Global Traditional Energy Resources

In North Carolina, assessment of potential shale gas resources is ongoing.¹ The United States Geological Survey believes that there may be commercially viable reserves in portions of the Deep River Basin and the Dan River Basin.² Deep River is the larger of the two.³ The North Carolina Department of Environmental and Natural Resources has estimated that the Sanford sub-basin, which lies within the broader Deep River Basin, could contain 309 billion cubic feet of technically recoverable gas.⁴

In 2015, the North Carolina Geological Survey took soil samples in Stokes County, which confirmed the existence of a shale gas deposit in the Dan River Basin.⁵ Triassic-era shale rock formations have been found in Lee and Chatham counties, where it is believed there is the most promise for energy exploration in the state.⁶

Statutory and Regulatory Framework

Until 2012, North Carolina prohibited both horizontal drilling and hydraulic fracturing through antiquated laws that, among other things, banned drilling outside a specified vertical diameter.⁷

Beginning in 2011, however, the North Carolina General Assembly directed the then-North Carolina Department of Environmental and Natural Resources (“DENR”),⁸ together with the State Departments of Commerce and Justice, to conduct an in-depth study of the use of directional and horizontal drilling within the State.⁹ DENR released its final report on April 30, 2012, concluding that hydraulic fracturing could be done “safely as long as the right protections are in place.”¹⁰ During the 2012 legislative session, the North Carolina legislature enacted the “Clean Energy and Economic Security Act” (the “CEESA”).¹¹ The bill repealed the prohibition on hydraulic fracturing but simultaneously placed a moratorium on permits until a comprehensive regulatory update was completed and additional legislative action was taken.¹²

The CEESA reconstituted the North Carolina Mining Commission as the Mining and Energy Commission (the “MEC”) and charged it with developing “a modern regulatory program for the management of oil and gas exploration and development in the State and the use of horizontal drilling and hydraulic fracturing treatments for that purpose.”¹³ The CEESA also created a Joint Legislative Commission on Energy Policy to which the Commission is required to report on a quarterly basis.¹⁴

In June 2014, as the MEC was nearing completion of its first comprehensive set of fracking rules, the state legislature enacted another law: the North Carolina Energy Modernization Act (the “Energy Modernization Act” or “Act”).¹⁵ Among other things, the Act lifted the moratorium on hydraulic fracturing and established a timeline for the eventual issuance of drilling permits.¹⁶ In addition, the Energy Modernization Act stated that, on July 31, 2015, the existing MEC would dissolve, and its responsibilities would be divided between two separate commissions, the Oil & Gas Commission and the Mining Commission.¹⁷ Finally, the Act restricted the ability of local governments to enact or enforce ordinances prohibiting oil and gas exploration, development, and production.¹⁸ The MEC completed its first set of fracking rules and released them for public comment in July 2014.¹⁹ After reviewing over 200,000 public comments,²⁰ the MEC finalized the rules in November 2014.²¹ In December 2014, the Rules Review Commission approved the MEC’s rules;²² the state legislature approved the rules and Governor Pat McCrory signed them into effect shortly thereafter in March 2015.²³ The rules cover a variety of topics, including the permitting process,²⁴ financial assurance,²⁵ chemical disclosures,²⁶ baseline testing and water supply monitoring,²⁷ setbacks,²⁸ well construction,²⁹ well spacing,³⁰ waste management,³¹ pit and tank construction,³² and well closure.³³

In October 2015, in response to various local efforts to further regulate hydraulic fracturing activities,³⁴ the North Carolina legislature passed Senate Bill 119, which, among other things, broadened the language originally enacted in the Energy Modernization Act aimed at ordinances prohibiting oil and gas exploration, development, and production.³⁵ The amended language now invalidates “all provisions of local ordinances . . . that regulate or have the effect of regulating oil and gas exploration, development, and production activities.”³⁶ Despite these developments, Rockingham County and the City of Reidsville each established a two-year moratorium on oil and gas development, including hydraulic fracturing, in November 2015 and April 2016, respectively.³⁷ Chatham and Lee counties also adopted fracking moratoriums set to expire in late 2018³⁸ and late 2019³⁹ respectively. The effect of these local measures remains uncertain in light of the amended prohibitions on local regulation of hydraulic fracturing set forth in the Energy Modernization Act, described above.⁴⁰

In November 2014, Governor McCrory filed a lawsuit challenging provisions in the Energy Modernization Act providing for legislative appointments to the Oil & Gas and Mining Commissions.⁴¹ In January 2016, the North Carolina Supreme Court determined that because the legislature appointed a majority of the commissioners and because the Governor’s ability to remove commissioners was limited, the appointments provision in the act unconstitutionally encroached on executive power.⁴² As a result, the two commissions were not permitted to act until the legislature modified the law and new appointments were made. In the wake of the North Carolina Supreme Court’s decision, the North Carolina legislature reconstituted the Oil & Gas Commission in July 2016 and gave the governor the power to appoint the majority of commissioners.⁴³

However, the hydraulic fracturing rules drafted by the MEC are on hold pending further legal action by the state.⁴⁴ A court order issued in May 2015 in a lawsuit filed by the Haw River Association prevented the MEC and the first iteration of the Oil & Gas Commission from “processing any drilling applications and creating any drilling units,” which effectively prevents the state from using the rules established by the MEC.⁴⁵ That order remains in effect, and legal issues involving the rules, which the new Oil & Gas Commission may choose to amend or repeal, remain unsettled.⁴⁶

Recent News and Developments

First Meetings of the New Oil & Gas Commission

The newly reconstituted Oil & Gas Commission has held two meetings as of July 2018 following two years of inactivity due to the lawsuit challenging legislative appointments to the Oil & Gas and Mining Commissions as described above. A third meeting is scheduled for August 2018. The initial meetings have largely been focused on developing the newly reconstituted Oil & Gas Commission’s internal structure, processes, procedures, and operating guidelines. A law passed in 2017 would allow the new Oil & Gas Commission to amend or repeal the hydraulic fracturing rules adopted by the MEC in 2015 if it chose to do so, but the new Oil & Gas Commission has not yet taken any action with respect to these rules.⁴⁷

Last updated September 2018.