1. NS4054 Fall Term 2015 Fracking Regulations

2. Overview Oxford Analytica, US: Fracking Regulations Will be Minimal, August 2, 2015 On March 20, 2015 U.S. Department of Interior unveiled first comprehensive federal rule to cover hydraulic fracturing (“fracking”) operations on federally-owned and Native American land. The rule defines construction standards to Protect water resources Requires companies to disclose the chemical content of fracking fluid and Give advance public notice on fracking activity 2

3. Background The United States may provide the template for shale regulations in other parts of the world Water scarcity will lead to additional public policy constraints on fracking The California drought will imperil the viability of the Monterey shale basin for years to come Fracking of shale deposits has transformed U.S. energy production Within the last five years the U.S. has surpassed Russia as the leading producer of natural gas. The EIA estimates that the U.S. has 1,161 trillion cubic feet of technically recoverable natural gas reserves Enough to last 75 years at 2013 consumption rates 3

4. Regulatory Framework I Regulation Tens of thousands of shale gas wells have been drilled across 30 states, regulated largely by states. There is wide variance on issues, such as Disclosure rules for fracking fluid (which companies argue constitutes proprietary information), and On the degree of public access to such information and the form in which it is available Enforcement of state rules is also uneven State law will continue to govern fracking operations on state and private lands The federal standards are intended to be a model for states, but up to the states whether to adopt or not. 4

5. Regulatory Framework II Key Federal Elements Interior Department’s Bureau of Land Management (BLM) overseas regulation of 700 million subsurface acres of federal mineral estate Roughly 100,000 wells are in operation on federally- managed lands and supply 11% of U.S., natural gas and 5% of oil Nine in every ten of these wells employ hydraulic fracturing 5

6. Regulatory Framework III New rules include several key elements mandating: public disclosure of chemicals used in fracking operations to the BLM Higher standards for interim storage of recovered waste fluids from fracking operations to reduce environmental risks Safeguards for protecting groundwater supplies by requiring federal officials to validate well integrity and That drillers have included strong cement barriers between the well bore and water zones 6

7. Regulatory Framework IV Challenges to the rules Two industry associations, the independent Petroleum Association and the Western Energy Alliance filed suit in federal district court in Wyoming against the rule BLM estimates that the new rule will on average cost less than 0.25% of the cost of drilling a well based on the EIA’s average per well cost of $5.4 million dollars More serious threat to industry profitability than new rules is lawsuits that seek to hold companies liable for earthquakes Allegedly caused by the disposal of hydraulic fracturing wastewater by injecting it into storage wells deep underground States with large fracking operations: Arkansas, Kansas, Ohio, Oklahoma and Texas are examining and in some cases limiting the practice. 7

8. State of the Industry I In 2014, U.S. oil output grew by 16.2% in large part due to the fracked shale plays in North Dakota and Texas. Production growth will not be as strong in 2015 (8.1%) and 2016 (1.5%) according to the EIA due to the supply glut and lower prices in global oil markets. Lower prices have already encouraged US producers to slow production in marginal drilling areas and focus on less risky wells. Cuts to capital expenditures have started to hit certain shale regions Production in the Permian Basin in West Texas is expected to rise through the first part of 2015 but will likely fall in the Braken and the Eagle Ford Basins 8

9. State of the Industry II The US rig count dropped fro 1,473 to 825 between April 2014 and April 2015 -- although many of those retired were older and less efficient rings Producers have increased efficiency by adopting new techniques such as “pad drilling” – multiple wells drilled in tight clusters with fewer rings) Ultimately, however, maintaining output will rest on new wells The marginal cost of fracking is already greater than that of conventional production New legal and regulatory costs will make some marginal projects unviable. 9

10. Outlook I New federal fracking rule is unlikely to affect volume or prices of US-produced oil substantially Nor will it shift the risk calculations states make when deciding what measures they should impose on such operations within their borders The next regulatory action expected to have an impact on fracking operations is the EPA’s final methane regulatory targets expected in late 2015 Methane, the main component of natural gas, is also a potent greenhouse gas that can leak into the atmosphere during natural gas production and distribution. 10

11. Outlook II Existing operations will be “grandfathered in” and exempted from any new standards But persistent low prices and the return of price volatility in the oil market mean it could become cost-prohibitive to drill new wells on federal lands States will remain the primary regulators of fracking operations as only a small percentage of US production takes place on federal or tribal lands Widespread state adoption of their versions to the new federal baseline standard is far from certain, especially if low oil and natural gas prices persist. Consequently states will continue to diverge in how they address fracking. 11