By Madeline Detelich
When Denton citizens came together last year to pass an unprecedented local ban on new hydraulic fracturing, retaliation by the powerful oil and gas industry seemed inevitable. With the passage of HB 40 this year, the 84th Legislature and Governor Greg Abbott reasserted the supremacy of the oil and gas industry lobby in the state of Texas. While it may not have come as a surprise, its predictability did little to soften the blow.
The new law severely limits local governments’ ability to protect their citizens from harm caused by the oil and gas industry. Local bans and regulation of below-ground-activities—such as making sure wells have shut-off valves in the event of a hurricane or allowing city officials to inspect the cement and casing jobs—are strictly prohibited. Municipalities, counties, and other political subdivisions are only left with limited power to regulate above-ground activity related to an oil and gas operation and only if those regulations are deemed “commercially reasonable.”
And just what is “commercially reasonable”? The new section of statute that HB 40 created defines it as:
“a condition that would allow a reasonably prudent operator to fully, effectively, and economically exploit, develop, produce, process, and transport oil and gas, as determined based on the objective standard of a reasonably prudent operator and not on an individualized assessment of an actual operator’s capacity to act.”
As confusing as that sounds, it seems like the requirement is vague enough to cover just about anything. At least a reasonably prudent reader of the text might think so. If commercial reasonability was the only metric that we tested our laws against, it seems that most regulations would have to be thrown out using this arbitrary language. While there are some expectations in contract law about how a reasonably prudent operator should behave, the legislature chose not to include language suggested by Sierra Club and others that would have defined a reasonably prudent operator as one that considers the surface rights of nearby property owners.
Crumbling Roads – Just One of Many Negative Impacts
Oil and gas operations have a large impact on the communities where they are located, so it is understandable why local governments would be interested in maintaining some ability to act on their constituents’ behalf. You can see – and feel – a great example of this impact by taking a drive through one of the main shale plays in the state and looking at the crumbling pavement. The rural infrastructure was not built to endure the type of industrial traffic that accompanies such a boom in oil and gas production. As a result, the roads are torn up and dangerous while maintenance and upgrades lag.
That the roads in the Eagle Ford and Permian Basin shale plays are suffering due to the explosion of industrial traffic is not news. Many news sources (examples here and here) have thoroughly reported on the woeful state of the roads in south and west Texas from the beginning of this boon in Texas natural gas production. Nonetheless, the problem persists because counties simply cannot afford to repair all the damage—TxDOT has estimated the cost at $1 billion a year in additional funding—despite the new influx in wealth that the industry has brought.
In 2013, the state got involved in the issue. The 83rd Legislature passed bills (HB 1025 and SB 1747) that gave the cash-strapped TxDOT $225 million to allocate to counties in oil and gas production areas. SB 1747 established the criteria for eligibility for the grants, but critics argued that TxDOT did not follow the law, handing out grants too loosely. LaSalle County even sued TxDOT. With too many hands in the underfunded cookie jar, the program barely made a dent in the problem.
This year, the 84th Legislature passed HB 4025, a bill that should address the concerns of LaSalle County and others by tightening the criteria for the TxDOT grants. Also, TxDOT can expect to have about $1.2 billion more this year because of last year’s successful proposition (Prop 1) to divert half of all severance taxes—taxes charged for extracting non-renewable natural resources—from the state’s Rainy Day Fund to the State Highway Fund. While the purpose of this cash is not specific to the problems facing roads in the Permian Basin and Eagle Ford shale plays, state officials have proposed spending 15 to 20 % of it there. Time will tell if the new laws will help the counties finance the expensive repairs, but so far, funding has fallen short and left counties with little recourse outside of waiting for voluntary donations from the industry.
What hasn’t occurred is an initiative to hold the oil and gas industry accountable for the consequences of conducting their heavy industrial operations in small, rural communities.
It might seem that using severance taxes to repair the infrastructure is one attempt to do this, but that’s not how taxes are supposed to work. Taxes on people and companies alike are levied to provide the state with revenue that the state then uses to fund activities that are necessary and beneficial to the people in the state. Without raising taxes on the industry to cover the damages and instead relying on existing tax revenue, we are subsidizing the oil and gas industry; we are transferring the costs from the industry to the individual taxpayer.
In fact, deductions, exemptions, and rate reductions have slashed many producers’ tax liabilities to zero, bringing down the overall tax rate from 7.7% to 2.9%. According to a recent Legislative Budget Boardstudy, over half of all operations take advantage of the “High-Cost Natural Gas Drilling Exemption.” Despite its name, this exemption is based purely on production definitions established in the 1970s, allowing, in one egregious example, a $24,000 well to be certified “high-cost” when the median drilling cost was $2.3 million. This finding led the Legislative Budget Board to recommend reducing the incentive; regrettably, with oil and gas companies lobbying heavily to prevent such changes, legislation went nowhere.
Nevertheless, taxes, donations, and grant programs might be able to patch many of the roads in the state’s shale plays, but what is the point if there is no plan to sustain the infrastructure by preventing or at least limiting the industry from ruining Texas roads?
Regulatory Dead End
Now, with HB 40, it seems that it would be all but impossible for local governments to set about creating such rules. Imagine an example in which a county designates certain roads for industry use and makes others off-limits in the interest of maintaining a safe and drivable path for residents and other businesses. If this route were not the shortest and most direct path possible, an operator could argue that they would be forced to incur more costs in the form of extra transportation costs. Therefore, the operator could challenge the rule under HB 40 citing that it is not commercially reasonable.
Foreseeing this possibility, during the debate over HB 40, county officials asked the House and Senate to include language clarifying that counties would continue to be able to regulate traffic and road regulations. The Legislature refused, stating that the legislative intent was clear that counties still could regulate traffic from oil and gas operations, and that no actual language was needed.
The oil and gas industry is making a killing off of our state’s natural resources but such extreme acceleration of production has consequences, the state of the roads is just one example. Nobody knows this better than the people living near the fracking operations, so it just makes sense to allow local governments to mitigate some of the adverse affects of the industry. Induced seismicity, with the damage it does to homes and businesses, is another prevalent example. Yet HB 40, with its vague language, may severely curtail their ability to improve their situation by making the companies pay for the damage they’re doing, or, better yet, prevent the damage from occurring in the first place.