In June 2013, Illinois Governor Pat Quinn signed Senate Bill 1715, the Hydraulic Fracturing Regulatory Act and the Illinois Hydraulic Fracturing Tax Act, into law, making Illinois one of the many states to prepare for hydraulic fracturing (“fracking”) in the “shale era.”[i] When passed, legislators hoped the new regulations would help Illinois’ economy by encouraging the oil and gas industry to invest in Illinois.[ii] They also hoped that this act could help create more jobs in the state.[iii]When signing, Governor Quinn stated: “This new law will unlock the potential for thousands of jobs in Southern Illinois and ensure that our environment is protected.”[iv] This blog explores the regulatory changes made by this law and the legacy of the Hydraulic Fracturing Regulatory Act amid the current energy climate.
The Hydraulic Fracturing Regulatory Act authorizes the Illinois Department of Natural Resources (IDNR) to write and enforce the rules for fracking in Illinois.[v] The law also subjects the oil and gas industry to disclosure rules.[vi] That is, hydraulic fracturing operators are required to submit pre- and post-fracking chemical disclosures to the state so that the state is better able to protect the environment and consumers.[vii] The concept of using information disclosure as a policy strategy for regulation in fracking parallels somewhat the use of the Toxic Release Inventory to positively affect the environmental performance of industry.[viii] Given this, disclosure rules are viewed very favorably by environmental groups.[ix] The Hydraulic Fracturing Regulatory Act also requires pre- and post-fracturing water testing.[x]
Additionally, the act establishes a severance tax on the extraction of oil and gas based on the well production.[xi] This tax is levied upon producers of oil and gas. For the first 24 months of well production, the tax rate is set at three percent of the value of oil or gas severed.[xii] After 24 months, the tax rate then varies depending on how much oil or gas is produced.[xiii] It is interesting to note that when creating this oil and gas tax, Illinois proposed a tax that is lower than those in other producing states.[xiv] Mark Haggerty of Headwaters Economics found that at the time of enactment, the effective tax rate in Illinois would be around 6.63 percent, which is nearly half the effective tax rates of other states, like North Dakota and Wyoming that have effective rates around 12 percent.[xv] This was likely done to encourage industry to invest in Illinois over other states.[xvi] Revenues collected from the severance tax are deposited in the state general fund.[xvii]
The law is said to be one of the strictest state hydraulic fracturing regulatory schemes in the United States.[xviii] Governor Quinn stated when signing, “hydraulic fracturing is coming to Illinois with the strongest environmental regulations in the nation. It’s about jobs and it’s about ensuring that our natural resources are protected for future generations.”[xix] One aspect which makes this law one of the strictest regulations of hydraulic fracturing is that it makes Illinois the first state in the nation where hydraulic fracturing operators are required to submit chemical disclosures and water testing results.[xx]
Yet, when passed, environmental groups were still dissatisfied. For example, many environmental groups said that they would have preferred a moratorium on fracking given the potential environmental consequences, like groundwater contamination and waste disposal issues, that fracking poses.[xxi] They would have liked more time to study the environmental impacts of fracking before making provisions that allowed industry to frack in the state.[xxii]
Despite the environmental push-back that existed when the act was originally enacted, a different force may prevent the goals of the Hydraulic Fracturing Regulatory Act from being realized: oil prices. As stated by the Chicago Tribune, “[l]ow oil prices have accomplished in Illinois what environmentalists couldn’t.”[xxiii] That is, despite their regulatory changes, Illinois has not, and will likely not, join the fracking movement because of low oil prices. As of January 2015, the IDNR stated that zero companies had applied for a fracking permit.[xxiv] This was attributed to low oil prices, making it unlikely that the industry could afford to take on the risk of beginning to frack in Illinois. Instead, companies are looking to continue to frack in states where they have leased land in areas where there is proven shale gas.[xxv]
Missing the shale boom means that Illinois will avoid any environmental consequences that come from fracking, however, it also means that Illinois will not benefit from any economic gains that the oil and gas industry may have provided. In fact, Haggerty estimates that Illinois has already lost a $500 million windfall over a 10-year period because of this lack of production.[xxvi] Compared to other states, like Ohio (where fracking started in 2010), it appears that Illinois’ failure to implement regulations in a timely fashion, by signing the law in 2013 and by implementing regulations by November 2014, will be what ultimately prevents the state from reaping any benefit that production would bring.[xxvii] In light of the poor economic situation in Illinois, and the potential benefits of fracking, this situation could become a huge disappointment to the state.
-Rachel L. Hampton is a General Member on MJEAL. She can be reached at email@example.com.
The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.
[i] Barry G. Rabe and Rachel L. Hampton, The Politics of State Energy Severance Taxes in the Shale Era (2014). APSA 2014 Annual Meeting Paper. Available at SSRN: http://ssrn.com/abstract=2452848.
[ii] Julie Wernau, Gov. Quinn sign bill to regulate fracking (June 17, 2013), http://articles.chicagotribune.com/2013-06-17/business/chi-quinn-fracking-bill-20130617_1_fracking-fracturing-our-environment-many-environmental-advocates.
[iii] Illinois Government News Network, Governor Quinn Signs Nation’s Strongest Regulations on Hydraulic Fracturing (June 17, 2013), http://www3.illinois.gov/PressReleases/ShowPressRelease.cfm?SubjectID=2&RecNum=11278.
[viii] Kraft, Stephan, and Abel, Coming Clean: Information Disclosure and Environmental Performance (2011). For more information about Michael Kraft and his lecture, see: Center for Local, State, and Urban Policy. Dec 2013. “Using Information Disclosure to Achieve Policy Goals: How Experience with the Toxics Release Inventory Can Inform Action on Shale Gas Fracking.” http:// www.fordschool.umich.edu/events/calendar/1601/.
[x] Illinois Government News Network, supra note 3.
[xi] McDermott Will & Emery, Illinois‘ Hydraulic Fracturing Tax Act, http://www.mwe.com/Illinois-Hydraulic-Fracturing-Tax-Act-07-25-2013/. (last visited March 22, 2015).
[xiv] Barry G. Rabe and Rachel L. Hampton, supra note 1.
[xv] Julie Warner, Illinois proposes fracking tax that is lower than in other states (April 19, 2013), http://articles.chicagotribune.com/2013-04-19/news/ct-biz-0331-fracking-state–20130331_1_severance-tax-tax-rate-tax-holiday.
[xvi] Barry G. Rabe and Rachel L. Hampton, supra note 1.
[xviii] Don Babwin, Illinois Gas Drilling Rules: Governor Pat Quinn Signs New Fracking Regulations Into Law (June 17, 2013), http://www.huffingtonpost.com/2013/06/17/illinois-gas-drilling-rules-fracking_n_3455668.html.
[xix] Illinois Government News Network, supra note 3.
[xxi] Julie Wernau, Gov. Quinn sign bill to regulate fracking, supra note 2.
[xxii] Don Babwin, supra note 13.
[xxiii] Julie Wernau, Illinois misses the fracking boom because of falling oil prices (January 24, 2015), http://www.chicagotribune.com/business/ct-fracking-illinois-0125-biz–20150123-story.html#page=1.
[xxvii] Seth Whitehead, Illinois and Ohio: A Tale of Fracking in Two States (February 3, 2015), http://energyindepth.org/illinois/illinois-and-ohio-a-tale-of-fracking-in-two-states/.