Fracking North Carolina: The Energy Modernization Act

North Carolina currently produces no oil or gas.[i] Yet, they have recently joined the approximately thirty-five states that have established a severance tax, a tax on the extraction of oil and gas.[ii] This tax is but one measure within North Carolina’s Energy Modernization Act, which includes an array of policy changes in North Carolina designed to decrease regulatory pressures on industry.[iii]

Passed in June 2014, the North Carolina Energy Modernization Act lifts the state’s moratorium on hydraulic fracturing, or fracking, as an effort to open the state to oil and gas extraction.[iv] The act also authorizes the Department of Environment and Natural Resources and the Mining and Energy Commission to issue permits for natural gas exploration and development.[v] Further, the act preempts local ordinances and prohibits local government from banning fracking.[vi]

Although North Carolina currently has no natural gas production or reserves, there may be shale gas resources present in the Deep River Basin located in the center of the state.[vii]The Deep River basin is made up of three sub-basins known as the Durham sub-basin, the Sanford sub-basin, and the Wadesboro sub-basin.[viii] The sub-basins are further divided into three formations: the Sanford Formation, the Cumnock Formation, and the Perkin Formation.[ix] The Deep River Basin is estimated to have 1,660 billion cubic feet of natural gas resources.[x] Additionally, a smaller basin, the Dan River Basin, has also been assessed and is estimated to contain forty-nine billion cubic feet of gas, an amount that could likely meet North Carolina’s demands for no more than sixty days.[xi] Given this, the amount of gas in Dan River Basin is less than one would expect to justify the expense of fracking. The Cumberland-Marlboro Basin and the Davie Basin are yet to be assessed, but the Davie Basin is not expected to have a significant amount of gas.[xii]

The severance tax is set at 0.9 percent of market value, with additional rates phased in between 2015 and 2021, based on the market value of gas.[xiii] The Energy Modernization Act states that:

The purpose of the tax is to provide revenue to administer and enforce the provisions of this Article, to administer the State’s natural gas and oil reclamation regulatory program, to meet the environmental and resource management needs of this State, and to reclaim land affected by exploration for, drilling for, and production of natural gas and oil.[xiv]

As a result, North Carolina has begun to create tax and budgetary infrastructure to deal with the possibility of oil and gas extraction. There have also been discussions of using tax revenue generated by increased energy production to relieve taxpayers.[xv]

This action by North Carolina parallels the action of a number of states seeking to get involved with oil and gas production as a result of the expansion of hydraulic fracturing and horizontal drilling techniques in the “shale era” of energy production. States have adjusted their policies that regulate oil and gas production, the taxation of that production, and the collection of revenues.[xvi] North Carolina state legislators hope that the passage of the Energy Modernization Act may prompt oil and gas development in North Carolina. When signing the act, Governor McCrory stated, “Now for the first time North Carolina is getting into energy exploration.”[xvii] He added, “North Carolina has been sitting on the sidelines for too long.”[xviii]

As oil and gas exploration progresses in North Carolina, business prospects for corporations and property owners will pose a number of legal challenges and opportunities. This is because oil and gas exploration will fall under the relatively new regulatory program, and property owners may explore leasing their property to companies, which has a number of procedural hurdles.[xix] Oil and gas exploration will open up a number of liabilities. It will also present a number of environmental challenges for areas within the state that will be impacted by this potential development. These environmental challenges and externalities may include wastewater contamination, seismic activity, chemical releases and spills, and road damage.[xx] The newly enacted severance tax may help to mitigate these challenges by providing funds to address environmental needs.[xxi]Additionally, legal advice in North Carolina will prove important to ensuring sustainable development practices in this new business area of fracking.

 

Rachel L. Hampton is a General Member on MJEAL. She can be reached at rlaurenh@umich.edu.

 


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] North Carolina State Profile and Energy Estimates, http://www.eia.gov/state/?sid=NC. (last visited March. 2, 2015).

[ii] Cassarah Brown, State Revenues and the Natural Gas Boom: An Assessment of State Oil and Gas Production Taxes, National Conference of State Legislatures (June 2013), http://www.ncsl.org/research/energy/state-revenues-and-the-natural-gas-boom.aspx.

[iii] E&E Publishing, Turning Carolina Red Reports from the Front of an Energy Culture War, Washington, DC: E&E Publishing, LLC (2014).

[iv] Marti Maguire, North Carolina governor signs law paving way for fracking, Reuters (June 4, 2014), http://www.reuters.com/article/2014/06/04/us-usa-northcarolina-fracking-idUSKBN0EF1VC20140604.

[v] Gary J. Salamido, Governor Signs Energy Modernization Act, North Carolina Chamber (June 5, 2014), http://ncchamber.net/governor-signs-energy-modernization-act/.

[vi] Senate Bill 786, General Assembly of North Carolina, Session 2013, http://www.ncleg.net/Sessions/2013/Bills/Senate/PDF/S786v7.pdf.

[vii] North Carolina State Profile, supra note 1.

[viii] Jeffrey C. Reid, et al., Natural Gas Potential of the Sanford Sub-basin, Deep River Basin, North Carolina (October 24, 2011), http://www.searchanddiscovery.com/pdfz/documents/2011/10366reid/ndx_reid.pdf.html.

[ix] Id.

[x] Clean Water for North Carolina, Potential Gas in NC: ‘Unassessed’ Shale Basins, http://www.cwfnc.org/documents/unassessed_shale_basins_final.pdf. (last visited March 2, 2015).

[xi] Id.

[xii] Id.

[xiii] Alexandra Sirota, Taxing Fracking, NC Policy Watch (May 22, 2014), http://pulse.ncpolicywatch.org/2014/05/22/taxing-fracking/.

[xiv] Senate Bill 786, supra note 6.

[xv] Patrick Gleason and Chris Prandoni, North Carolina Is The New Ground Zero In The Fracking Debate, Forbes (Nov. 2, 2014), http://www.forbes.com/sites/patrickgleason/2014/09/03/north-carolina-is-the-new-ground-zero-in-the-fracking-debate/.

[xvi] 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.

[xvii] John Murawski, NC to start test drilling for natural gas to lure energy industry, The Charlotte Observer (June 6, 2014), http://www.charlotteobserver.com/2014/06/04/4955299/nc-to-start-test-drilling-for.html#.VOqcXbDF9tI.

[xviii] Id.

[xix] Forrest Firm, North Carolina Assembly Passes Energy Modernization Act, http://forrestfirm.com/north-carolina-assembly-passes-energy-modernization-act/. (last visited March 3, 2015).

[xx] Christopherson, S., & Rightor, N. Confronting an Uncertain Future: How U.S. Communities are Responding to Shale Gas and Oil Development. National Agricultural and Rural Development Policy Center. Brief 18, November 2013.

[xxi] See Senate Bill 786, supra note 6.

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