Smaller companies involved with the exploration and production (E&P) of oil and natural gas from shale are opting to drill on state lands over federal lands due to longer permitting with the latter, and some federal regulations could ultimately be challenged in court, according to testimony before the Senate Energy and Natural Resources Committee on Tuesday.

The hearing, one of three scheduled by the committee, was to discuss energy accountability and reform legislation. The hearings are part of an effort by the committee’s chairman, Sen. Lisa Murkowski (R-AK), and others, including some Democrats, to assemble a comprehensive energy bill for a vote later this year (see Daily GPI, May 7; Feb. 24).

During the hearing, Murkowski touched on one of the bills she introduced — S 1230, which would instruct the Interior Department’s Bureau of Land Management (BLM) to coordinate with state oil and gas regulatory programs to create consistent rules and processes.

“When we turn to the federal lands — our BLM lands, or any other agency — they’ve got their own rules,” Murkowski said. “They’ve got their own measure for production, accounting for royalties, inspecting meters and operations. In many cases, the state laws are clearly superior to the federal laws, and yet what we have is just this duplication of effort — a redundancy that really doesn’t ensure greater protection to the taxpayer. All it does is create a more complicated and complex operating environment.”

Mark Mills, senior fellow for the Manhattan Institute for Policy Research, told Murkowski that the regulatory environment was a “critical issue” for small E&P companies.

“The oil and gas business is populated by thousands of small- to mid-sized enterprises,” Mills said. “The friction that’s created is very real; it’s very expensive and it slows development. We have the evidence of how big an impact it is.

“There’s a lot of shale on federal land. We know how much the shale oil and gas production has not increased on federal land and how much it has increased on state lands. It’s a very simple metric — not because the shale doesn’t exist, [but] because you’re comparing permits that take days and weeks to permits that take years. If you’re a small business employing 20 people, you can’t wait and pay for their salaries for a permit that takes a year. You will go where the permit takes 40 days.

“No one in that business is looking to avoid the permitting requirements; they just want them to be clear and expeditious.”

Murkowski agreed. “I think this is where the great frustration is,” she said. “It’s not as if the states are not doing a good job. In fact in many cases [they are doing] an exemplary job of regulating.

“Somehow we’ve gotten to the point where unless it’s regulated by the feds, it’s just not good. I’m not quite sure how we got there, but I want to change that dynamic. I think that states have done good jobs, continue to do good jobs, and I think that we need to recognize that. And yet so many of our policies say ‘unless it’s federal oversight on top of what the states are doing, we can’t trust you.’ We’ve got to get away from this lack of trust of what our states have been doing.”

Sen. Cory Gardner (R-CO) touched on last week’s draft assessment by the Environmental Protection Agency that hydraulic fracturing (fracking) has not led to systemic impacts on drinking water (see Shale Daily, June 4). He added that three weeks ago, Colorado officials met with the BLM to discuss a memorandum of understanding over a possible variance to a BLM rule governing fracking on public and tribal lands, which is to take effect on June 24 (see Shale Daily, April 28; April 16; March 26).

“What we have been told is that BLM is still waiting for guidance and templates of the variance request from Washington, and there’s little chance that the state could have a variance in place by June 24,” Gardner said.

Karen Harbert, CEO of the Institute for 21st Century Energy, said states like Colorado “have some of the best environmental permitting regulations in the country.

“The federal process, by BLM’s own statistics, is not as good as yours,” Harbert said. “Adding an inferior process on top of a superior process doesn’t sound like good policy or good regulation.

“In talking with the BLM — and looking at the regulatory process and the actual regulation — we entered into the record the fundamental question, ‘Why do we need this?’ They were supposed to answer that in the final regulation, [but] they did not. So it is clear that this is ultimately going to end up in the courts, because they have not justified why this process is needed.

“In the interim, they’re going to leave states like Colorado and investors in limbo, not knowing what rules to follow. [That’s] not good for Coloradans, it’s not good for the industry, and it’s not good for continued production. They’re introducing a level of uncertainty that is needless and unjustified.”

Earlier this month, Wyoming and Colorado filed in federal court for a preliminary injunction to block the BLM’s new fracking rule (see Shale Daily, June 1). The states joined earlier filings made by the Independent Petroleum Association of America and Western Energy Alliance, which filed for similar injunctions on May 15. The states’ filing was made in the U.S. District Court for the District of Wyoming.