In the first federal court decision to directly examine an agency’s review of the potential environmental impacts of hydraulic fracturing, a federal magistrate judge[1] in the Northern District of California ruled that the U.S. Bureau of Land Management (BLM) violated the National Environmental Policy Act (NEPA) when the agency failed to prepare an Environmental Impact Statement (EIS) prior to entering into two oil and gas leases with companies seeking to conduct hydraulic fracturing (commonly called “fracking”). Order Re Cross-Motions for Summary Judgment, Center for Biological Diversity v. Bureau of Land Management, No. 11-06174 (N.D. Cal. filed Dec. 8, 2011). The March 31, 2013 decision turned directly on a finding that increasing interest in hydraulic fracturing has rendered prior development forecasts in older Resource Management Plans (RMPs) and accompanying environmental reviews obsolete. The decision, if upheld, may cause BLM to require greater environmental scrutiny of hydraulic fracturing proposals on public lands, including preparation of an EIS.

Background

California is becoming a major battleground in the hydraulic fracturing debate. See A. Orford, Hydraulic Fracturing in California: Oil Boom on the Horizon; Groups Seek Statewide Injunction Pending Review; State Considering Regulation, Marten LawEnvironmental News (Nov. 19. 2012); D. Kolta, California Issues Draft Hydraulic Fracturing Rule — Alaska, South Dakota Also Announce New Regulations, Marten LawEnvironmental News (Jan. 22, 2013). With the discovery that the Monterey/Santos shale play may hold 15.4 billion barrels of oil that may be extractable using hydraulic fracturing, growing interest has sparked a real estate rush in the region.[2]

Nearly half of the land in California is owned by the federal government and managed by federal agencies including BLM, the U.S. Bureau of Reclamation, the U.S. Forest Service, and the National Park Service (see map at this link). Each agency has its own programs for resource use on lands under its jurisdiction. BLM coordinates mineral leasing in California and elsewhere through its Oil and Gas Management program. While working on regulations governing the use of hydraulic fracturing on its lands,[3] BLM has continued to grant access to public lands for oil and gas development under its existing authorities: the Federal Land Policy and Management Act (FLPMA) and the Mineral Leasing Act (MLA). In brief, to permit oil and gas development, BLM must first prepare an area-wide RMP that discusses oil and gas development potential in the planning area. The preparation of an RMP is subject to NEPA and often accompanied by an EIS. With a RMP in place, BLM may lease specific lands in RMP areas to interested parties, subject to further approval requirements. Finally, if a lessee decides to move forward with exploration or development, it must submit Applications for Permits to Drill (APDs) to BLM for review and approval.

The Monterey Shale Leases and BLM’s Environmental Review

The lands at issue in CBD v. BLM were covered by the BLM Hollister Field Office’s RMP for the Southern Mountain Diablo Range and Central Coast of California (HFO RMP), which governs the use of 274,000 acres of BLM land and the mineral rights for an additional 588,197 acres of “split estates,”[4] spread throughout 12 California counties.[5]A Final EIS was prepared for the HFO RMP, and the documents were adopted in a September 2007 Record of Decision.[6] Importantly, the HFO RMP/FEIS predicted that based on past data, no more than 15 wells would be drilled in the entire covered area between 2006 and 2026.[7]

In September 2011, in response to increasing industry interest driven by hydraulic fracturing opportunities, BLM auctioned and sold four oil and gas leases covering approximately 2,700 acres in the HFO RMP area, which includes large portions of the Monterey Shale play. Two of the four leases contained “No Surface Occupancy” (NSO) stipulations, which preclude lessees from using or even occupying the surface of the leased land without further BLM review.[8] Leases with NSO stipulations do not trigger NEPA review.[9]

However, two of the leases were “non-NSO” leases, meaning they lacked the NSO stipulation. Because such leases do not “reserve[] to the agenc[y] the ‘absolute right to deny exploitation of … resources,’” the sale of non-NSO leases triggers NEPA’s environmental review requirements.[10] For the non-NSO leases, therefore, BLM initiated environmental review.[11] However, rather than immediately prepare an EIS, BLM prepared an Environmental Assessment (EA), tiered to the 2007 HFO RMP/FEIS, to determine whether the non-NSO leases would have any “significant” impacts to the environment, thus triggering the need for an EIS.[12] BLM concluded that the leases would not have any significant impacts, issued a Finding of No Significant Impact (FONSI) to that effect (meaning no EIS was prepared), and emphasized that further environmental review would occur when lessees submitted APDs.[13]

BLM’s FONSI was based largely on BLM’s tiering to the HFO RMP/FEIS’s earlier buildout predictions, which BLM extrapolated to conclude that, at most, the non-NSO leases would result in a single well being drilled in the leased area.[14] BLM acknowledged that the emergence of widespread hydraulic fracturing had resulted in a nationwide increase in oil and gas production, specifically noting an EPA study that predicted that by 2020 shale gas would comprise over 20% of the U.S. gas supply and a 2010 U.S. House of Representatives committee’s call for further study of hydraulic fracturing.[15] However, BLM concluded that these facts were “not relevant to the analysis of impacts …” and in any event were “outside the scope of [the] EA because they are not under the authority or within the jurisdiction of the BLM.”[16] Environmental groups challenged the agency’s decision not to prepare an EIS, claiming that BLM failed to account for the increased development potential opened up by modern hydraulic fracturing techniques.[17]

The Court’s Decision

Magistrate Judge Grewal began his analysis by explicitly stating that “the policy question of whether fracking in the Monterey Shale or anywhere else is a good thing or bad thing” was not before the Court.[18] Rather, as necessary under the APA, the opinion focused on whether “BLM’s actions at issue … were ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,’” and particularly whether the agency had given a “hard look” at the potential environmental consequences of its decisions.[19] The Court concluded that BLM’s failure to account for the increased development potential of hydraulic fracturing was arbitrary and capricious, and that, had BLM considered it, it would have had to conclude that those impacts were potentially significant enough to merit production of an EIS.[20]

The Court’s focus was on BLM’s responsibility to evaluate “all reasonably foreseeable environmental effects” of its decision, and to prepare an EIS whenever commenters “raise substantial questions whether a project may have a significant effect on the environment.”[21] Against this, the Court took issue with BLM’s conclusion that the non-NSO leases would result in only a single exploratory well being installed on the leased lands, in light of the potential for additional hydraulic fracturing activities.[22] The Court explained:

While BLM argues that this conclusion borne out of past data was reasonable, logically this projection fails to take into account all ‘reasonably foreseeable’ possibilities as required by NEPA. BLM plainly limits its analysis to one scenario – a lessee drills an exploratory well, no oil is found, and the lessee halts all further exploration. While this may have been reasonable in the past, the record before the agency teaches that it was not reasonable by the time the non-NSO leases were issued. Even BLM itself has acknowledged that fracking activity has increased dramatically in recent years. But rather than engaging in this reality by at least considering what impact might result from fracking on the leased lands, whatever its ultimate conclusion, BLM chose simply to ignore it … .[23]

Thus, BLM erred by “categorically refusing to consider an effect that bears ‘reasonably close causal relationship’ to the action at issue,” as the EA itself acknowledged the rise of hydraulic fracturing and horizontal drilling.[24] The Court further reasoned that the “potential risk for contamination from fracking, while unknown, is not so remote or speculative to be completely ignored,” especially considering that the EA also included reference to the potential risks of drinking water contamination from harmful chemicals.[25] Both BLM and the Court acknowledged uncertainty surrounding the impacts of hydraulic fracturing; for the Court, this uncertainty made preparation of an EIS all the more necessary.[26]

On these findings, the Court found fault in BLM’s determinations on three of the ten “significance” factors at 40 C.F.R. § 1508.27.[27] First, the Court ruled that BLM failed to acknowledge the decision’s “controversy,” meaning a real dispute over the size, nature, or effect of the action.[28] Second, the Court held that BLM erroneously analyzed the potential effect of the leases on public health and safety by failing to consider potential groundwater contamination risks attributable to hydraulic fracturing.[29] While acknowledging that the risks are debated, the Court noted that the leases were near important water resources and that the risks were not so remote or speculative as to justify completely ignoring them.[30] Third, the Court ruled that BLM failed to follow the rule that an EIS must be prepared “where uncertainty may be resolved by further collection of data, or where collection of such data may prevent speculation on potential effects.”[31]Ultimately the Court concluded:

BLM argues that the effects of fracking on the parcels at issue are largely unknown. The court agrees. But this is precisely why proper investigation was so crucial in this case. BLM’s dismissal of any development scenario involving fracking as ‘outside of its jurisdiction’ simply did not provide the ‘hard look’ at the issue that NEPA requires.[32]

The Court thus granted the plaintiffs’ motion for summary judgment on their NEPA argument. After considering possible remedies, including “enjoining further surface disturbing activity pending EIS analysis, or invalidating the improperly-granted leases,” the Court declined to order relief, instead requiring the parties to submit briefing regarding the appropriate remedy.[33] This briefing is now due on May 15, 2013.[34]

Conclusion

In the first decision to directly examine whether potential effects of hydraulic fracturing require the preparation of an EIS, the Court determined that those potential effects rise to the level of NEPA “significance” and therefore that an EA was inadequate, even when tiered to an earlier EIS (where that EIS did not discuss hydraulic fracturing in detail). Certainly, in this particular case and others like it, a quick fix may be the inclusion of NSO provisions in future BLM mineral lease sales. But when developers seek to drill, they will be required to submit APDs, and to the extent that APDs propose hydraulic fracturing, the decision calls into doubt BLM’s ability to tier to prior RMPs and environmental reviews based on projections of development impacts made before the current boom in oil and gas production via hydraulic fracturing. CBD v. BLM may affect similar BLM decisions to lease federal land, including the December 12, 2012 lease sale of 18,000 acres in the Monterey Shale region,[35] and could threaten to chill or delay exploration, development, and production in the Monterey Shale as well as the jobs and tax dollars that would come with tapping the region’s vast potential. Given the stakes, BLM will likely seek solutions that allow drilling to go forward while minimizing environmental impacts.

At some point, sooner rather than later, BLM likely will be required to supplement its RMP EIS documents to examine the wide range of alleged potential impacts related to hydraulic fracturing. Assuming these reviews are eventually prepared, the next fight may well be over the sufficiency of the agency’s examination of potential impacts of hydraulic fracturing, and its conclusions and recommendations regarding mitigation of those potential impacts going forward.

For more information, please contact Adam Orford, Daniel Kolta, or any member of Marten Law’s Energy practice group or San Francisco office.