North Carolina Bill Aims to Send Signal on Future Shale Development

North Carolina hopes recent legislation introduced into its general assembly will send a "very clear signal" to oil and gas companies that the state wants shale gas exploration in the state, a state representative told Rigzone in an interview Monday.

State Sen. E.S. "Buck" Newton, the sponsor of Senate Bill (SB) 76, the Domestic Energy Jobs Act, told Rigzone that, while the ban on horizontal drilling and hydraulic fracturing has been lifted, the state hopes to provide certainty to the energy industry by fixing a specific date in which permits for shale gas drilling can be pulled.

Newton, who represents Johnston, Nash and Wilson counties in eastern North Carolina, introduced the bill last week. SB 76, which would authorize the state's Department of Environment and Natural Resources to issue permits for oil and gas exploration and production, including horizontal drilling and hydraulic fracturing, on or after March 1, 2015.

North Carolina officials hope to send a signal in two ways – one, that the legislature is very serious about pursuing shale exploration, and two, that the state is working "with all deliberate and purposeful speed" to get itself ready to issue permits.

Early indicators show North Carolina to have shale gas reserves that may be on the order of the Fayetteville play in Arkansas, with approximately 1.4 million surface acres with shale deposits of an average thickness of 200 feet. North Carolina has three basins with shale potential. The Deep River Basin, the one that is most talked about, has wet gas reserves.

Last year, the General Assembly passed a bill -- over the veto of then Democratic Gov. Beverly Purdue's veto a bill -- that would authorize and legalize hydraulic fracturing and horizontal drilling. General Assembly ratified the Clean Energy and Economic Security Act, which reorganized the state's Mining Commission as the North Carolina Mining and Energy Commission, and directed the commission and other state regulatory agencies to develop a modern regulatory program for the management of oil and gas activity in the state, including horizontal drilling and hydraulic fracturing.

Historically, horizontal drilling had been effectively illegal in the state because of fears that landowners might use horizontal drilling to drill into a neighboring property and steal another landowners water supply, said Bill Weatherspoon, executive director of the North Carolina Petroleum Council, a division of the American Petroleum Institute, in an interview with Rigzone. The law, which dated to the 1940s, forbade drilling to vary more than 3 degrees off center when a well was drilled.

The bill will rewrite existing North Carolina oil and gas legislation in part to modernize the tax structure.

"We wanted to give companies an incentive to come earlier rather than later," Newton commented.

The legislation includes a severance tax, which will be 1 percent in the first year of production, 2.5 percent in the second year, and then will go to a floating rate that would adjust with natural gas prices, ranging from 2.5 percent to 6 percent. Energy industry officials, in early discussions with state officials, really like the proposed severance tax, which gives them flexibility, Newton said.

SB 76 will also attempt to create a one stop shop for pulling permits so that companies will not have to go to different agencies. One thing North Carolina officials want to make clear is that oil and gas companies will not have to pay local taxes or impact fees, other than regular property taxes, to ensure that local governments can't use impact fees as a means to create barriers.

"Not having any experience in the oil and gas industry, we get to draw on the experiences of other states that have been in the industry for a long time and to cherrypick the best of the best," Newton said, adding that the bill not only covers regulatory changes for onshore drilling, but changes that could govern offshore drilling down the road.

"We're trying our best to introduce standards and practices the industry finds helpful and familiar."

The state has no horror stories of environmental problems related to oil and gas, and has a clean slate which state officials hope to keep clean through the use of technological standards, said Weatherspoon.

"The state is trying to take a very calm, study-type approach," said Weatherspoon of the two-year timeframe to accomplish the revisioning of rules and regulations before 2015.

While the counties Newton represents are not among the 10 to 12 counties that have shale gas resources, Newton's familiarity with what oil and gas exploration and development have done for other U.S. state economies – and the need to create jobs and new sources of revenue within North Carolina – prompted him to introduce the legislation.

The legislation is also part of Newton's effort to help North Carolina Gov. Pat McCrory frame his plans to bringing the oil and gas industry for North Carolina. During his election campaign last fall and his inaugural speech, the newly elected governor expressed his desire to get North Carolina into the energy business.

The new Republican-dominated leadership in the state not only is showing interest in developing the state's onshore shale resource, but its offshore interests as well. McCrory already is working with the governors of South Carolina and Virginia to re-open the Atlantic Outer Continental Shelf for exploratory drilling.

Newton doesn't anticipate the bill not passing, due to the fact that McCrory and North Carolina's General Assembly – with Republicans now controlling both for the first time in more than a century – favor bringing oil and gas development to the state. Newton said he hadn't briefed McCrory on SB 76, but saw no reason to think he wouldn't fully back the legislation.

No Significant E&P Industry to Date

Other than some coal mining activity, the state has not had a significant oil and gas exploration and production industry. North Carolina has been well-known for its tobacco, textiles and furniture-making industries, but the state's economy has been in transition for the past 50 years, with banking, pharmaceutical and life sciences and transportation now major industries in the state.

To date, 125 oil and gas wells have been drilled in the state, but all were capped and abandoned, said Weatherspoon. However, a discovery in near the central North Carolina town of Sanford in Lee County indicated the state could have shale gas potential.

Some leasing activity offshore North Carolina for exploratory drilling did take place in the 1970s, when Mobil Corp. bid $103 million for one offshore tract 40 miles offshore Cape Hatteras, N.C., Weatherspoon noted. While geologists believe there might be a natural gas play offshore the state, drilling never took place due to political opposition.

The effort to update North Carolina's oil and gas regulations are all about jobs and revenue, said Weatherspoon, noting that the state ranks among the top U.S. states in terms of unemployment.

"Politically, there's strong motivation for state officials to do everything they can to create jobs."

Gov. McCrory has made revitalizing the state's economy his No. 1 priority. With the fifth-highest employment rate in the country, McCrory said he hoped that Republicans and Democrats from all areas of the state can work to help turn North Carolina's economy around. These efforts include better matching the talents and expertise of the state's workforce with opportunities available through educational programs.

In December of last year, North Carolina's unemployment rate rose to 9.2 percent from 9.1 percent in November. The state started 2012 with a 10.2 percent unemployment rate.

While early indicators show the state to have good potential for gas reserves, environmentalists have worked hard to play upon the fear of the unknown, said Newton, who pointed to the lively debate between environmentalists and legislators when the bill was introduced.

Newton expects debate to continue, but also believes that people in the state are hungry for economic growth and jobs, noting that, "The more people learn about it, the more excited they are."