By Rory Carroll
SAN FRANCISCO (Reuters) - A federal judge has ruled the Obama administration broke the law when it issued oil leases in central California without fully weighing the environmental impact of "fracking," a setback for companies seeking to exploit the region's enormous energy resources.
The decision, made public on Monday, effectively bars for the time being any drilling on two tracts of land comprising 2,500 acres leased for oil and gas development in 2011 by the Interior Department's Bureau of Land Management in Monterey County.
The tracts lie atop a massive bed of sedimentary rock known as the Monterey Shale Formation, estimated by the Energy Department to contain more than 15 billion barrels of oil, equal to 64 percent of the total U.S. shale oil reserves.
Most of that oil is not economically retrievable except by hydraulic fracturing, or fracking, a production-boosting technique in which large amounts of water, sand and chemicals are injected into shale formations to force hydrocarbon fuels to the surface.
Fracking itself is not a new technology but its widespread use in combination with advances in horizontal drilling to extract oil and gas from underground shale beds has fueled a new onshore U.S. energy boom.
It also has sparked concerns about impacts on the environment, including questions raised about the potential effects of fracking on groundwater.
Environmental groups also criticize oil shale production as at odds with efforts to curb heat-trapping greenhouse gas emissions from fossil fuel combustion that scientists blame for global climate change.
California is implementing a host of policies to cut its greenhouse emissions, including a carbon cap-and-trade program that it bills as a potential model for other states.
The issue came into sharp focus in California last month when Governor Jerry Brown, who has long touted his record as an environmentalist, said the state should consider fracking technology to develop its shale reserves as a way of reducing reliance on imported oil.
U.S. District Judge Paul Grewal in San Jose ruled that the federal government erred, and violated U.S. environmental law, in declining to conduct a full-fledged environmental impact study of its oil leasing for the Monterey Formation.
JUDGE FINDS RISKS 'COMPLETELY IGNORED'
Grewal held that BLM's analysis was flawed because it "did not adequately consider the development impact of hydraulic fracturing techniques ... when used in combination with technologies such as horizontal drilling."
"The potential risk for contamination from fracking, while unknown, is not so remote or speculative to be completely ignored," Grewal wrote.
But the judge stopped short of ordering the leases canceled, as sought by environmental groups. Instead, he ordered the parties to confer and either submit a joint plan of action if they can agree or prepare to argue their respective cases for a remedy if they cannot.
"In any event, it is clear from the order and the general requirements of the law that BLM cannot allow drilling on the leases until and unless it completes a more thorough environmental review," said Brendan Cummings, a lawyer for the Center for Biological Diversity, which brought the suit with the Sierra Club.
He hailed the decision as a milestone in efforts to seek greater scrutiny and regulation of fracking.
"It's the first federal court opinion we're aware of that explicitly holds that federal agencies have to analyze the environmental impacts of fracking when carrying out an oil and gas leasing program," Cummings told Reuters.
But oil company representatives played down the ruling's significance, saying the judge took issue only with the BLM process, not fracking as a method of recovering oil.
"There are many hurdles that producers have to go through, and oftentimes they add delay and cost to energy production," said Tupper Hull, a spokesman for the refinery group Western States Petroleum Association.
"Hopefully the court will ultimately allow the lease to go forward and production to take place," he said.
Cumming said the outcome would likely have implications for a more recent and much larger lease sale of 18,000 acres for oil and gas development in the same general region, which the BLM approved under the same "flawed analysis."
He said the BLM should rescind those leases and "conduct the proper environmental review" or face more court challenges.
(Editing by Steve Gorman and Mohammad Zargham)