In a decision made public on April 8, 2013, the United States District Court, for the Northern District of California, effectively put an end to fracking in the Monterey Shale Formation, for the time being, with its opinion in Center for Biological Diversity and Sierra Club v. The Bureau of Land Management and Ken Salzar, Secretary of the Department of the Interior, Case No. 11-6174 PSG. Although the Court made clear that the policy question of whether fracking is a good thing or a bad thing is outside the Court’s bailiwick, it is apparent from the Court’s decision that fracking may continue to be subject to intense judicial scrutiny.  

In this case, the plaintiffs challenged the decision of the Bureau of Land Management (“BLM”) and Interior Secretary Ken Salazar’s sale of four oil and gas leases for approximately 2,700 acres of federal land in Monterey and Fresno counties, in California.  The Plaintiffs argued that the leases were sold in violation of the National Environmental Policy Act (“NEPA”) and the Mineral Leasing Act of 1920 (“MLA”).  The Court found that the lease terms did not violate the MLA, but that the leases were issued in violation of NEPA.

In 2006, BLM prepared a Proposed Resource Management Plan/Final Environmental Impact Statement (“PRMP/FEIS”) which outlined a plan for managing approximately 274,000 acres of land, and 588,197 acres of split estate (surface rights owned by private owners/subsurface mineral rights owned by the United States), including the leased area at issue in this case which lies in the Monterey Shale Formation. This Shale is estimated to contain over 15 billion barrels of oil, or 64 percent of the nation’s total shale oil reserve. The PRMP/FEIS included a Reasonably Foreseeable Development Scenario for Oil and Gas (“RFD”) which projected that no more than 10 development wells would be drilled over the next 15 to 20 years across the entire development area. The PRMP/EIS also addressed the potential impacts of oil and gas development on specific endangered animal species. The report was published and adopted by the BLM in its Record Division (“ROD”), which subsequently established stipulations and conditions to protect endangered species, as well as water and air quality. 

In April 2011, BLM proposed an oil and gas lease sale for approximately 2,700 acres and issued a draft Environmental Assessment (“EA”).  During the comment period, BLM received many comments related to the potential effects of fracking; however, BLM stated that “these issues are outside the scope of this EA because they are not under the authority or within jurisdiction of the BLM.”  This comment would later become important to the Court’s analysis.

In June 2011, BLM issued its final EA, which discussed environmental issues, and evaluated the environmental impacts of three alternatives:  1) a competitive oil and gas lease sale for 2,605 acres of federal mineral estate, including 360 acres of split estate; 2)  a competitive lease sale of 6,401 acres of federal minerals for sale, which would include the acreage from alternative number one, plus an additional 3,796 acres of split-estate federal minerals; 3)  no proposed sale of the federal mineral estate. Importantly, the EA also evaluated and projected the extent of drilling activity to be conducted and its impacts.  Using the 2006 projection in the PRMP/FEIS, and considering the fact that no wells had been drilled on the subject property in the five years since the issuance of the RFD, the BLM projected that no more than one exploratory well would be drilled on the land within the leases. The BLM reserved its analysis of the impacts of fracking until applications for permits to drill were submitted, as it determined that analyzing site-specific impacts would be more feasible.  Also important for the Court’s analysis, the EA noted that a discussion of fracking was “not relevant to the analysis of impacts…because the reasonable foreseeable development scenario anticipates very little (if any) disturbance to human environment.”

On June 16, 2011, BLM’s Acting California State Director executed a Finding of No Significant Impact (“FONSI”).  Following this, the BLM issued its final Decision Record documenting the decision to offer for oil and gas lease auction eight parcels encompassing the 2,703 acres of federal mineral estate.  The Decision Record stated that a NEPA review would be conducted at the well permitting application stage.  

Plaintiffs, and others, protested the lease sale; however, the lease sale went forward.  In September, 2011 BLM successfully auctioned leases in three parcels, and a fourth parcel was sold “over the counter.”  All four leases were subject to standard stipulations as well as three Special Stipulations.  All four leases included Special Stipulation No. 1 (Endangered Species Stipulation) and Special Stipulation No. 2 (Cultural Resource Stipulation).  Two parcels contain Special Stipulation No. 3, which is a No Surface Occupancy (“NSO”) stipulation.  The other two parcels did not contain this stipulation.  

Plaintiffs were successful with their challenge under NEPA, with the Court finding that BLM did not meet its obligations under NEPA.  NEPA requires federal agencies to take a “hard look” at “every significant aspect of the environmental impact of a proposed action.”  It also requires an agency to inform the public that it has considered environmental impacts, and requires agencies to prepare an Environmental Impact Statement (“EIS”) for all proposed federal actions which will “significantly affect the quality of the human environment.”  The Ninth Circuit case of Conner v. Burford, 848 F.2d 1441 (9th Cir. 1988) was instructive for the Court. Conner requires an EIS to include a statement of “any irreversible and irretrievable commitments of resources which would be involved in the proposed action should it be implemented.”  Relying on Conner, the Court found in the instant case that the two leases categorized as NSO leases, contain a provision preventing any surface-disturbing activities, and, under Conner, did not result in an “irretrievable commitment of resources”  Therefore, there was no obligation for BLM to conduct a NEPA analysis at the time of the lease sale for the NSO leases.  The other two parcels do not contain NSO provisions.  Without NSO provisions, the government does not have the absolute ability to prohibit potentially significant impact on the surface environment, and cannot unilaterally deny drilling rights on the non-NSO leases. As a result, the Court found that BLM was required to conduct a thorough NEPA analysis to determine whether the sale would have a substantial environmental impact.  

The Court also found that BLM’s conclusion that the leases would have no “significant environmental impact” was unreasonable. In order to avoid issuing an EIS, a FONSI must contain a statement of reasons as to why the project’s impacts are insignificant.  An agency must consider both the context of the action and the intensity of the action. The Court took great fault with BLM’s projection that only one well would be drilled across the four parcels to be leased.  The Court found that this projection failed to take into account all “reasonably foreseeable” possibilities, as required by NEPA. Furthermore, the Court was incensed by BLM’s assertion that the issue of environmental impact of fracking was outside of BLM’s jurisdiction.  “…if not within BLM’s jurisdiction, then whose?” The Court went through a recitation of facts related to the increase in fracking nationwide, and the fact that the 2006 PRMP/FEIS did not address potential concerns related to fracking that have since come to light.  

The Court further found that BLM’s assessment of intensity factors in its FONSI was distorted.  First, BLM erroneously held that the leases were not highly controversial. Second, BLM erroneously analyzed the potential effect of the leases on public health and safety. Third, BLM discounted the uncertainty of fracking that could have been addressed in an EIS.  

The Court declined the Plaintiff’s request to invalidate the lease sale, and instead is requiring the parties to meet and confer and submit an appropriate judgment by April 15, 2013.  
Producers may take solace in the fact that the Court did not tackle the policy issues associated with fracking, and instead based this ruling on BLM’s failure to comply with appropriate procedure; however, the Court did spend time making note of the controversial nature of fracking, the studies by the U.S. House and EPA which  take notice of potential contamination risks, and opined that the “…potential risk for contamination from fracking, while unknown, is not so remote or speculative to be completely ignored.”  Therefore, if this case is any indication of future judicial review, fracking will continue to be closely scrutinized.  

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“Our decision today should not be interpreted as a comment on the wisdom or policy merits of EPA’s Transport Rule.  It is not our job to set environmental policy.  Our limited but important  role is to independently ensure that the agency stays within the boundaries Congress has set.  EPA did not do so here.”  EME Homer City Generation, L.P v. E.P.A., ---F.3d --- (2012).  

On August 21, 2012, the United States Court of Appeals for the District of Columbia Circuit ruled in Homer City that the United States Environmental Protection Agency (“EPA”) overstepped its bounds when it promulgated the controversial Transport Rule.  The Transport Rule, a/k/a the Cross-State Air Pollution Rule, was enacted for the EPA to implement the statutory “good neighbor” provision of the Clean Air Act (“CAA”).  The Rule was proposed in August 2010, and finalized in August 2011 at 76 Fed.Reg. 48,208 (August 8, 2011).  The Rule defines emissions reduction responsibilities for 28 upwind States based on those States’ contributions to downwind States’ air quality problems.  

To completely understand the decision in Homer City, it is important to understand the “why” behind EPA’s promulgation of the Transport Rule.  Under the CAA, the EPA sets National Ambient Air Quality Standards (“NAAQS”), which outline the maximum permissible levels of common pollutants in the ambient air.  The EPA uses this information to designate “nonattainment” areas in the States.  After this is done, each State is responsible for implementing the NAAQS in their State through State Implementation Plans (“SIPs”). The SIPs must include provisions to address the “good neighbor” provision, i.e., how is each State going to protect its down-wind neighbors from pollutants which may contribute significantly to the downwind States’ nonattainment areas.  The EPA can reject a State’s SIP, or find that a State has failed to submit a SIP and issue a Federal Implementation Plan to implement the NAAQS within a State.  The “good neighbor” provision has been before the D.C. Circuit before.  Notably, this issue was addressed in North Carolina v. EPA, 531 F.3d 896 (D.C. Cir. 2008), when the EPA’s 2005 Clean Air Interstate Rule (“CAIR”) was challenged.  In North Carolina, the Court emphasized that States should only be required to eliminate their own significant contribution to downwind pollution, and should not be required to share the burden of reducing other upwind States’ emissions.  In North Carolina, CAIR was remanded, but left in place pending the development of a valid replacement.  The EPA promulgated the Transport Rule as its replacement for CAIR.
The Transport Rule 1) defines each State’s emissions reduction obligations under the “good neighbor” provision; and, 2) prescribes Federal Implementation Plans to implement those obligations at the State level.  In Homer City, the Court finds that the Rule violates federal law.  The Court cited “at least three independent but intertwined legal flaws in EPA’s approach to the good neighbor provision.”  First, the requirements imposed on upwind States is not based on pollution from upwind States that “contribute significantly to nonattainment” in downwind States - as required by the Statute, and the Court’s prior decision in North Carolina v. EPA, 531 F.3d 896 (D.C. Cir. 2008).  Second, the Rule does not take into account the proportionality requirement, i.e., it does not look at the contributions of other upwind States to the downwind States’ nonattainment issues, and fails to take into account the downwind States’ fair share of pollution contributing to its nonattainment.  Finally, the Rule does not protect the upwind States from unnecessary over-protection, or over-control in the downwind States.  The Court also took serious issue with the EPA’s issuance of Federal Implementation Plans without giving the States a chance to implement the obligations themselves through their own SIPs.  

In the end, the Court found that the EPA’s authority comes from statute and is limited by statute.  The Court summarized that the Transport Rule, as promulgated, stands on an unsound foundation, and vacated the Transport Rule and the Transport Rule FIPs.  Much like the decision in North Carolina, the matter has been remanded to the EPA to develop a valid replacement that can sustain a legal challenge.  In the meantime, the EPA will continue to administer CAIR.   
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