Day

August 7, 2013

07 August 2013

This Week in Hydraulic Fracturing

Volume 2, No. 31

Federal

BLM to study hydraulic fracturing on public lands in California. The Bureau of Land Management (“BLM”) announced it will prepare an environmental impact statement (“EIS”) to study the potential impacts of hydraulic fracturing in central California’s Monterey Shale formation. Based on the findings, BLM could amend the area’s resource management plan for oil and gas development on federal lands. With the state, BLM will concurrently review scientific literature regarding potential seismic impacts from drilling. The seismicity study will be led by the California Council on Science and Technology and will undergo peer review before publication and incorporation into the EIS. The studies were announced in response to a court ruling finding BLM violated the National Environmental Policy Act (“NEPA”) by issuing leases for hydraulic fracturing without adequately considering its potential environmental impacts.

BLM plan to allow oil and gas exploration in Montana struck down. The Ninth Circuit remanded a 2008 U.S. BLM plan to allow oil and gas exploration in an area of Montana designated as a national monument in 2001. The Montana Wilderness Association argued BLM’s plan violated the Federal Land Policy and Management Act, NEPA, and the National Historic Preservation Act (“NHPA”) when it allowed for exploration activities in the Upper Missouri River Breaks National Monument. The court found BLM violated the NHPA when it failed to consider the effect of increased traffic on historic areas, such as survey stations established by explorer Meriwether Lewis.

House Committee votes to block BLM hydraulic fracturing rules. The House Natural Resources Committee voted to advance a bill that would block BLM from finalizing its proposed regulation of hydraulic fracturing on federal land. Instead, state regulations would govern drilling activities. The bill’s proponents criticized the proposed BLM rule as duplicative and unnecessary. Although the bill may pass the House, it is not expected to pass the Senate.

Senators seek clarification on DOE power to revoke LNG export permits. Senate Energy and Natural Resources Committee Chairman Ron Wyden (D-Or.) and ranking member Lisa Murkowski (R-Alaska) wrote U.S. Department of Energy (“DOE”) Secretary Ernest Moniz asking whether DOE was empowered to revoke previously approved permits to export liquefied natural gas (“LNG”) to non-free trade countries. Sen. Wyden has asserted that exports could be restricted if domestic gas prices reach levels that weaken U.S. manufacturing and power sectors. DOE likewise has stated it could revoke or modify permits under “appropriate circumstances,” but the Senators are asking DOE to define the “appropriate circumstances” standard as well as whether DOE would consider the cumulative impact of natural gas exports and whether LNG exporters would receive a hearing before their permits were cancelled or modified.

House members seek answers on EPA water investigations. Members of the U.S. House of Representatives wrote EPA Administrator Gina McCarthy asking why the agency began investigations into claims of drinking water impacts from hydraulic fracturing in Pennsylvania, Texas, and Wyoming. After several years of investigation, EPA declined to take action in each case, engendering criticism from both hydraulic fracturing proponents and environmental groups. The representatives asked how often EPA has used its emergency powers under the Safe Drinking Water Act to investigate such claims and how it determines that “appropriate State and local authorities have not acted.”

States

Halek Operating ND fined $1.5 million. The North Dakota Industrial Commission fined Halek Operating ND LLC $1.5 million, the maximum possible, for the illegal disposal of wastewater in underground injection wells. The Commission is also pursuing criminal charges against Nathan Garber, the president of Executive Drilling, which bought the wastewater disposal site from Halek and allegedly continued the illegal disposal practices. According to the Commission, Garber instructed workers to mislead state inspectors regarding the company’s disposal practices. The wastewater was from hydraulic fracturing operations in the Bakken shale play.

Pennsylvania to monitor air quality in Marcellus Shale play. The Pennsylvania Department of Environmental Protection (“PDEP”) will be monitoring air quality at wells and compressor stations in southwestern Pennsylvania. Although PDEP recently imposed more stringent air emission standards for compressors, and prior PDEP studies showed that the area met federal ambient air quality standards, residents and activists have raised concerned about potential health impacts to residents living near gas well sites. A report on the findings will be issued in early 2014.

Colorado County blocks natural gas liquids pipeline. The Adams County Colorado Commission rejected a proposed route for the Front Range pipeline, a 435 mile pipeline that would carry natural gas liquids from Northern Colorado to Texas. The project is a joint venture of Anadarko Petroleum, Enterprise Products Partners, and DCP Midstream Partners. The Commission stated the pipeline would interfere with the county’s economic development plans. A project spokesman stated that it would continue to work with the county on a more acceptable route but that it was also considering its legal options.

Business

Platts creates new oil pricing index. Platts, the commodities pricing company, has created a new Light Houston Sweet daily assessment price. Previously, “the price of crude oil” has always referenced the West Texas Intermediate (“WTI”) index price at the New York Mercantile Exchange. For WTI, the benchmark price settlement point is in Cushing, Oklahoma, where terminals collect crude oil from Midwest production wells and imported oil from Houston before shipping to coastal refineries. Hydraulic fracturing, however, has led to pipelines and railway lines that allow crude oil to bypass Cushing and to go directly to refineries. The Light Houston Sweet price will be based on spot prices at three Houston crude oil terminals which Platts hopes will make for pricing that is more relevant for regional traders.

Pioneer Resources bets big on Spraberry/Wolfcamp field. Independent exploration and production company Pioneer Natural Resources Company is planning to spend $1.6 billion, half of its capital budget, on developing the Spraberry/Wolfcamp field. Many companies have been deterred from developing the field due to difficult geology, but Pioneer believes the field holds 50 billion barrels of recoverable oil and gas, second only to Saudi Arabia’s Ghawar oil field. Their research shows that shale strata in the field are several thousand feet thick, as opposed to a few hundred feet thick in most other plays. Pioneer plans on using a “stacked lateral” drilling method where horizontal wells are drilled below each other. This would allow the company to drill 30 to 40 wells from a single well pad.

Reinsurance industry seeking more data on risks. It has been reported that the reinsurance industry wants more information on the potential hazards of hydraulic fracturing in U.S. shale plays before determining whether to provide insurance policies and at what cost. Among other things, reinsurers are seeking a clearer set of best operating practices from oil and gas companies and are struggling with conflicting claims about risks from hydraulic fracturing. Among these best practices could be criteria for pre-drilling evaluations that identify abandoned wells, potential seismicity, shallow gas zones, and risks to aquifers; baseline sampling of nearby water wells; the disclosure of hydraulic fracturing fluid chemicals; and the use of a “closed loop” system for wastewater. Companies now largely cover shale play development with self insurance and surety bonds. Satisfying reinsurers, however, may become more important.

Oil company sues well field service companies for price fixing. Citing a U.S. Department of Justice investigation into the possibility of anticompetitive practices, Cherry Canyon Resources LP filed a class action suit in federal court alleging that Halliburton, Schlumberger, and Baker Hughes conspired to raise prices and squeeze out smaller competitors. According to the suit, the hydraulic fracturing boom attracted many new well service companies, leading the defendants to restrict the price of services in order to increase prices and the companies’ market share. Halliburton, Schlumberger, and Baker Hughes are the three largest publicly traded well service companies in the country, accounting for about 60% of U.S. marketshare. The suit asserts that it is filed on behalf of all companies that contracted with the defendants for well field services since May 29, 2011 and is seeking treble damages.

Encana moves into Michigan. Encana Corporation is planning to drill up to 500 wells in the Antrim and Collingwood shale plays, situated in the northern tier of Michigan’s Lower Peninsula. The company believes that both plays are rich in natural gas. Opposition groups are forming to block the project, claiming shale development will contaminate drinking water and cause earthquakes. Encana has been exploring the Antrim and Collingwood plays since 2009. Governor Rick Snyder is encouraging shale production, stating that it will bring jobs to Michigan.

Hess sells off energy marketing division. London-based Centrica PLC purchased Hess Corporation’s natural gas and electricity delivery unit for $1.03 billion. The unit, based in Woodbridge, New Jersey, provides gas and electricity to 23,000 area customers and will be run by Centrica’s U.S. subsidiary Direct Energy Business. The sale is part of Hess’ strategy to divest its downstream assets to focus on exploration and production. Hess has already sold off $4.5 billion in assets this year. Centrica, however, is looking to dramatically increase its North American presence within the next five years. The company is reportedly interested in acquiring pipeline and storage capacity from other U.S. companies.

M&A activity in energy sector down. Deloitte issued a report finding that mergers and acquisitions in the energy sector have fallen over last year. In the last half of 2012, there were 109 U.S. mergers and acquisitions worth $84.4 billion. The first half of 2013 saw 76 deals worth $34.5 billion. The report suggested several possibilities for the decline, including low natural gas and natural gas liquids prices, slowing economic growth in Asia, the potential for changes to energy tax policies, and a general industry transition from acquiring new assets to developing those assets. Further, “distress sales” of assets by companies struggling with debt have largely leveled off but may pick up in the future if independent exploration and production companies cannot weather a prolonged period of significant debts and low gas prices. The report did note that investment in master limited partnerships in the pipeline and midstream asset sector was doing very well, up to $25.1 billion in the first half of 2013 versus $18.7 billion in the second half of 2012.

Chemical tankers booming as chemical exports to Asia surge. The influx of low cost natural gas from hydraulic fracturing is leading to record U.S. chemical exports, especially to Asia where China is the largest importer of chemicals. The specialized tankers used to ship the chemicals are also setting records. Freight rates are at a five-year high and set for a 12% increase next year, according Norwegian investment bank RS Platou Markets AS. Norwegian tanker owner Stolt-Nielson is one of the biggest beneficiaries with Platou estimating shares to rise 24% over the next year with fleet use expected to approach 90%. Utilization may increase further in 2015 when several new U.S. chemical plants and unit expansions are expected to come on-line. Utilization on a ton-mile basis is further increased because shipping chemicals from the U.S. to Asia is a much longer trip than shipping from the Persian Gulf. Shippers are ordering new tankers, although they may not arrive in time to prevent shortages and higher shipping rates.

Research

Study of wells near Barnett Shale. A new study by a University of Texas-Arlington researcher, published in Environmental Science & Technology, found that wells closer to Barnett Shale drilling operations were more likely to have elevated levels of arsenic, strontium, and barium, although the study could not conclude that drilling caused contamination as other wells near the drilling did not have elevated contaminant levels and the researcher acknowledged there are other potential causes. The study examined 91 drinking water wells within 3 miles of a natural gas well and compared those to other wells, both within and outside the Barnett Shale, where there was no drilling. Nearly all of the wells contained some level of strontium and barium; 29 had arsenic concentrations above regulatory levels and two had selenium concentrations above regulatory levels. Comparisons to baseline data taken between 1989 and 1999 showed that water quality in many of the wells has declined.

Study of North Dakota flaring. Activist investor group Ceres issued a report finding that Bakken Shale oil drillers doubled the amount of natural gas flared since 2011. Ceres estimated that 266 million cubic feet of gas per day, with a current market value of nearly $1 billion, was burned off instead of being captured and sold. With the price of crude oil nearly 30 times higher than natural gas, there is little economic incentive to construct natural gas pipelines to the area and hence the infrastructure to sell the gas does not currently exist. Ceres urged that new regulations be adopted, while a spokesman from the North Dakota Department of Mineral Resources stated that new tax incentives to build pipelines should reduce flaring in the future.

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