Oil & Gas Alert
July 2008
Authors:
Kenneth Komoroski
kenneth.komoroski@klgates.com
412.355.6556
Michael Schalk
michael.schalk@klgates.com
412.355.6493
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The Ninth Circuit Court of Appeals Decision
in NRDC v. EPA and its Impact On Storm
Water Permitting of Oil & Gas Activities
in Pennsylvania
The recent decision of the Ninth Circuit Court of Appeals in Natural Resources Defense
Council v. EPA1 has created considerable question as to whether and what degree oil and
gas exploration, development, production and other operations will be exempted from
NPDES stormwater permitting requirements under the Federal Clean Water Act, despite
provisions contained in the Energy Policy Act of 2005 which many in the industry had
thought provided a broad exemption.
The Energy Policy Act of 2005 (“Energy Policy Act”) was passed by Congress in July
2005 and signed into law by President George W. Bush on August 8, 2005. The lengthy and
complex Energy Policy Act changed federal energy policy and modified numerous existing
statutes, in the process providing tax incentives and loan guarantees for energy production
of various types and establishing “streamlined” permitting procedures for certain types
of activities. Title III of the Act specifically addressed oil and gas activities, with Subtitle
C of Title III containing two important sections affecting oil and gas exploration and
production activities. First, Section 322 exempted “the underground injection of fluids or
propping agents (other than diesel fuels) pursuant to hydraulic fracturing operations related
to oil, gas, or geothermal production activities” from the underground injection control
provisions of the Safe Drinking Water Act. Second, Section 323 attempted to clarify the
NPDES stormwater permitting requirements under programs administered by the U.S.
Environmental Protection Agency (“EPA”) and the exemptions previously contained in
the Federal Clean Water Act (“CWA”) by adding to definitions contained in the CWA.
Specifically, the Energy Policy Act added the following new definition of “oil and gas
exploration and production” to Section 502 of the CWA:
(24) Oil and Gas Exploration and Production.—The term ‘oil and gas exploration,
production, processing, or treatment operations or transmission facilities’ means all
field activities or operations associated with exploration, production, processing,
or treatment operations, or transmission facilities, including activities necessary
to prepare a site for drilling and for the movement and placement of drilling
equipment, whether or not such field activities or operations may be considered to
be construction activities. (emphasis added)
This new definition was added by Congress to clarify and potentially broaden the scope
of the coverage of an exemption from NPDES stormwater permitting found in Section
402(l)(2) of the CWA. Section 402(l)(2) provides:
The [EPA] Administrator shall not require a [National Pollutant Discharge Elimination
System (“NPDES”)] permit … , nor shall the Administrator directly or indirectly
require any State to require a permit, for discharges of stormwater runoff from mining
operations or oil and gas exploration, production, processing, or treatment operations
1 No. 06-73217, 2008 U.S. App. LEXIS 11080 (9th Cir., May 23, 2008).
Oil & Gas Alert
or transmission facilities, composed entirely of
flows which are from conveyances or systems
of conveyances (including but not limited to
pipes, conduits, ditches, and channels) used for
collecting and conveying precipitation runoff
and which are not contaminated by contact with,
or do not come into contact with any overburden,
raw material, intermediate products, finished
product, byproduct, or waste products located on
the site of such operations. (emphasis added)
Prior to adoption of the Energy Policy Act, EPA had
taken the position that construction activities associated
with oil and gas operations were not exempt from the
NPDES permit program, and EPA had issued a series
of statements expressing concern about the potential
of sediments leaving oil and gas construction sites
causing pollution of the nation’s streams. As a result
of the definition change provided by the Energy Policy
Act, it became clear that “construction activities” were
eligible for the stormwater permitting exclusion found
in Section 402(l)(2); but what was left open was just
how broadly that exclusion might extend. The CWA
language is not a categorical permit exclusion for all
stormwater, but only extends to stormwater which
is “not contaminated by contact with, or do[es] not
come into contact with any overburden, raw material,
intermediate products, finished product, byproduct, or
waste products” located on the oil and gas site.” The
issue of what constitutes “contamination by contact” or
“contact” with such materials was left undefined, and
likewise the CWA contains no definition of overburden,
raw material, intermediate products, finished product,
byproduct, or waste products.
Following passage of the Energy Policy Act, on June
12, 2006, EPA published a rule amending EPA’s preAct regulations,2 and attempted to further explain
the CWA §402(l)(2) exemption from NPDES permit
requirements for oil and gas activities. The Natural
Resources Defense Council (“NRDC”) and other
organizations challenged the rule; and on May 23,
2008, the U.S. Court of Appeals for the Ninth Circuit
vacated EPA’s 2006 regulation.
in a water quality standard violation. Although the
Ninth Circuit seemingly agreed that uncontaminated
storm water discharges from oil and gas construction
activities were exempted, it held that EPA’s claim that
the Act establishes an absolute exemption was arbitrary
and capricious.
In reviewing (and ultimately rejecting) EPA’s
interpretation, the Ninth Circuit purported to apply
the tests enunciated in Chevron U.S.A., Inc. v. Nat’l
Res. Def. Counsel, 467 U.S. 837 (1984). As applied
to this situation, the Chevron analysis involved
two steps. First, the court was required to decide
whether Congress unambiguously intended to exempt
storm water discharge of sediment from oil and
gas construction activities from NPDES permitting
requirements, regardless whether such discharge causes
a water quality violation. If answered in the negative,
the court was then required to determine whether EPA’s
interpretation of what is exempted is a permissible and
reasonable construction of Section 402(l)(2) of the
CWA, as amended by the Energy Policy Act.
The Ninth Circuit acknowledged that EPA had
some degree of discretion to define what constitutes
“contamination” or “contact with” certain “statutorily
undefined contaminants.”3 The court found that the
limited legislative history of both the CWA and
Energy Policy Act did not indicate whether Congress
unambiguously intended to exempt, or not exempt,
from NPDES permitting requirements discharges
of storm water runoff “contaminated solely with
sediment.”4 Thus, the question became whether EPA’s
2006 rule reflected a permissible interpretation of the
statute. Without clearly enunciating what would be a
permissible interpretation, the majority of the Ninth
Circuit panel concluded that EPA’s rule “represent[ed]
a complete departure from its previous interpretation of
what constitutes ‘contamination’ under Section 402(l)
(2)” of the CWA, and vacated EPA’s rule – sending in
back to the agency for reconsideration.
In the 2006 rule, EPA asserted that the 2005 Energy
Policy Act’s amendment to the CWA created an
absolute exemption for storm water discharge of
sediment, whether or not such discharge would result
In reaching its decision, the court reviewed EPA’s
historic pronouncements on what does or does not
constitute “contamination.” In 1990, EPA promulgated
a rule defining “contamination” as, among other things,
runoff involving discharge of a “reportable quantity”
of pollutants as defined in certain regulations, and
runoff that contributes to a water quality violation.
2 4 0 C.F.R.122.26(a)(2)(ii), adopted at 71 Fed. Reg. 33,628
(June 12, 2006).
3 Id.
4 2008 U.S. App. LEXIS 11080 at *31.
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Oil & Gas Alert
40 C.F.R. § 122.26(c)(1)(iii). The preamble to the
1990 rule emphasized EPA’s concern over the serious
environmental implication of storm water runoff
contaminated with sediment from construction
activities, where EPA had stated: “[T]he run-off
generated while construction activities are occurring
has the potential for serious water quality impacts and
reflects an activity that is industrial in nature …. Where
construction activities are intensive, the localized
impacts of water quality may be severe because of
high unit loads of pollutants, primarily sediments. It
is evident from numerous studies and reports…that
discharges from construction sites continue to be a
major source of water quality problems ….”5 (emphasis
added). Statements made by EPA in subsequent Federal
Registers continued to reiterate this conclusion.6
Then, in 2006, in response to the enactment of the
Energy Policy Act amendments to the CWA, EPA
promulgated the challenged regulation that explicitly
exempted sediment discharges from permitting, even
if such discharges caused violation of a water quality
standard. As the challengers noted, read literally, EPA’s
2006 rule would have exempted from permitting any
sediment discharge, even where such discharge caused
the stream to exceed limitations for total suspended
solids, oil, grease, nutrients or other pollutant criteria.
Comparing the 2006 EPA pronouncement to earlier
EPA commentary, the court “conclude[d] that EPA’s
inconsistent and conflicting position regarding the
discharge of sediment-laden storm water from oil
and gas construction sites causes its interpretation of
amended section 402(l)(2), as reflected in the storm
water discharge rule, 40 C.F.R. § 122.26, to be arbitrary
and capricious.” The court added that its conclusion is
reinforced by the fact that neither the amending statute
(Section 323 of the Energy Policy Act), nor the new
statutory definition added to the CWA and the statutory
exemption contained in Section 402(l)(2)) make any
mention of “sediment” – or of whether it is covered
or not. Id. at *43-44 (citations omitted). Oddly, the
court did not mention the fact that EPA’s prior position
was offered before the CWA was amended in 2005
5 55 Fed. Reg. at 48,0333 (November 16, 1990)
6 See 64 Fed. Reg. 68722, 68724 (December 8, 1999) (“siltation
is the largest cause of impaired water quality in rivers”); 69
Fed. Reg. 22475 (April 26, 2004) (“Sediment is the pollutant
most commonly associated with construction activities,
whether at oil and gas sites or elsewhere.”).
and EPA’s new position was offered after the CWA
amendment effectuated by the Energy Policy Act.
The NRDC v. EPA leaves what the industry had viewed
as a permit exemption for all oil and gas activities
(including construction) in some substantial limbo. The
court was clearly troubled by (and ultimately rejected)
an interpretation that would allow without permits the
discharge of sediments resulting from construction
where such a discharge would cause a violation of
water quality standards. As held by the Ninth Circuit,
the CWA does not provide an absolute exemption
for all storm water discharges, or for all sediment
from construction. What the court did not resolve,
however, is what are the boundaries of what constitutes
uncontaminated stormwater, or more precisely, what
constitutes stormwater that has been “contaminated
by contact with” or had “contact with” “overburden,
raw material, intermediate products, finished product,
byproduct, or waste products” – which would fall
outside the permitting exemption. The issue has been
remanded to EPA for reconsideration, and it is up to
EPA to develop a revised interpretation. The further effect of the court’s ruling may not be
known unless and until EPA promulgates a revised final
rule that survives further judicial challenge. It may be
reasonable to expect EPA to revise its rule to require
that oil and gas companies obtain NPDES permits for
storm water discharges of sediment that will likely
result in a water quality standards violation. Such a
rulemaking, however, is not likely to come until after
inauguration of a new federal administration, whose
policies and approach might be quite different and less
sympathetic to the oil and gas industry. Hence, one
cannot rule out EPA taking an even more restrictive
view of the stormwater permitting exemption,
and a broader interpretation of what constitutes
“contamination by contact with” or “contact with” the
types of materials enumerated in Section 402(l)(2). In
the near term, EPA may seek and obtain rehearing or
may appeal, and potentially overturn, this decision by
the Ninth Circuit.
Despite this uncertainty, the court’s ruling does not
affect the statutory language in the Act. Thus, as EPA
now states on its website,7 Section 402(l)(2) of the
CWA clearly exempts most construction activities at
7 See http://cfpub.epa.gov/npdes/stormwater/oilgas.cfm
July 2008 | 3
Oil & Gas Alert
oil and gas sites from the requirement to obtain NPDES
permit coverage for storm water discharges. The
statutory language, however, conditions this exemption
upon such stormwater not being contaminated
by contact with or coming into contact with listed
materials. Unfortunately, a more definite scope cannot
be ascertained pending further agency, judicial or
Congressional action.
From a practical perspective, operators need to be
aware of this uncertainty and, during site construction
activities, ensure all measures are in place and effective
at preventing sediment discharges. After construction
activities are completed, operators should consider
measures at operating sites designed to avoid having
storm water come into contact with, or become
contaminated by contact with, the types of materials
listed in Section 402(l)(2) (namely, overburden, raw
material, intermediate products, finished product,
byproduct, or waste products). Any inadvertent
spills or improper storage or disposal of chemicals,
fuels, drill cuttings or fluids need to be addressed
or remediated promptly to avoid entrainment into
stormwater in subsequent precipitation or runoff
events; and the storage and management of chemicals
used in well development and waste products merits
close monitoring to avoid stormwater contamination.
With specific regard to Pennsylvania requirements,
it does not appear that the NRDC decision has
much direct effect on the applicability or validity
of the Pennsylvania Department of Environmental
Protection’s (“DEP”) Erosion and Sediment Control
General Permit (“ESCGP”) or any other aspect of DEP
regulation. Given that DEP has long required controls
to prevent water quality violations from stormwater and
sediment discharges, the effect of the NRDC decision
likely has limited impact on Pennsylvania programs.
DEP may argue that absent a binding regulation from
EPA, the NRDC decision leaves state agencies, as well
as EPA, open to interpret Section 402(l)(2)’s exemption
more narrowly, but the viability of such an argument
is certainly a matter that would need to be examined
closely.
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