Regulation of Hydraulic Fracturing in QLD & NSW

In Brief

• In Queensland, new regulation has recently been introduced (under the new section 312W of the Environmental Protection Act 1994) to prohibit, beyond a maximum amount, the use of petroleum compounds containing benzene, toluene, ethylbenzene and xylenes (commonly referred to as BTEX) in the process of fracture stimulation.
• Currently, there are no laws in NSW specifically addressing hydraulic fracturing and the use of BTEX. However, prior to March 2011 elections in New South Wales, the NSW Coalition (now in government) had announced that it would ban the use of BTEX in fracture stimulations. At present, it is uncertain whether the NSW Coalition Government will proceed with its pre-election pledge.
• Despite the existing uncertainties surrounding the extent to which the use of hydraulic fracturing fluids will be regulated, companies must carefully assess the impact of legislative measures on their fracture stimulation activities in Queensland and NSW.

What is ‘fraccing’?

Hydraulic fracturing (or ‘fraccing’) is a technique used by the oil and gas industry to improve the production efficiency of production wells, including CSG production wells. A hydraulically-created fracture acts as a conduit in the rock or coal formation that allows the oil or gas to travel more freely from the rock pores. To create such a fracture, a viscous, water-based fluid is sometimes pumped into the coal seam under high pressures until a fracture is created. These fluids consist primarily of water, but in some cases they also contain various additives such as BTEX.

This use of fraccing has raised environmental concerns in Australia, particularly in Queensland and New South Wales where most of the fraccing activities are reportedly taking place. Opponents of fraccing argue that water supplies are in jeopardy. In response, industry groups have rebutted allegations that fraccing is causing the contamination.

Queensland Legislative Framework

In August 2010, an underground coal gasification pilot plant in Kingaroy, Queensland was closed down after traces of benzene and toluene were reportedly found in bores near the plant. This incident resulted in a growing public concern and demands for regulation. In response to those demands, the Queensland Minister for Environment and Resource Management announced that the Queensland Government would ban the use of BTEX in coal seam gas extraction. The Minister further stated that he would be writing to all existing CSG environmental authority holders to advise them of the new rules and regulations.

In October 2010, 'the Natural Resources and Other Legislation Amendment Act (No. 2) 2010 (NROLA Act)’ was introduced. The policy objectives of the Amendment Act included amending the Environmental Protection Act 1994 (Qld) (EP Act) to:

• prohibit the use of certain chemicals to stimulate the fracturing of coal seams and other geological structures; and
• improve notice requirements of incidents that may cause serious or material environmental harm to affected landholders.

According to the Explanatory Memorandum to the NROLA Act, the policy objectives are achieved by amending the EP Act “to create a mandatory condition on current Chapter 5A environmental authorities (petroleum, gas, greenhouse gas sequestration and geothermal activities) that prohibits the use of restricted stimulation fluids, which are fluids which contain petroleum hydrocarbons containing benzene, toluene, ethylbenzene or xylene (BTEX) or chemicals which are likely to produce BTEX as they break down”.

The Explanatory Memorandum to the NROLA Act further states that the prohibition is precautionary in nature and will ensure that, in the future, BTEX chemicals will not be used in the hydraulic fracturing process.

While the Bill introducing NROLA Act stipulated a mandatory condition on Chapter 5A activities prohibiting the use of restricted stimulation fluids, after industry consultation, the relevant section (section 312W) was amended to prohibit BTEX in levels greater than the maximum amount prescribed under a regulation. This is discussed in more detail below.

Restricted stimulation fluids [section 312W EP Act (Qld)]

In Queensland, environmental authorities do not currently contain any specific mandatory legislative prohibitions on the type of chemicals that can be used for stimulating (including hydraulic fracturing) of coal seams.  However, section 312W of the EP Act now imposes a deemed condition into the chapter 5A environmental authorities that prohibits the use of restricted stimulation fluids.

Section 312W deals with the “statutory conditions of environmental authority (chapter 5A activities)” and states that “an environmental authority (chapter 5A activities) is taken to include a condition prohibiting the use of restricted stimulation fluids”. It provides for “the use of hydrocarbon chemicals to stimulate the fracturing of coal seams” as an example of such use.

Section 312W further defines “restricted stimulation fluids” as “fluids used for the purpose of stimulation, including fracturing, that contain the following chemicals in more than the maximum amount prescribed under a regulation:

1. petroleum hydrocarbons containing benzene, ethylbenzene, toluene or xylene;
2. chemicals that produce, or are likely to produce, benzene, ethylbenzene, toluene or xylene as the chemical brakes down in the environment.”

It is noteworthy that currently there is no regulation in Queensland specifying the maximum amount of BTEX.

        Mandatory Notification

Under the Petroleum and Other Legislation Amendment (POLA) Regulation 2011, which took effect on 7 April 2011, petroleum authority holders must notify each landowner and each occupier when carrying out or completing fraccing. Further, within 2 months of any fraccing activity, permit holders must also lodge a completion report with the Department of Employment, Economic Development and Innovation that includes:

• statement on the composition of fluids used at each well
• an assessment of the implications of fraccing for each well.

Legislative framework in New South Wales

In December 2010, the former NSW Labour government announced that it was considering new requirements for CSG exploration licences which would include tighter environmental controls during the approval process.  It also announced that it will examine banning the use of BTEX chemicals in situations which may pose a risk to groundwater.

Prior to the State elections in March this year, the NSW Coalition indicated that, if elected, it would take a similar approach towards the use of BTEX. According to the “Strategic Regional Land Use Policy”, published in January 2011, an elected NSW Coalition government would:

• where CSG activities involve interference with groundwater systems, require that proponents must obtain an Aquifer Interference Approval under section 91 of the Water Management Act 2000;
• review relevant petroleum well construction and fraccing standards to ensure that inter-aquifer leakage is prevented;
• develop better standards;
• ban the use of BTEX in fraccing fluids;
• require CSG proponents to report on the location of wells to be stimulated by fraccing, details of chemicals used, the toxicity of ingredients and mixtures; and
• demonstrate that fraccing activities won’t result in environmental harm; including inter-aquifer damage and contamination.

If the Coalition’s pre-election blueprints could be taken as a guide for its approach towards fraccing activities, it would be reasonable to expect the new NSW Coalition Government to implement tougher regulations on the use of hydraulic fracturing fluids either in the form of a total ban on the use of BTEX fluids in fraccing process or by setting a threshold level for such use (as has been done in Queensland).

Future Outlook

In Queensland, regulation is expected to be introduced to prescribe the threshold amount for BTEX fluid under the new section 312W of the EP Act. In New South Wales, whatever regulatory path the government decides to take (i.e. outright ban or restricted use), the use of fraccing fluids is expected to become subject to  regulation.

Coal seam gas companies and drilling contractors should therefore plan for the new regulatory environment and carefully assess the impact of legislative measures on their fraccing activities in Queensland and NSW and on their existing and future contractual arrangements.

This article was written by Andrew Bruton, Partner and Amir Kordvani, Solicitor.

Related Articles

• Energy and Resources June 2011 Newsletter
• PPSA Snapshot: Energy and Resources
• Regulation of Hydraulic Fracturing in QLD & NSW
• Changes to the pricing methodologies
• NSW Strategic Regional Land Use Policy
• HWL Ebsworth welcomes Peter Dreher and Amir Kordvani

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Important disclaimer: The material contained in this publication is of a general nature only and is based on the law as at 9 June 2011. It is not, nor is intended to be, legal advice. If you wish to take any action based on the content of this publication we recommend that you seek professional advice.