BILL ANALYSIS                                                                                                                                                                                                    

          |                                                                 |
          |                   Senator Fran Pavley, Chair                    |
          |                    2011-2012 Regular Session                    |
          |                                                                 |

          BILL NO: AB 972                    HEARING DATE: June 26, 2012  
          AUTHOR: Butler                     URGENCY: No  
          VERSION: June 13, 2012             CONSULTANT: Katharine Moore  
          DUAL REFERRAL: Environmental QualityFISCAL: Yes  
          SUBJECT: Oil and gas: hydraulic fracturing: moratorium.  
          California is the 4th largest oil and gas producing state and 
          natural resources extraction is an important contributor to the 
          state's economy.  According to 2009 data provided by the Western 
          States Petroleum Association (WSPA), approximately 100,000 
          people were directly employed in oil and gas production in 
          California and the state received a combined $5.8 billion in 
          fuel excise, corporate and personal income taxes. The Division 
          of Oil, Gas, and Geothermal Resources (DOGGR) exists within 
          California's Department of Conservation (department). DOGGR's 
          Supervisor (supervisor) has extensive and broad authority to 
          regulate activities associated with the production and removal 
          of hydrocarbons (e.g. oil and gas) from the ground (Public 
          Resources Code (PRC) 3106). This includes the subsurface 
          injection of water and other fluids. The supervisor's authority 
          is granted in order to prevent damage to life, health, property, 
          natural resources, and to underground and surface water suitable 
          for irrigation or domestic purposes. DOGGR issues permits for 
          drilling new wells or re-working old ones (PRC 3203) and has 10 
          working days to respond to each application. Once a permit is 
          approved, it is valid for one year from the date of issuance.

          "Hydraulic fracturing" or "fracking" of hydrocarbon wells to 
          enhance oil and gas recovery is an increasingly popular 
          subsurface process/technique.  Due to technological innovations, 
          fracking, by itself and in combination with advanced drilling 
          techniques (e.g. directional and horizontal drilling) have 
          allowed companies to develop previously uneconomic oil and gas 
          reserves, such as those located in subsurface shale formations 
          throughout the United States. Once an oil or natural gas well is 
          drilled and its casing properly installed and perforated in the 


          production zone, fluids are pumped down to an isolated portion 
          of the producing zone of the well at pressures high enough to 
          cause or enlarge cracks in the subsurface geologic formation 
          surrounding the well bore. These cracks or fractures allow oil 
          and natural gas to flow more freely into the well and then to 
          the surface. The pumped fracking fluid is usually - but not 
          always - comprised almost entirely of water with a small 
          fraction of additional substances (less than a few percent by 
          volume) added to enhance the process.  In absolute terms the 
          amount of additives may be thousands of pounds as a considerable 
          amount of water - hundreds of thousands to millions of gallons - 
          may be needed to frack an individual well. The fluid volume 
          needed, its chemical composition and physical characteristics 
          will vary depending upon the particular conditions of each well.

          According to industry reports and academic papers, wells have 
          been fracked in California for several decades. Estimates vary, 
          but informal reports suggest that a majority of wells in the 
          state may be fracked.  Recently WSPA, based upon voluntary 
          reporting by its members, reported that 628 new and existing oil 
          and gas wells were fracked in California in 2011, considerably 
          less than half the new wells drilled (about 2,300) and much less 
          than half of existing wells (about 50,000 producing oil and 
          2,000 dry gas wells).  Counties where wells have been fracked 
          include Kern, Ventura, Santa Barbara, Los Angeles and Monterey. 
          Recovery of the hydrocarbon reserves in the Monterey shale 
          formation may be an important "unconventional play" in the 
          future, and some fracked wells are producing from the formation 
          already.  However, the decline in natural gas prices - current 
          spot prices are less than 25% of the peak reached in July 2008 - 
          suggests exploitation in the near term is less likely in favor 
          of conventional reservoirs.  Fracking treatments are necessary 
          to achieve unconventional reserves' full potential with current 
          technology. However, fracking has become a highly controversial 
          technique subject to considerable scrutiny.

          Significant environmental contamination is attributed to 
          fracking in cases in Wyoming, Texas, Colorado, West Virginia and 
          Pennsylvania. New York state established a fracking moratorium 
          until new regulations are developed, due, in part, to the 
          potential risks to New York City's watershed from water 
          contamination, as well as public health concerns.  Recent news 
          reports suggest that a partial ban in New York may remain in 
          effect indefinitely.  Vermont instituted a ban in May, and bills 
          banning fracking are active in New Jersey.  Although their 
          authority to do so is being contested, local governments in New 
          York, Pennsylvania and other states have passed ordinances to 


          ban fracking within their jurisdiction.  Other states, including 
          Texas, Colorado, West Virginia, Arkansas and Ohio have revised 
          their laws and regulations to provide for additional safety and 
          protective measures for fracking operations.  At the federal 
          level, fracking is largely exempt from the provisions of the 
          Safe Drinking Water Act and the Underground Injection Control 
          (UIC) well program courtesy of the "Halliburton Loophole," and 
          the Bureau of Land Management is in the process of developing 
          fracking regulations.

          In California, despite nationwide concern and two years of 
          specific legislative direction, DOGGR has not exercised its 
          acknowledged authority to either regulate or systematically 
          collect data on hydraulic fracturing treatments under PRC 3106. 
           In March, DOGGR finally issued a formal notice to well 
          operators asking for voluntary reporting of fracking data 
          (WSPA's response is reported above).  DOGGR is also conducting 
          seven public fracking "workshops" across the state.  These 
          started in May and are expected to be completed in July.  The 
          department has announced that an independent scientific study on 
          fracking in California will be conducted.  The department's 
          director has further committed to a timetable to produce draft 
          fracking regulations towards the end of the summer with the 
          intent of having fracking regulations in place by the end of 
          this year. While some argue that DOGGR already regulates 
          fracking through regulating well integrity, well casing failures 
          are known to occur (comprehensive data are not available from 
          DOGGR). Arguably, it is difficult to specify or regulate design 
          criteria for a well casing when all the conditions the casing is 
          exposed to (e.g. fracking) are not known.

          PROPOSED LAW
          This bill would :
                 Define hydraulic fracturing and provide alternate terms 
               for it
                 Bar the supervisor from issuing a permit for an oil and 
               gas well that will be hydraulically fractured until 
               regulations governing its practice are adopted.

          According to the author, DOGGR has not responded adequately to the 
          Legislature regarding numerous questions related to the safety and 
          efficacy of the Underground Injection Control Class II well 
          program and hydraulic fracturing.  Therefore, Assemblymember 
          Butler continues "in the interest of the environment and public 
          health,  AB 972 requires DOGGR to cease authorizing well drilling 
          permits where the process of fracking will be used, until DOGGR 


          adopts hydraulic fracturing "fracking" regulations."

          WSPA argues that "this significant, untimely burden on 
          California's businesses and economy is unnecessary. ?] By 
          obstructing an important means of growing our in-state 
          production capability, AB 972 will necessitate increased oil 
          imports, raising the cost not only of fuel, but of 
          manufacturing, agricultural operations, public transportation 
          and all goods and services which are energy-dependent.  This 
          will, in turn, place our businesses at a competitive 
          disadvantage, impede job growth and suppress property, income 
          and excise tax revenues."

           The moratorium will take up to a year to take full effect  .  Well 
          permits are valid for one year from the issue date (PRC 3203).  
          Therefore, any permits issued this year will be valid for at 
          least some portion of next year.  Should this bill be chaptered, 
          there may be a significant number of such carry-over permits in 
          effect that would not have any restriction on fracking.

           The definition of fracking  .  An oil and gas well must first be 
          drilled before it can be fracked.  Fracking itself is considered 
          a well or reservoir stimulation technique that is used to 
          "complete" a well - in other words, make the well ready for 
          hydrocarbon production.  As noted above, hydraulic fracturing 
          fluids are intrinsic to the conduct of fracking and the fluids 
          can include a variety of additives to serve different purposes.  
          For example, biocides, oxygen scavengers, enzyme breakers, 
          acids, stabilizers, gels, and rust inhibitors, among others, may 
          all be added to the fracking fluid.  In particular, sand and 
          other materials - known as "proppants" - are routinely added to 
          fracking fluids to help keep the fractures open once fracking 
          has been completed.  The definition of fracking in this bill 
          should be revised and additional terms added to clarify intent 
          and conform to terminology in use (Amendment 1).

           "Unconventional shale drilling" and "fracking" are not 
          synonymous  .  "Conventional" oil and gas reservoirs are located 
          in relatively porous geologic formations.  When a well is 
          drilled, oil and gas will flow out due to the pressure of the 
          reservoir within the formation itself (primary production) or 
          with the help of added pressure or temperature applied to the 
          reservoir (secondary and tertiary production).  By contrast, 
          "unconventional" oil and gas reservoirs are tightly bound within 
          the geologic formations they are found in.  Oil and gas 


          production is difficult because these formations are largely 
          impermeable.  Unlike conventional production, applied pressure 
          will not, by itself, lead to viable hydrocarbon production.  
          Discrete fractures are necessary in unconventional resources to 
          spur hydrocarbon production - hence the popularity of fracking 
          to exploit the hydrocarbons bound in unconventional shale 
          formations.  However, the drilling of unconventional shales and 
          the subsequent fracking of these wells are two different steps.  
          The alternate terms provided for fracking in the definition 
          should be revised to reflect this (also a part of Amendment 1).

           The existing well permit process .  As noted above, a well owner 
          or operator has to file a notice of intent to drill with DOGGR 
          prior to drilling or re-working a well.  The form used does not 
          currently require that any information be provided specific to 
          hydraulic fracturing treatments.  The language of the proposed 
          moratorium should be clarified and incorporated into the 
          existing relevant code section to provide direction to DOGGR 
          (Amendment 2).  The regulations must be approved and in effect 
          for the moratorium to be lifted.

           Impact of the proposed ban on economic activity  .  As noted 
          above, California is one of the major oil and gas producing 
          states in the country.  It is unclear what the impact from the 
          proposed ban on hydraulic fracturing would be given that DOGGR 
          has publicly committed to attempting to have fracking 
          regulations in place by the end of this year and the moratorium 
          will not be fully in place until January 1, 2014 if DOGGR does 
          not.  At the least, this will introduce uncertainty to 
          operational planning for well owners and suppliers.  It is 
          possible that further exploration and resource exploitation will 
          be delayed with a corresponding impact on both direct and 
          indirect economic activity tied to the oil and gas industry.  

           Previous legislative direction to DOGGR.   The Governor's 2010 
          May Revise budget requested new positions for DOGGR, in part, to 
          regulate fracking.  The Legislature approved this request, but 
          DOGGR took no action on fracking.  In 2011, budget control 
          language authorized DOGGR to use funding "for the collection and 
          public dissemination of information related to hydraulic 
          fracturing."  Again, despite the authorization for further 
          additional positions, DOGGR took no action on fracking.  This 
          year, the Assembly and Senate Budget subcommittees for natural 
          resources both expressed significant displeasure to the 
          department's director about DOGGR's inactivity.  The recent 
          actions by DOGGR on fracking, noted above, followed these 


           Is fracking safe  ? It is impossible to answer that question for 
          California today given the lack of available information. 
          However, plausible mechanisms exist for significant subsurface 
          fluid and/or gas migration, including breaches of the integrity 
          of the well-casing or reservoir. As noted in an earlier section, 
          there is considerable evidence that suggests the increasing 
          concern about the potential public health and environmental 
          impacts of the practice is warranted. Furthermore, according to 
          a recent congressional report, from 2005 - 2009 oil and gas 
          companies throughout the US used fracking products containing 29 
          chemicals that are (1) known or possible human carcinogens, (2) 
          regulated under the Safe Drinking Water Act for their risk to 
          human health, or (3) listed as hazardous air pollutants under 
          the Clean Air Act. Additionally, the composition of fluids 
          injected into some wells cannot even be identified by well 
          owners or operators. This is considered proprietary information 
          by the product manufacturer and is not disclosed. 
          Late-breaking support "if amended" position by numerous parties.  
          Several groups provided "support if amended" position letters to 
          Committee staff too late to be fully incorporated into this 
          analysis.  The proposed amendments were not uniform between 
          letters, but, in general, recommended more comprehensive 
          language and environmental review and analysis.  The amendments 
          proposed below do not address these concerns.
          Related legislation
           AB 591 (Wieckowski, 2011) - would require disclosure of 
          hydraulic fracturing and fracking fluid chemical composition to 
          DOGGR after operations have occurred, among other related 
          provisions. Currently in Senate Appropriations Suspense file.

          SB 1054 (Pavley, 2012) - would require advance disclosure to the 
          neighbors of hydraulic fracturing activities, among other 
          related provisions. Failed on the Senate floor.


               AMENDMENT 1  
               Delete page 2, lines 3 - 5, inclusive, and page 3, lines 1 
               - 4, inclusive and replace with 4 new sections:
               "3017.  "Hydraulic fracturing" means a well stimulation 
               treatment used in completing a well that typically involves 
               the pressurized injection of hydraulic fracturing fluid and 
               proppant from the well into an underground geologic 
               formation in order to fracture the formation, thereby 


               causing or enhancing, or intending to cause or enhance, for 
               the purposes of this division, the production of oil or gas 
               from a well.  Alternate terms include, but are not limited 
               to "fracking," "hydrofracking," and "hydrofracturing."
               3017.1  "Hydraulic fracturing fluid" means a base fluid 
               mixed with physical and chemical additives, including 
               proppants, for the purpose of hydraulic fracturing.  
               Additives may be of any phase.  A hydraulic fracturing 
               treatment may include more than one hydraulic fracturing 
               3017.2  "Base fluid" is a continuous phase liquid or gas 
               used to transmit pressure to the underground geologic 
               3017.3  "Proppants" mean materials inserted or injected 
               into the underground geologic formation that are intended 
               to prevent fractures from closing."

               AMENDMENT 2 
               Delete page 3, lines 6 - 12, inclusive and replace with:
               "  SEC. 5. Section 3203 of the Public Resources Code is 
               amended to read:
                3203. (a) The operator of any well, before commencing the 
               work of drilling the well, shall file with the supervisor 
               or the district deputy a written notice of intention to 
               commence drilling. Drilling shall not commence until 
               approval is given by the supervisor or the district deputy. 
               If the supervisor or the district deputy fails to give the 
               operator written response to the notice within 10 working 
               days from the date of receipt, that failure shall be 
               considered as an approval of the notice  , except as provided 
               for in subdivision (d), and the notice, for the purposes 
               and intents of this chapter, shall be deemed a written 
               report of the supervisor. If operations have not commenced 
               within one year of receipt of the notice, the notice shall 
               be deemed canceled. The notice shall contain the pertinent 
               data the supervisor requires on printed forms supplied by 
               the division or on other forms acceptable to the supervisor 
                and shall indicate if a hydraulic fracturing treatment will 
               be used or is planned to be used in completing the well  . 
               The supervisor may require other pertinent information to 
               supplement the notice.
               (b) After the completion of any well, this section also 
               applies as far as may be, to the deepening or redrilling of 
               the well, any operation involving the plugging of the well, 
               or any operations permanently altering in any manner the 
               casing of the well. The number or designation of any well, 
               and the number or designation specified for any well in a 


               notice filed as required by this section, shall not be 
               changed without first obtaining a written consent of the 
               (c) If an operator has failed to comply with an order of 
               the supervisor, the supervisor may deny approval of 
               proposed well operations until the operator brings its 
               existing well operations into compliance with the order. If 
               an operator has failed to pay a civil penalty, remedy a 
               violation that it is required to remedy to the satisfaction 
               of the supervisor pursuant to an order issued under Section 
               3236.5, or to pay any charges assessed under Article 7 
               (commencing with Section 3400), the supervisor may deny 
               approval to the operator's proposed well operations until 
               the operator pays the civil penalty, remedies the violation 
               to the satisfaction of the supervisor, or pays the charges 
               assessed under Article 7 (commencing with Section 3400).
                (d) (1) No notice of intention to commence drilling shall 
               be approved for any well where a hydraulic fracturing 
               treatment will be used or is planned to be used in 
               completing the well until regulations governing hydraulic 
               fracturing treatments are adopted by the division and have 
               taken effect.
               (2) The hydraulic fracturing treatment regulations shall be 
               comprehensive and ensure that the integrity of the well and 
               well casing are maintained.  

          California Coastal Protection Network (if amended)
          California League of Conservation Voters (if amended)
          Clean Water Action (if amended)
          Earthworks (if amended)
          Food and Water Watch (if amended)
          Natural Resources Defense Council (if amended)
          Sierra Club California (if amended)
          Supervisor Mark Ridley-Thomas, County of Los Angeles
          The Wildlands Conservancy (if amended)

          California Chamber of Commerce
          California Construction Trucking Association
          California Independent Oil Marketers Association
          California Manufacturers & Technology Association
          California Small Business Alliance
          Coalition of Energy Users
          Friends for Saving California Jobs
          Independent Oil Producers Agency
          Kern County Taxpayers Association


          Western States Petroleum Association