica Trauzzi: There's this perception that companies are hiding the types of chemicals that they're using in fracking fluids, but you think that this is no longer going to be an issue in a year or two. Explain that, because this is really one of the most contentious issues in the debate over fracking right now.
Jim Pardo: It is and there's a perception that companies, in not making full disclosures of their constituents that are being used in the fracking fluid, are trying to hide something. Really, it's not much of an issue I think anymore, because most companies, in fact, are making those disclosures. They don't have anything to hide. There's an industry sponsored and supported website called Frack Focus. Most companies are voluntarily disclosing the contents of their fracking fluid on that website. Most companies are actually disclosing the contents of their fracking on their own websites. Most states, most state regulations require the disclosure of those fracking fluid constituents, either on Frack Focus or to the state regulators. The difficulty, the problem, the conflict has been that there are certain components of the fracking fluid compounds that the companies are claiming are proprietary and there are certain confidentiality too. There are, under most state provisions, exceptions to that when those particular constituents of the fluid will need to be disclosed to regulators, but unless those contingencies occur, they can-the companies can assert confidentiality to them. And so they've done that. What they're really trying to protect right now though are the recipes. This is an evolving industry. It's a very competitive industry. Given the price of natural gas right now, they're very, very small profit margins. These are companies who have invested years of time, millions of dollars developing fracking fluids. And if they believe they have one that's better than their competitors, they're going to want to protect that recipe. It gives them a competitive advantage. The constituents are being disclosed. What really isn't being disclosed right now is the recipe. It's a little like Coca-Cola. We all know what the constituents or what the ingredients of Coke are. What we don't know, what's locked away in that vault in Atlanta is the recipe. That's what the companies are trying to protect.
Monica Trauzzi: When you advise your clients, do you advise them that litigation is inevitable in this line of business? I mean do you see it that way?
Jim Pardo: I don't. I don't think litigation is inevitable. I wouldn't even say it's likely. What companies need to be doing right now to avoid litigation I think and what we've been advising some of our clients to do is really basic, you know, basic strategy. Know the rules that you need to play by and make sure that you're in compliance with them. Know the best practices. API has five different best practices that they've put out and just yesterday the Marcellus Shale Coalition put out its own best practices for drillers to follow. Know what those are and do your best to comply with them. Obviously, you should be following the litigation to see where other companies may be getting tripped up, so that you can avoid those things as well. And then finally, it's not enough I think to be a good corporate citizen out here. You need to remember, as a stakeholder, that you're coming into people's homes and neighborhoods really and you need to be a good citizen. Part of that is just making sure that you're communicating with the communities and the residents where you're doing business. If you do those things, I think you can avoid a lot of the things that may ultimately lead to litigation for other companies.
Monica Trauzzi: All right, we'll end it there on that note. Thank you for your views.
Jim Pardo: Thank you.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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