Fracking: NC lawmakers vow to avoid Pa.'s costly mistakes

Critics say Pennsylvania rushed into the gas drilling business six years ago, overhauling its rules only after problems with gas wells and other regulatory oversights were discovered.

Some of the same complaints are echoed in North Carolina, which is expected to allow gas drilling and hydraulic fracturing by next summer. Those complaints include the fiercely debated risks to groundwater, the speed with which lawmakers are moving to adopt regulations, and the influence of the gas industry on state policy.

The N.C. Mining and Energy Commission and lawmakers who support fracking say this state can avoid problems such as water contamination. They say they've studied laws and fracking operations in other states and learned from their mistakes.

A comparison of North Carolina's proposed drilling rules and environmental protections with Pennsylvania shows some similarities. Yet North Carolina law has a weaker bonding requirement for drillers, which could mean taxpayers get stuck paying for cleanups or other mishaps if a driller goes out of business. And North Carolina is proposing a tax and fee structure that would give gas companies a significant break compared with Pennsylvania, according to a Fayetteville Observer analysis.

Wednesday, the N.C. Senate voted to begin issuing drilling permits in July 2015. The energy bill requires one more vote in the Senate, scheduled for today. If approved, it will go to the House. If approved there, the bill signals to the industry that drilling is certain to begin next year, even though the state has yet to adopt a full slate of regulations.

The legislature likely will wait until its long session begins in January to consider all the 120 rules proposed by the mining commission.

The Deep River shale basin beneath Lee, Moore and Chatham counties likely will be the hub of drilling next year, though scientists believe Cumberland and other region counties could have gas deposits, too.

"Our intent is to have the very best and safest rules in North Carolina," said Republican Sen. Bob Rucho of Matthews, who is co-chairman of the state Energy Policy Commission. Rucho's panel has taken two fact-finding tours in Pennsylvania and Arkansas.

Environmentalists, though, believe lawmakers are fast-tracking regulations needed to keep toxic, cancer-causing chemicals pumped into wells from polluting groundwater. In Pennsylvania, those same fears were realized.

Pennsylvania regulators were caught off guard when fracking into the massive Marcellus shale began in 2008, though scientists had vastly underestimated gas reserves. The state relied on a 1984 oil and gas law that set well permit fees at $100.

In the first three years of drilling, before Pennsylvania toughened its regulations and raised its fees, faulty well linings caused contamination of drinking water in some communities.

Chesapeake Energy of Oklahoma City was fined $900,000 after the state said gas wells in 2010 allowed methane gas to seep into the drinking supply of 16 homes in Bradford County, a heavily drilled community in northeastern Pennsylvania.

In 2011, state regulators imposed new construction standards for well casings, which are the metal and concrete piping that prevents fossil fuels from leaking near the surface. The following year, the legislature adopted a wider overhaul of drilling regulations - known as Act 13 - sought by newly elected Republican Gov. Tom Corbett.

The N.C. Mining and Energy Commission wants to require wells to have steel casings that meet American Petroleum Institute standards and pass several tests for strength, leaks, thickness and pressure.

Jim Womack of Lee County, chairman of the mining commission, promises that the state will have "the most comprehensive and thoroughly vetted well construction standards in the country."

Lessons from Pennsylvania

Other changes that Pennsylvania enacted through Act 13 include:

Despite Pennsylvania's regulatory overhaul, critics said Act 13 gave favorable treatment to the industry with tax waivers and subsidies and failed to require tougher environmental standards.

Walter M. Brasch, a former journalist who wrote "Fracking Pennsylvania: Flirting With Disaster," said lawmakers were so desperate to improve the economy that they promoted drilling without doing their research.

"It was pushed through so fast, so hard and mostly written by the industry itself," Brasch said. "There was a lot of problems and not enough protections for the residents and landowners."

Neither Pennsylvania's Act 13 nor North Carolina's proposed regulations allow counties or municipalities to restrict gas drilling.

Brasch said special-interest groups, such as the American Legislative Exchange Council, helped craft Act 13. The council promotes conservative policies and writes model bills for fracking.

One such bill - adopted in Pennsylvania and proposed in North Carolina - requires companies to report the chemicals used in fracking fluids to fracfocus.org, a publicly accessible online registry used by 10 states. Some critics say the site contains incomplete information, and gas companies can claim trade secrets to withhold data.

The energy bill pending in North Carolina also requires full disclosure of chemicals to state regulators, but those considered trade secrets would not be public record. Pennsylvania's law does the same.

How states tax the gas industry varies widely, but North Carolina's proposal is more generous to gas companies than Pennsylvania's.

Act 13 set an annual impact fee to gas companies over the first 15 years of a well's operation, based solely on the price of gas. At current prices, a Pennsylvania driller will have paid the state $310,000 over 15 years, regardless of how much gas is produced.

In North Carolina, a driller of a typical well would end up paying just $124,000 in taxes and fees over the same 15 years.

Part of that amount is an up-front impact fee of $2,000 for a well pad, plus $1,800 for each fracking stage per well. That could total about $45,000, based on a state geological report that said an Ohio well underwent 24 fracturing stages over a two-week period.

The rest of that $124,000 estimate is from a severance tax on gas produced from a well. The mining commission proposed a 1.5 percent tax, but the Senate energy bill lowers the levy to 0.9 percent of the market value of natural gas through 2019. The tax bill on a typical well producing 130 million cubic feet of gas a year would be about $79,000 after 15 years, at current prices. Higher-producing wells would generate more tax revenue.

This week, Senate President Pro Tem Phil Berger's office said the energy bill provides incentives for companies to hire workers "by establishing one of the most competitive severance tax plans in the nation."

The price of natural gas would need to rise to $15 per cubic foot for a well in North Carolina to generate the same amount of tax revenue as it does in Pennsylvania. Current prices are about $4.50 per cubic foot.

MAP: 2,000 wells drilled in Bradford County, Pa.

Bradford County, which has more than 800 gas-producing wells, has reaped nearly $16 million from the state's impact fees. The county has lowered property taxes, eliminated debt and begun planning a 911 call center and first-responder training hub.

North Carolina's mining commission has said the state's tax levy should generate only enough revenue to pay for additional staffing for industry inspections - about $3 million a year. Counties and towns would get the proceeds from the one-time impact fees. The state estimates it will have 55 fracked wells by 2017.

North Carolina's bonding requirement for drillers is weaker than Pennsylvania's, but that could change.

Current law requires a bond of $5,000, plus $1 per linear foot, to cover costs of plugging and abandoning a well. The bond would total about $15,000.

Pennsylvania raised its $25,000 bonding requirement to a maximum of $35,000 to $250,000, based on the number of wells by operator and their depth.

Amy Pickle, an N.C. mining commission member who is the director of the State Policy Program at Duke University's Nicholas Institute for Environmental Policy Solutions, said the bonding requirement is too low and "not likely to be sufficient if something goes wrong."

Womack said the mining commission debated last week whether the bonding requirements are adequate. It may recommend changes in June.