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Although the agencies tried to make it a general discussion on oil and gas, the presentation and most of the questions from the audience focused on the controversial topic of fracking….and it was clear the local police and the agencies were prepared for potential trouble as there were six conservation officers and three police cruisers in the parking lot. (A clear difference from other DNR/DEQ presentations I’ve attended in the past!) Despite the controversial topic, decorum was maintained and there were no disturbances.

The issue of fracking has been getting a lot of press recently but companies have been doing it in Michigan in a lesser but somewhat comparable form since 1952. Since that time more than 10,000 fracking wells have been installed in Michigan, mostly in a geological formation called the “Antrim Shale.” Since 1925 a total of 60,000 oil and gas wells have been drilled; of those 4,500 have been for oil, 11,000 have been for gas and 3,000 have been for gas storage.

About 80% of the wells drilled in Michigan (and the U.S.) recently have been fracking wells and the natural (methane) gas produced from those wells have caused the price of natural gas to plummet in the U.S. to $2 per million British thermal units (compared to $10 in the U.K.) According to some analysts (as noted in this recent Washington Post article), this gas boom is fueling a revival in American manufacturing – something we desperately need in this country.

Naturally, this flush of inexpensive gas doesn’t come without weighty public policy issues, and the issues the attendees focused on during last night’s forum are the same being raised elsewhere in the country: contamination of groundwater aquifers and depletion of fresh groundwater.

According to the DEQ, vertical fracking wells use between 50,000 to 100,000 gallons while some horizontal wells (like most of the current wells) can use up to 20 million gallons of water. In comparison, total water withdrawals in Michigan in 2010 amounted to 267 billion gallons. (However, the DEQ admitted that most of the later amount returns to the environment while the millions of gallons of water used in fracking are permanently removed from and never return to the watershed due to the contaminants in it.) Although groundwater used for oil and gas production are exempt from Michigan’s water withdrawal legislation, the Supervisor of Wells issued Well Instruction 1-2011 which allows the DEQ to use Michigan’s water withdrawal assessment tool to determine if a proposed gas well will have an adverse impact on stream flow. If such an impact is identified, the DEQ does not issue a permit.

The DEQ also asserted that claims about “flaming tap water” (as seen on YouTube) due to fracking are false and the instances where it has occurred are not due to the fracturing of bedrock but methane leaking around improper well casings (or methane naturally seeping into an overlying aquifer). According to the DEQ, Michigan’s well casing requirements prevent this from happening. In Michigan, drillers are required to use several corrosion resistant metal casings (conductor, surface, intermediate, and production casings) that are cemented together to seal off the well from the surrounding environment. (A diagram of the typical well is depicted to the right.)gas well

If these requirements are followed, according to the DEQ, the risk of a well contaminating groundwater is very low.

All in all I think the DEQ/DNR did a good job at trying to explain the issues and point out some facts to ameliorate the public’s concerns but I don’t think the issues, especially the water withdrawal issue, will be going away any time soon. As with everything, the goal will be trying to find the right balance.

Additional information about the location and type of wells currently in Michigan can be accessed here and the DEQ’s GIS database (GeoWebFace) of oil and gas related information can be accessed here.

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Through the process of compulsory pooling, oil and gas interests in a given area can be pooled into one drilling unit, regardless of whether a property owner agrees. Part 615 of the Natural Resources and Environmental Protection Act designates the Director of the Michigan Department of Environmental Quality as the “Supervisor of Wells” and provides the legal authority of the Supervisor of Wells pool properties to form drilling units for private developers.

The concept of compulsory pooling was originally, among other purposes, intended to protect property owners from having oil and gas drained from the underground portion of their property without being compensated for it. However, it is also used by the MDEQ to combine the mineral rights of a property owner who refuses to lease their land with other property owners in a drilling unit. It is typically applied to a situation where surrounding property owners have signed leases and there are a few holdouts who refuse.

As a result of this Michigan law, property owners who do not consent to sign an oil or gas lease may nevertheless be compelled to allow a private developer to remove oil and gas from beneath the property. Also, compulsory pooling may allow the controversial process of “fracking”, regardless of the property owner’s desires. Although the property owner will be compensated; usually, receiving 1/8th of the royalty from the well’s production, the idea of compulsory pooling seems contrary to long held common notions of private property rights.

Property owners are, therefore, in a conundrum: whether it is better to negotiate a lease with a mineral rights developer or whether to risk the potential for compulsory pooling. Although property owners can participate in a hearing before the MDEQ and provide input, the Supervisor of Wells has the power to establish a formula for sharing costs and revenues and takes the negotiation of any particular lease out of the hands of a property owner who refuses to sign a lease. The terms of a compulsory pooling order could be different from what was originally offered in a mineral lease.

Recently, this issue arose in a case in Saline Township, Michigan. The property owner was surprised when it turned out that regardless of an adamant refusal to sign oil and gas leases, the oil and gas developer initiated a compulsory pooling process to do just that without the property owner’s consent.

Property owners who are approached by oil and gas developers should be aware of compulsory pooling and the potential ramifications of refusing to sign oil and gas leases under Michigan law, especially when they are the last holdout. While saying “no” to a oil and gas company may be within the rights of a landowner, “no” may not always mean “no” when one considers the concept of compulsory pooling in Michigan.

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A similar boom is going on with natural gas produced through fracking, and the U.S has become the largest producer of natural gas in the world. According to the Energy Information Administration website, the U.S. produced almost 30 million cubic feet of natural gas in 2012.

This new found energy production is having impacts elsewhere too. Oil and gas employment has increased 40 percent over the last 5 years.

Fracking also has created a huge demand for sand (a key ingredient in the fracking process). As noted in the Wall Street Journal, energy companies are expected to use 56 billion pounds of sand this year and it takes approximately 25 railcars of sand to frack one well.

The increased production and use of natural gas also appears to have had a positive environmental impact. By some accounts, C02 emissions in the U.S. have dropped 12% due to the switch from coal to natural gas.

Amidst all of this positive news, taxpayers, scientists and regulators are keeping a watchful eye on these industries due to health, safety and environmental concerns. In Oklahoma (a state with an average of 50 tremors per year) there have been 2,600 earthquakes in 2013 and the increase coincides with rise in fracking. The cause? Scientists suspect it’s due to the pressures created when fracking wastewater is injected deep underground. Other issues such as groundwater withdrawal and contamination also have been raised.

As with many aspects of our increasingly complex lives, as the U.S. enjoys the fruits of these energy resources, society will have to make hard policy decisions relating to the management of these risks and benefits.

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Michigan residents are paying close attention to gas and pipeline transport issues in the region because of our water resources.

What is the main issue in Michigan? Two words – groundwater withdrawal. Many Michigan rivers and streams are fed by groundwater. With fracking pads using up to 20 million gallons of water, the concern is fracking near waterbodies will result in reducing water levels to a point that fishing and boating will be adversely impacted. Recently, because of local opposition to oil and gas leases along the “Holy Waters” section of the AuSable River, the DNR designated those leases as non-production leases. In addition, the sensitivity of this issue for Michigan residents has prompted the MDEQ to re-evaluate its fracking rules.

Michigan residents are also concerned about oil transport through the Great Lakes region. Companies like Enbridge are building or expanding pipelines in Michigan to handle the increased production of oil elsewhere. There are also plans to build an oil shipping port in Superior Wisconsin so that up to 35,000 barrels (about 1.4 million gallons) of oil from Alberta’s tar sands can be shipped to refineries around the Great Lakes.

As many recall, in 2010 one of Enbridge’s oil pipelines near Marshall, Michigan ruptured spilling over one million gallons (about 24,000 barrels) of diluted bitumen (“dilbit”) oil into the Kalamazoo River – a spill that Enbridge is still cleaning up. While Michigan residents understand the need for oil, they are not interested in a repeat of the Enbridge spill – especially one that would involve one of the Great Lakes.

Although water is abundant around the Great Lakes, it is used by many for recreational purposes in addition to industrial/commercial uses. As a result, there is significant interest and demands for it to be managed so that it can be enjoyed by the greatest number of people.

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2013 was a great year for solar energy installations in the U.S. and globally. According to an article published on the CleanTechnica website, on a global basis it was the first time that solar installations surpassed wind installations. As of July, Forbes reported that the U.S. had joined the ranks of Italy, Germany and China with 10,000 MW of solar capacity installed. With 930 MW installed in the 3rd Quarter of 2013 alone, the U.S. was expected by some commentators to surpass long-time leader Germany. As noted by the Forbes article, one of the main reasons for the increase in solar photovoltaic installations is the large drop in production cost. In 2008, the cost of a solar panel was around $3.65. Today it’s 50 cents per panel and that’s expected to drop to 36 cents by 2017.

What’s more, solar isn’t going away any time soon; stock market analysts are expecting an equally, if not bigger, year for U.S. solar companies in 2014.

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Enbridge Energy Partners LP, a subsidiary of Enbridge Inc., headquartered in Calgary, Alberta, is the owner of two oil pipelines that lie at the bottom of the Straits of Mackinac. Michigan’s Department of Environmental Quality maintains that the two pipelines are potentially unstable and could be prone to breakage, which could cause substantial environmental and economic damage to the area.

The two pipelines, which were installed in 1953, are 20 inches in diameter and are the conduit for 23 million gallons of crude oil daily. They are part of what is called Line 5 and they carry oil from Superior, Wisconsin to Sarnia, Ontario. Line 5 is a component of the larger Lakehead pipeline system which traverses Canada and the northern United States.

There have been other significant oil spills from pipelines in other parts of the U.S. Surely adding consternation to the DEQ is a 2010 oil pipeline rupture in Marshall, Michigan, that damaged the Kalamazoo River and nearby waterways. That rupture caused a spillage of 840,000 gallons of crude oil. The owner of that pipeline: Enbridge, Inc.

Federal officials were quite critical of Enbridge in their report of the 2010 incident. That oil spill, according to the published report of the National Transportation Safety Board, was preventable. Furthermore, when the spill occurred, Enbridge delayed action that exacerbated the extent of the spill. Then Chairman of the NTSB Deborah A.P. Hersman likened the Enbridge employees to “Keystone Kops” as they failed to notice the rupture and continued to pump oil.

The 2010 oil spill resulted from cracks in the pipeline. Enbridge was aware of the cracks as early as 2005 and did not repair them. There have been other, less publicized, breaks in the Lakehead system, including a 1988 spill in the Clinton River.

Regulation of the nation’s oil pipelines is convoluted at best. The pipeline system is under the aegis of the Pipeline and Hazardous Materials Safety Administration, which is a sector of the U.S. Department of Transportation. PHMSA is a relatively small government entity, with reportedly just 500 employees. Environmental activists maintain that PHMSA is inadequate to the task of inspecting and enforcing pipeline compliance. Hersman in her report blamed not just Enbridge but improper regulation, specifically allowing pipeline operators to inspect and report on their self-inspections, rather than relying on governmental oversight.

The Straits of Mackinac are of great importance to the Michigan economy. Not only is Mackinac Island a favorite tourist destination, but the recreational and commercial fishing in the area is also an economic mainstay. Additionally, the area would be very difficult to clear in the case of a catastrophic oil spill. The currents are known to be swift, the water is particularly deep and clean-ups would have to be delayed during the long periods of the winter when the Straits are ice-covered.

In order to allay concerns, Enbridge will allow Michigan Technological University to operate an underwater vehicle outfitted with a digital camera to descend to the pipeline and photograph it. Most likely, the vehicle will not be able to detect cracks. In addition, Enbridge plans to add support anchors below the pipelines in August. The installation is scheduled to take 90 days. The DEQ maintains that supports of the pipelines should be installed every 75 feet. Currently, there is a 140 foot span with no supporting anchors.

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President Obama’s budget still has not been enacted. Many of the components of the budget may not survive the upcoming expected legislative wrangling, including the House-Senate conference procedures. But the budget does represent the President’s wish list.

Receiving extra emphasis this year are elements that encourage renewable energy projects. Perhaps most noteworthy is the extension of the renewable energy production tax credit, changing it from needing to be extended every year to be being a permanent tax credit. This would be a complement to the permanent status that Congress afforded the research and experimentation credit.

The production tax credit will affect the following renewable energy production facilities: wind, solar, hydroelectric, geothermal, hydroelectric as well as waste facilities that produce energy like municipal solid waste, landfill gas and biomass.

One caveat: in order to claim these tax credits, production of the facilities must begin by January 1, 2017 except for wind facilities, which must commence construction by January 1, 2020. The tax credit for wind facilities is being phased out, and will reduce each year between now and 2020. The tax credit for solar facilities will also decrease yearly beginning in 2020.

Additional tax credits are proposed for qualifying advanced energy projects, which are defined as products that make substantial changes to existing manufacturing facilities or construct new ones that do the following:

Produce energy from renewable resources
Creates components for use with electric or hybrid vehicles
Creation of electric grids that support renewable energy sources
Creation of blended fuel technology
It will be interesting to see which of these budgetary items will become law and which will end up on the cutting room floor.

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The essence of the bill changes the way that utility-scale solar energy producers pay for power they produce and consume.

Right now, solar users can consume all of the electricity that they produce. These solar consumers then receive compensation for any power that they send to the grid. They are paid a retail rate for this solar power.

The new bill would change the compensation and payment setup. SB 438 as written would require solar consumers to purchase all of their electricity from the power company. Subsequently, they will be paid a wholesale, as opposed to retail rate for the power that they send to the grid.

Some solar energy advocates are wary of the bill, as solar producers will be compensated at a lower level than they were previously. This will mean that investments in solar energy will take longer to pay off. But utility companies contend that the original NEM formula was created in order to foster growth in the nascent solar energy industry. Now that solar energy is considered a more mature industry, they argue, the subsidized rates can be phased out.

Michigan Senate Bill 438 is currently being addressed at the committee level by the Senate Energy and Technology Committee. The bill was introduced by John Proos of St. Joseph.

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Cannon Township in western Michigan recently adopted regulations regarding new building construction that appear to limit fracking. The ordinances required a variance for lighting structures (they cannot be taller than 25 feet) that may limit the abilities of companies to drill.

Indeed, the state of Michigan officially is the legal issuer of drilling permits. However, local authorities have some wiggle room in that they do have some authority regarding storage and transportation, especially transportation of hazardous materials, as well as noise abatement and traffic congestion. Fracking takes place often in rural and residential areas, and local authorities may deem the existing roadways insufficient to handle the traffic and materials being transported.

The oil and gas industry is now faced with a diverse group of local laws and has to proceed cautiously, unsure as to what hurdles will be placed by local authorities.

In Colorado, Perry Buck, a Republican legislator, has proposed that mineral owners be compensated for lost property value by counties who then enact limiting regulations. This has led to further questions, including how to assess damages and determining when the beginning of the enterprise would be established: when the decision to drill was made or when the drilling commenced. To complicate matters, it is unclear if Colorado’s Democratic Governor John Hickenlooper would sign that legislation, if passed.

Montana is dealing with issues still at the state level, essentially in the arena of water quality. Certain environmental and citizens’ groups are at odds with oil and gas development companies regarding the components of the water that is injected for the purposes of fracking.

Other fracking issues have come before local governmental groups in places ranging from Denton, Texas to Compton, California to Lafayette, Colorado.

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