An overview of oil and gas regulation in Michigan

By Sally M. Elmiger, AICP, LEED APOil and gas production has been occurring in Michigan since the 1930s. As technological advances are made, more oil and gas can be economically extracted from the various geologic formations throughout the state. One such advance, hydraulic fracturing or “fracking,” has captured a lot of attention of both residents and public officials. Municipal leaders have heard from concerned citizens about this process, and have been asked to limit any potential impacts in their community. But what can local governments do to regulate this industry? This paper provides an overall look at how oil and gas drilling and production are regulated in Michigan. It also discusses the current, and still evolving, regulatory tools that are available to local governments. The information presented here is intended as a general discussion of the topic. Any decisions made by a local government regarding the regulation of oil and gas facilities in their community should be carefully evaluated by a municipal attorney.

FRACKING AND HORIZONTAL DRILLING

Oil and gas previously unavailable can now be harvested through recent advances in technology. Some oil and gas reserves are trapped in “tight” rock formations and require a process called “hydraulic fracturing” or “fracking” to improve the flow of oil out of the rock and into the well. Fracking fractures the rock underground, opening natural fissures that allow the oil or natural gas in the deposit to flow more easily. The technique is commonly used in shale rock formations, which can be found in the northern part of Michigan’s southern peninsula. It is also commonly used in association with “horizontal drilling.” The illustration above shows the combination of the two techniques.Fracking is generally conducted in a horizontal well. A well is drilled and at a certain point, the direction of the well is turned to a horizontal position. After the bore hole is drilled, a steel casing is inserted into the hole, and then concrete inserted between the sides of the bore hole and the casing. This seals the well to prevent any interaction between the well and neighboring aquifers. Normally, oil/gas reserves are much deeper than fresh water aquifers. However, each formation is unique.At the end of the well casing (in the portion of the well that is horizontal) a special device is inserted into the well that blows small holes through the casing and concrete, and into the adjacent rock. Then fracking fluid is forced into the well and through the small holes in the casing. This fluid is made up mostly of water, but with added sand and chemicals that aid the process. This pressurized fluid fractures the rock, and allows oil or gas to flow into the well. The fracking process is done in intervals along the well. Once the horizontal portion of the well is fully fractured, then the oil/gas flows to the surface. A video illustrating the fracking process can be viewed on YouTube (http://www.youtube.com/watch?v=VY34PQUiwOQ ).These wells can have multiple drilling locations from a single well site. The wells can be as deep/long as a mile or more. The well bore can also be drilled under roads, buildings, aquifers and other places where surface conditions wouldn’t make a well head practical.

 MICHIGAN’S REGULATORY SYSTEM

Michigan’s laws regarding all aspects of oil and gas production are mostly divided among the Michigan Department ofEnvironmental Quality (MDEQ), the Michigan Public Service Commission (MPSC), and the US Environmental Protection Agency (US EPA).

Michigan Department of Environmental Quality

Michigan’s first law regulating oil and gas production was passed in 1927 with P.A. 65. This law established the position “Supervisor of Wells,” who is charged with conserving oil and gas, and preventing waste (including environmental pollution) in sinking, drilling, and abandoning of oil, gas, and test wells. As the law was amended over time, the Supervisor of Wells has been retained and now obtains authority through Part 615 of the Natural Resources and Environmental Protection Act (NREPA). MDEQ has jurisdiction over locating, drilling, deepening, re drilling or reopening, casing, sealing, operating, and plugging oil and gas wells.The Supervisor of Wells today is the Director of the MDEQ. He appoints an Assistant Supervisor of Wells to carry out the functions of the office. The Supervisor issues rules, orders and instructions regarding the general spacing, maximum production rates, pooling unleashed interests in drilling units, variances and exceptions, and operational practices of oil and gas production. The office of Oil, Gas and Minerals (within the MDEQ) reviews and issues permits for drilling, secondary recovery, or disposal of wastes from the drilling process. In addition, permits are required for underground storage of gas or oil products, as well as surface and subsurface equipment and facilities, including pipelines.The MDEQ has additional laws that apply to oil and gas wells through Parts 55, 301 and 303 of the NREPA regarding air pollution control, inland lakes and streams, and wetlands.

Michigan Public Service Commission

The MPSC regulates the buying, selling and transportation of natural gas. This agency obtains its authority from PA 9, of 1929. After a well is drilled, the MDEQ categorizes the well based on the petroleum product the well can produce. If the well is a natural gas well, then a permit must be obtained from the MPSC to connect the well to a pipeline system.

US Environmental Protection Agency

A number of federal laws apply to oil and gas production and the transportation of these materials through interstate pipelines. For example, the Safe Drinking Water Act requires an EPA permit to construct an injection well to dispose of fluids used in oil and gas production. (Note that this does not include fracking liquids, which, in most cases, are permitted by the MDEQ.) The Federal Energy Regulatory Commission regulates interstate pipelines in coordination with state agencies, and implements the National Environmental Policy Act through the Pipeline and Hazardous Materials Safety Administration. Other federal agencies, such as the Department of Transportation Office of Pipeline Safety, the Department of the Interior’s Bureau of Land Management, the Occupational Safety and Health Administration, and the Department of Interior’s Maritime Administration also have regulatory authority, among others.

Michigan Zoning Enabling Act

In general, local municipalities have not been given the authority to regulate oil and gas well drilling, operation, or abandonment. However, they can use zoning to regulate the location of the processing, refining, and transport of oil and gas. Determining what facilities constitute “processing, refining, and transport” can be a complex issue and should be evaluated by a municipal attorney. However, a rule of thumb is offered by MSU’s Dean Solomon and Kurt Schindler:“drilling, completion, and operation ends at the point the meter is placed that measures how much gas and oil comes out of the well for purposes of paying royalties to the mineral owner.” (1)Note that local ordinances cannot limit the processing, refining and transport if, by doing so, it is excluding oil and gas wells from the jurisdiction. Local ordinances also need to consider that the support facilities must be placed in reasonable proximity to the wells. However, the oil resource (and thus wellheads) may not necessarily be located in the particular zoning district that allows for the support facilities. Since the make-up and structure of each community’s geology and oil/gas resources are unique, any regulations dealing with support facilities should be carefully reviewed by a municipal attorney.

Drilling, Operation and Abandonment

There are a number of laws and court cases that confirm that local governments do not have authority over oil and gas drilling, operation and abandonment:• The Zoning Enabling Act specifically prohibits counties and townships from regulating or issuing permits for “drilling, completing, or operation of oil or gas wells or other wells drilled for oil or gas exploration purposes…”• No such specific prohibition is stated for cities and villages. However, as with any use where there is a demonstrated need, a municipality is prohibited from exclusionary zoning.• The Zoning Enabling Act also states that an “ordinance shall not prevent the extraction, by mining, of valuable natural resources from any property unless very serious consequences would result from the extraction of those naturalresources. Natural resources shall be considered valuable for the purposes of this section if a person, by extracting the natural resources, can receive revenue and reasonably expect to operate at a profit.” Six standards to determine if “very serious consequences” would result are listed in the statute.• The one area where the Zoning Enabling Act allows some local oversight is “reasonable regulation of hours of operation, blasting hours, noise levels, dust control measures, and traffic…” However, these ordinances cannot be in conflict with the NREPA. Also, this paragraph specifically refers to “mining.” This term is not defined in the statute, and whether this provision applies to oil and gas operations has not been clarified through the courts.• The Michigan Supreme Court concluded that the Supervisor of Wells’ authority has precedence over local ordinances if he chooses to exercise it. While the Supervisor’s jurisdiction does not preempt local jurisdiction, is will be primary and the local ordinance would have to yield to the Supervisor’s authority. If the Supervisor chooses not to exercise his authority, then the facility would be subject to local zoning. (Note that this decision was made regarding a pipeline and processing facility in the case Addison Twp v Gout (1990). This same conclusion was made in a later case (County of Alcona Wolverine Environmental Production, Inc. (1998)), ruling that the Secretary’s authority was primary regarding ancillary facilities. A soil erosion control permit in connection with an access road to a natural gas well issued by the Secretary was at issue in this case.)

Fracking

Since hydraulic fracturing (fracking) is used in association with drilling an oil or gas well, jurisdiction of this process lies with the MDEQ. According to their publication: Questions and Answers About Hydraulic Fracturing in Michigan (available at www.michigan.gov/frackingfacts) fracking has been occurring in Michigan to facilitate oil and gas production for about 50 years, and has been used in over 12,000 wells “without any consequence to the environment or public health.” It also stresses that Michigan has strict rules about how much water can be used for fracking, how wells are constructed, how they are tested before they are employed, and how the water that flows back up through the well during the fracking process is contained and disposed of.Public support for fracking is currently not as evident as public opposition. As of February, 2013, an initiative has been proposed to prohibit horizontal drilling/fracking, prohibit injection wells of fracking fluids, and strike language of maximizing production from the State’s existing laws. Since local governments are not authorized to regulate fracking, addressing citizens’ concerns regarding this practice may only be possible through education and information sharing on how fracking works, and how the State oversees and regulates the activity.

Other Practical Considerations

There are other issues involved in regulating oil and gas facilities that a community needs to consider. For arguments sake, let’s say a city or village decides to include performance standards in their Zoning Ordinance regarding hours of operation, noise, dust, and traffic for oil/gas well operations within its boundaries. If a proposal for a new well were to come before the Planning Commission, the municipality would have to have the political fortitude to allow the well if it meets the standards. These decisions can be very difficult politically. If the proposed well location is unpopular, political fallout could be intense. On the other hand, if the municipality were to deny the proposal, then they could be exposing themselves to a potential law suit.Another practical issue to consider is that zoning locates the surface features of a well in a particular area. However, the underground oil or gas resources may not be located in that specific zoning district. Also, new technology enables wells to be drilled as far as a few miles from the wellhead. Therefore, the well head and accessory structures may be in the designated zoning district, but the well may be directed under other zoning districts that do not allow this use. This, again, could cause concerns for residents if they are not interested in signing an oil and gas lease for resources under their property.Lastly, the oil and gas industry has geologic experts and deep pockets to obtain the resources they are seeking. Most local units of government do not have the extensive resource necessary to fight a proposal if it is seen to be obstructing oil and gas exploration or extraction.

 CONCLUSIONS

The production of oil and gas is a very complex process that includes geology, physics, engineering, chemistry and many other areas of expertise. Because it is such a complex process, there are many different components that are regulated by a large number of state and federal agencies. Local units of government, while not having much authority in this realm, can participate in regulating the support facilities for an oil and gas operation. However, the regulation may not be done in such a way that excludes the oil and gas wells from their community. Other important considerations are the potential political economic repercussions of having regulations on the books that may need to be defended in light of public opposition for a particular project.

REFERENCES

(1) Solomon, Dean and Kurt H. Schindler, Can Local Governments Regulate Oil and Gas Development?, Michigan State University Oil & Gas Newsletter, June, 2012. (http://msue.anr.msu.edu/program/info/oil_and_gas )Presentation by William A. Horn, Mika, Meyers, Beckett & Jones, PLC, March 14, 2013, hosted by Halfmoon Education Inc., Altoona, WI.Presentation by Susan J. Sadler, Dawda, Mann, Mulcahy, & Sadler, PLC, March 14, 2013, hosted by Halfmoon Education Inc., Altoona, WI.