What is the company doing at this stage?

Leasing

Only exploratory drilling can confirm the presence of viable oil or gas deposits. Prior to drilling, however, the company must obtain the rights to develop the subsurface minerals. If early exploration has indicated promising geologic structures, the company will attempt to purchase or negotiate lease contracts with the mineral owners, who could be individuals, trusts, governments, or other companies. 

Where conditions are suitable for oil and gas development, state regulators create a system for efficiently extracting the resources. This process includes determining well spacing, or the permissible proximity of wells within one geological formation. A drilling unit is the area designated by state governments that can contain a single oil or gas well, and the allotted acreage can vary widely by state.

The company typically needs to lease a certain portion of a drilling unit before drilling can take place. If the company does not obtain control of the necessary acreage, then production in that area might not proceed; in that case, the company might sell its interests in the leases it has obtained.

Permitting

Once the leases are in hand, the company must secure the necessary permits before it can proceed with drilling a well. Depending on the location, there can be local, state, tribal, and federal government agencies involved in the permitting process.

Who has authority over the permitting process?

Federal Government

There are several federal statutes, including the Clean Air Act and the Clean Water Act, that apply to shale energy development (for a summary of federal laws and regulations pertaining to shale development, see Appendix C). Federal agencies may delegate the implementation of federal laws to the states under federal oversight. States may adopt their own standards on these issues, although they must be at least as protective as the federal statutes—and can be more so. Federal agencies also directly regulate oil and gas development occurring on federal lands.

Tribal Government

Native American lands are often held in trust by the federal government, and therefore potential energy development on or near tribal lands involves coordination and negotiation with both the tribal government and relevant federal government agencies. There can also be unique laws and regulations pertaining to energy development on tribal lands.

State Government

States regulate shale gas development and production on their territory and may be the primary administrators of relevant federal laws. It is possible for several different state agencies to play a role in regulating shale development. The agency with primary authority varies from state to state; there may be a designated oil and gas commission, or the primary agency may be housed in the state’s department of natural resources or environmental protection agency (for the agency with primary authority in your state, see Table 2). The recent boom in shale energy development has resulted in many states finding that they have insufficient resources and staffing to meet the demands of administering the necessary regulations. 

Local Government

County and municipal governments often play a regulatory role in or near populated areas, where they may manage issues such as noise levels, lighting, traffic flow, and the required distance that the operation must maintain from residences or other sensitive areas (or setbacks). Zoning laws are the primary tool for local governments to manage shale development in their area. In some cases, local governments have attempted to impose limits or bans on shale development in their area, bringing them into conflict with the state’s authority over the development of natural resources. State courts are currently adjudicating some of these state preemption cases with varying outcomes (see Appendix C).

What must the operator do to obtain the necessary permits?

Once the company has gathered the leases in an established production unit, it must secure state and local permits prior to drilling an oil or gas well. In order to file for the permits, operators must prepare for a number of aspects of the development process, which vary from state to state. For example, the Colorado Oil and Gas Conservation Commission (COGCC) drilling permit application 1 includes the following elements:

  • Financial assurance—in most states, the company must post a bond that guarantees the funding for proper well abandonment and site restoration.
  • Leases and agreements—the operator must have acquired the mineral rights where it intends to drill. In Colorado it must also stake the site by surveying the land, mapping out the area where it intends to locate the well pad, and marking it with stakes to create a plot. The survey details are required in the permit application. In the case of a split estate (see Box 2), the operator must make arrangements made with the surface owner for access, either by signing a surface use agreement or by posting a bond.
  • Setbacks—to comply with setback regulations, operators must indicate the distance to the nearest public infrastructure. In a review of regulations in 31 states with existing or potential shale development, the nonprofit organization Resources for the Future (RFF) found that most states require setbacks from buildings and other sensitive structures. Setback distances range from 100 to 1,000 feet from the well. 2 Fewer than half of the states (12 of 31) require setbacks from water sources; Colorado is among them.
  • Groundwater monitoring—operators must conduct pre- and post-drilling groundwater monitoring and post the results on the COGCC website. As of May 2013, a limited number of states require baseline water well testing (8 of 31 surveyed). 3
  • Waste and wastewater disposal plan—operators must indicate how they plan to handle wastes from the drilling operation in a manner that meets the applicable regulations.

In addition to the drilling permit, the operator must obtain federal Department of Transportation (DOT) permits for the transport of heavy loads. Some states or localities may require operators to work with local agencies to designate which roads it intends to use or construct. The operator might also need to obtain a permit to construct temporary housing facilities for workers or to identify the source of water that it will draw on for its operations.

During this phase, the operator will typically bring in a small team of experts to begin the necessary assessments and prepare the plans. It might also hire a few additional local workers. Once the state approves the permits, the operator typically has a 1-2 year timeframe in which to construct the well pad site. 

Notes:

  1. Colorado Oil and Gas Conservation Commission, “Application for Permit to Drill – Form 2,” video (8:26) on website, accessed December 10, 2014.
  2. Resources for the Future, “A Review of Shale Gas Regulations by State:  Setback Restrictions from Buildings,” updated May 22, 2013.
  3. Resources for the Future, “Shale Gas Regulations.”