July 22, 2011
Practice Group:
Oil & Gas
North Carolina Takes a Step Closer to
Shale Gas Production
Overview and Background
North Carolina is not traditionally thought of as an oil and gas state. However, legislation enacted in
June sets in motion a process that could result in the authorization of horizontal drilling and hydraulic
fracturing – game-changing technologies that have turned shale deposits in other parts of the country
into top resource plays. Furthermore, a study by the North Carolina Geological Survey has found that
potential shale gas reserves, once thought to be inadequate for commercial production, may be much
larger than historically estimated. If the advanced technologies employed in other states become legal
in North Carolina, the state’s shale basins could become an important regional gas play. If not, the
state’s shale gas will remain in the ground.
The Legislation
The North Carolina General Assembly passed two bills in June with provisions requiring state
agencies to study shale gas exploration and production and to develop an outline for a regulatory
framework to permit shale gas production. The first bill, House Bill 242, was signed into law by
Governor Bev Perdue and is now Session Law 2011-276. The second bill, Senate Bill 709, was
vetoed by Governor Perdue for unrelated reasons and currently awaits an override vote. Each takes a
slightly different approach to reforms and to studying further substantive changes.
House Bill 242 directs the North Carolina Department of Environment and Natural Resources
(“DENR”), the Department of Commerce, and the Department of Justice to “study the issue of oil and
gas exploration in the State and the use of directional and horizontal drilling and hydraulic fracturing
for that purpose.” The study will review the issues from several different angles, including analysis of
potential economic impacts, environmental impacts, social impacts, consumer protection, and
potential oversight and administrative issues. As part of this process, DENR must hold at least two
separate public hearings by February 1, 2012. DENR must make its full report to the General
Assembly by May 1, 2012 and must include specific legislative proposals, including regulatory
requirements to address environmental issues associated with hydraulic fracturing.
House Bill 242 also makes a number of minor updates to the Oil and Gas Conservation Act and adds a
number of protections for landowners who lease subsurface rights for gas development. The law
requires compensation of landowners for any damage to water supplies in use prior to natural gas
activities on the property and requires gas developers to indemnify adjacent property owners for
property damage. The law also establishes a lease termination provision by which gas leases will
automatically terminate after ten years, unless oil or gas is being produced by the end of the initial tenyear term and commercial production has not stopped for a period of six months or more. Other
protections include a requirement that the gas developer provide written notice to the landowner
including an exploration or development plan prior to commencement of gas exploration or
production.
North Carolina Takes a Step Closer to Shale Gas
Production
A related bill, Senate Bill 709, the Energy Jobs Act, was vetoed by the Governor. Nevertheless, the
Senate has overridden the veto, and the House will take up the override issue next week. The
potential implications of this bill are worthy of note. The provisions of the Energy Jobs Act dealing
with shale gas also require DENR to provide a comprehensive report by May 1, 2012. This report is
to outline the commercial potential of shale gas resources within the state and the regulatory
framework necessary to develop shale gas in North Carolina. Additionally, DENR would be required
to review all North Carolina natural gas laws and regulations and to review federal laws and the laws
of Texas, Pennsylvania, and Arkansas as reference points for a new state regulatory framework. The
legislation also calls for an inventory of water supplies and an evaluation of water supply availability
in the areas with known or suspected shale gas. If the Energy Job Act becomes law, this study would
be consolidated with the study required by House Bill 242.
The North Carolina Shale Gas Resource
North Carolina’s shale reserves are located in two Triassic period river basins deep under the surface:
the Deep River Basin and the Dan River Basin, shown in green below. The Deep River Basin is made
up of the Sanford sub-basin in Chatham, Lee, and Moore counties; the Durham sub-basin in Chatham,
Wake, Orange, Durham, and Granville Counties; and the Wadesboro sub-basin in Montgomery,
Richmond, and Anson Counties. The Dan River Basin crosses Stokes and Rockingham Counties, and
continues north into Virginia, where it is known as the Danville Basin.
These areas contain organic-rich shales that may yield commercially viable quantities of natural gas.
In fact, the North Carolina Geologic Survey estimates that North Carolina may have enough shale gas
to meet the state’s current level of energy demand for 40 years.
Although geologic conditions in these basins are not ideal, similar conditions have yielded profitable
operations in the Barnett Shale in Texas, the Haynesville Shale in Louisiana, and the Marcellus Shale
in several northeastern states, thanks to horizontal drilling and hydraulic fracturing, higher energy
prices, and an increased demand for natural gas.
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North Carolina Takes a Step Closer to Shale Gas
Production
Economic Development Potential
The potential economic impact of shale gas production could be profound in North Carolina.
Development of a shale gas industry could add thousands of jobs, significant payments to landowners,
and large revenue streams to the state in the form of royalty payments. Furthermore, natural gas
development is capital intensive, and substantial investments could be made in the counties where the
shale deposits are located.
By way of illustration, it is estimated that the recent natural gas boom in the Marcellus Shale region of
Pennsylvania, West Virginia, New York, and Ohio supported nearly 140,000 jobs, $1.1 billion in state
and local tax revenues, and $11.2 billion in the regional equivalent of gross domestic product in 2010.
Of course, the North Carolina shale gas play is estimated to be a fraction of the size of the Marcellus
Shale, but these figures indicate that the economic development potential of shale gas in North
Carolina is significant.
Additionally, domestic shale gas production reduces American dependence on foreign gas and oil,
increasing energy independence. Natural gas, which burns cleaner than other fossil fuels, is widely
touted as a transition fuel from coal and oil to renewable energy sources.
Legal and Environmental Issues
The prospect of shale gas development in North Carolina raises a long list of legal and environmental
issues. Like all oil and gas wells, the drilling and completion process engenders concerns regarding
casing and cementing protocols to seal off and protect shallow fresh groundwater zones and prevent
gas migration between penetrated formations. The process of hydraulic fracturing, one of the
techniques that makes shale plays viable, uses high-pressure injection of water, sand, and usually
small amounts of chemical additives (such a surfactants) deep underground to create fractures in the
shale to unlock the natural gas within. The process uses large volumes of water and generates
significant amounts of wastewater as well, which raises water resource and wastewater management
issues. Air emissions, well construction standards and inspections, solid waste handling, storm water
management, sedimentation and erosion control, pre-drilling surveys of nearby water supplies and
related protections of public and private water supplies, and numerous other issues are implicated.
Other significant legal and administrative issues would be raised as well. Permit requirements,
severance taxes or state royalties, landowner protection issues, local land use policies, mineral rights
and leasing, and the adequacy of roads and other infrastructure are just some of the issues that would
require attention if shale gas production were to become a reality in North Carolina. Part of North
Carolina’s challenge will be in establishing workable programs, standards and regulatory approaches
that address these issues, providing predictable rules of the road while facilitating use of these
potentially important energy resources.
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North Carolina Takes a Step Closer to Shale Gas
Production
Conclusion
Although the recent legislation does not legalize hydraulic fracturing in North Carolina, it moves the
state significantly closer to shale gas development and sets a path for a regulatory framework for
horizontal drilling and hydraulic fracturing. All of the legal, environmental, and policy issues
associated with this resource will be debated in the next two years in North Carolina. K&L Gates LLP
has vast experience assisting natural gas developers in Texas and has led the way on important legal
issues in Pennsylvania and throughout the Marcellus Shale. As such, we are uniquely qualified to
assist with the environmental, legal, regulatory, and policy issues related to the potential development
of shale gas in North Carolina.
Authors:
Stanford D. Baird
stanford.baird@klgates.com
919.743.7334
James L. Joyce
jim.joyce@klgates.com
919.743.7336
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