In North Carolina, assessment of potential shale gas resources is ongoing.1 The United States Geological Survey believes that there may be commercially viable reserves in portions of the Deep River Basin and the Dan River Basin.2 Deep River is the larger of the two.3 The North Carolina Department of Environmental and Natural Resources has estimated that the Sanford sub-basin, which lies within the broader Deep River Basin, could contain 309 billion cubic feet of technically recoverable gas.4
Statutory and Regulatory Framework
Until 2012, North Carolina prohibited both horizontal drilling and hydraulic fracturing through antiquated laws that, among other things, banned drilling outside a specified vertical diameter.5
Beginning in 2011, however, the North Carolina General Assembly directed the then-North Carolina Department of Environmental and Natural Resources (“DENR”),6 together with the State Departments of Commerce and Justice, to conduct an in-depth study of the use of directional and horizontal drilling within the State.7 DENR released its final report on April 30, 2012, concluding that hydraulic fracturing could be done “safely as long as the right protections are in place.”8 During the 2012 legislative session, the North Carolina legislature enacted the “Clean Energy and Economic Security Act” (the “CEESA”).9 The bill repealed the prohibition on hydraulic fracturing but simultaneously placed a moratorium on permits until a comprehensive regulatory update was completed and additional legislative action was taken.10
The CEESA reconstituted the North Carolina Mining Commission as the Mining and Energy Commission (the “Commission” or “MEC”) and charged it with developing “a modern regulatory program for the management of oil and gas exploration and development in the State and the use of horizontal drilling and hydraulic fracturing treatments for that purpose.”11 The CEESA also created a Joint Legislative Commission on Energy Policy to which the Commission is required to report on a quarterly basis.12
In June 2014, as the MEC was nearing completion of its first comprehensive set of fracking rules, the state legislature enacted another law: the North Carolina Energy Modernization Act (the “Energy Modernization Act” or “Act”).13 Among other things, the Act lifted the moratorium on hydraulic fracturing and established a timeline for the eventual issuance of drilling permits.14 In addition, the Energy Modernization Act stated that, on July 31, 2015, the existing MEC would dissolve, and its responsibilities would be divided between two separate commissions, the Oil and Gas Commission and the Mining Commission.15 Finally, the Act restricted the ability of local governments to enact or enforce ordinances prohibiting oil and gas exploration, development, and production.16 The Commission completed its first set of fracking rules and released them for public comment in July 2014.17 After reviewing over 200,000 public comments,18 the Commission finalized the rules in November 2014.19 In December 2014, the Rules Review Commission approved the Commission’s rules;20 the state legislature approved the rules and Governor Pat McCrory signed them into effect shortly thereafter in March 2015.21 The rules cover a variety of topics, including the permitting process,22 financial assurance,23 chemical disclosures,24 baseline testing and water supply monitoring,25 setbacks,26 well construction,27 well spacing,28 waste management,29 pit and tank construction,30 and well closure.31
In October 2015, in response to various local efforts to further regulate hydraulic fracturing activities,32 the North Carolina legislature passed Senate Bill 119, which, among other things, broadened the language originally enacted in the Energy Modernization Act aimed at ordinances prohibiting oil and gas exploration, development, and production.33 The amended language now invalidates “all provisions of local ordinances . . . that regulate or have the effect of regulating oil and gas exploration, development, and production activities.”34 Despite these developments, Rockingham County and the City of Reidsville each established a two-year moratorium on oil and gas development, including hydraulic fracturing, in November 2015 and April 2016, respectively.35 The effect of these local measures remains uncertain in light of the amended prohibitions on local regulation of hydraulic fracturing set forth in the Energy Modernization Act, described above.36
Recent News and Developments
Appointments to the Oil and Gas and Mining Commissions
In November 2014, Governor McCrory filed a lawsuit challenging provisions in the Energy Modernization Act providing for legislative appointments to the Oil and Gas and Mining Commissions.37 In January 2016, the North Carolina Supreme Court determined that because the legislature appointed a majority of the commissioners and because the Governor’s ability to remove commissioners was limited, the appointments provision in the act unconstitutionally encroached on executive power.38 As a result, the two commissions cannot act until the legislature modifies the law and new appointments are made. Senate Bill 71, passed by the state legislature in June 2016, included new procedures for appointing commissioners to the Oil and Gas and Mining Commissions,39 but the Governor vetoed the bill.40
Preliminary Injunction Halts Permitting
A second lawsuit, filed in January 2015, raised a similar challenge to the legislative appointments to the MEC.41 There too, a majority of the commissioners are appointed by the state legislature.42 Plaintiffs in Haw River Assembly v. Rao asked the court not only to declare the legislative appointments to the MEC unconstitutional, but also to void all of the Commission’s actions, including the recently promulgated fracking rules.43
In May 2015, Superior Court Judge Donald Stephens issued a preliminary injunction “to prevent the Commission from accepting or processing applications for drilling units44 and from creating any drilling units.” The court’s order states that the injunction shall remain in place pending the North Carolina Supreme Court’s decision in McCrory “or until further order from the Court.” The McCrory case did not raise the issue of whether the presence of unconstitutionally appointed commissioners invalidates the Commission’s past actions. The Haw River Assembly case remains pending.
Last updated March 2015.