This Week in Hydraulic Fracturing

Volume 2, No. 38

Federal

Environmental groups move to block Utah oil and gas leasing, sue over air quality. Several environmental groups filed an administrative protest with the U.S. Bureau of Land Management (“BLM”) to block the Bureau’s proposal to lease blocks within Utah’s 2,000 square mile San Rafael Swell for oil and gas development. They argued that BLM failed to sufficiently consider the environmental consequences of oil and gas leasing. The lease auction is currently set for November 2013. Separately, environmental groups filed suit against Environmental Protection Agency (“EPA”), claiming that it must classify Utah’s Uinta Basin as a non-attainment area for ozone. They argue that oil and gas development is responsible for the area exceeding the national ambient air quality standard for ozone of 0.075 parts per million.

Japan has been seeking more U.S. LNG exports. U.S. Department of Energy (“DOE”) documents show that Japan has been lobbying for more U.S. liquefied natural gas (“LNG”) exports since March 2011, fearing that blackouts could cripple the world’s third-largest economy. The country recently took its last operating nuclear plant off-line for repairs, and government officials stated Japan only has a two to three week supply of LNG with most of its exports coming from an unstable Middle East. Japanese officials warned that supply disruptions could send approximately 1/3 of the country into darkness. The danger of a blackout is becoming acute as Japan faces increasing power demands during winter.

New projects press for preferred LNG export approval. EOS LNG and Barca LNG filed petitions for approval to export LNG to non-free trade countries from floating liquefaction facilities that would be constructed offshore of Brownsville, Texas. The project owners, which include African-Americans and disabled veterans, are urging DOE’s Office of Fossil Energy to consider the project applications before nearly two dozen others that have waited longer, some for two years. Los Angeles businessman, Andrew Kunian, who owns a 49% stake in each project, stated that the federal government must give preference to minority and veteran owned businesses. Recent comments by Senator Ron Wyden, Chairman of the Senate Committee on Energy and Natural Resources, that LNG exports are reaching a maximum limit may spur applicants to pursue novel strategies to gain accelerated consideration of their applications.

States

Texas re-investigating Weatherford homes for possible well contamination.&llt;/STRONG> Although EPA dropped its controversial enforcement action against Range Resources, the Texas Railroad Commission is now conducting a new investigation into well contamination at the same residences near Weatherford, Texas. Homeowners stated the methane in their well water has gotten worse since the initial investigation three years ago even though the Commission attributed the methane to natural sources. Range, which continues to monitor the area, stated that some of the residents’ wells were drilled through a shallow gas-producing formation unrelated to the company’s oil and gas development. Range has since sold the two wells that were the source of the controversy to Legend Natural Gas.

State, industry survey Colorado flood aftermath. Now that floodwaters have receded in Colorado, the oil and gas industry and the Colorado Oil & Gas Conservation Commission (“COGCC”) are scrambling to examine potential damage to wells and compressors that were either submerged or cut off by washed out roads. A spokeswoman from the Colorado Oil & Gas Association informed COGCC that all wells and compressors were shut off before the flood and that a “majority of operators” reported no significant impacts from the flooding. COGCC is currently investigating ten oil releases from the Denver-Julesburg Basin, including the Wattenberg Field, which is the site of extensive oil drilling. COGCC only characterized two releases as “notable,” releases of a combined 18,000 gallons of crude condensate into the South Platte and St. Vrain rivers from two Anadarko storage tanks. The company is currently working to clean up the spills. Clean Water Action, an environmental group, criticized the response and demanded civil and criminal action against Anadarko. The group also wants COGCC to inspect every one of the 1,900 wells potentially impacted by the flooding and to report the types of chemicals used in hydraulic fracturing fluid that could have been released during the flood. Industry groups have stated there were no releases of either fracturing fluid or wastewater.

Colorado expands wildlife habitat areas. COGCC added 2.2 million acres to state wildlife habitat areas, including areas for protected winter elk, bighorn sheep, Gunnison sage grouse, and lesser prairie chickens. Environmental groups often cite the potential for harm to these species when opposing development. Companies proposing to drill in wildlife habitats must consult with Colorado Parks and Wildlife on how to minimize their impact. The new rules also added 40,000 acres of restricted surface occupancy areas where development is all but prohibited. Additional protected acreage may be added after Colorado Parks and Wildlife completes its analysis of sage grouse habitat. The U.S. Fish & Wildlife Service (“F&WS”) is considering whether the lesser prairie chicken and greater sage grouse should be listed as endangered species, and part of F&WS’ evaluation is whether state measures are preserving critical habitat sufficiently.

Environmental groups rally state opposition to LNG export terminal. Environmental NGOs are pressing Maryland Governor Martin O’Malley (Dem.) to block the Dominion Cove Point LNG export terminal project. The groups argue that the LNG export terminal would pollute the Chesapeake Bay, increase energy costs, and worsen climate change, asserting that the terminal’s lifecycle GHG emissions would be greater than all of the state’s seven coal-fired power plants combined. Dominion stated that most of the infrastructure is already in place, greatly reducing the environmental impacts that would be involved with constructing a green field terminal. The project is still undergoing an environmental review before Federal Energy Regulatory Commission (“FERC”), and the environmental groups want the state of Maryland to oppose the project before FERC.

Proposed North Carolina regulations would preclude local bans. A North Carolina Mining and Energy Commission study group proposed rules for hydraulic fracturing that would prevent municipal governments from imposing bans on hydraulic fracturing. Local governments would still be able to regulate light, noise, odors, and setbacks at well sites but would be prevented from using zoning or other measures to block drilling. The North Carolina League of Municipalities immediately protested the proposal, stating that the draft rules would prevent local governments from keeping heavy industrial operations out of residential areas. North Carolina, which holds a portion of the Deep River shale formation, has no history of hydrocarbon development and is writing wholly new oil and gas regulations. A state-wide moratorium is in place until the Commission issues rules for drilling and hydraulic fracturing.

New Jersey borough bans hydraulic fracturing. Highland Park became the first New Jersey municipality to ban hydraulic fracturing. The ordinance is mostly symbolic. Although the U.S. Geological Survey identified the potential for shale gas development in the South Newark Basin, which partly underlies the state, no companies have considered exploring the basin. A state-wide moratorium on hydraulic fracturing expired at the beginning of 2013.

International

Canada releases new hydraulic fracturing filing rules. The National Energy Board proposed new filing requirements for hydraulic fracturing operations in Canada’s Northwest and Nunavut Territories. The proposed rules would address financial responsibility obligations, pre-drilling environmental assessments, safety and environmental management plans, and well construction requirements. The Board will take comments on the new proposals.

Chevron: China shale exploration disappointing so far. Trade press reports state that, at a recent conference, a Chevron official asserted that exploratory drilling shows that U.S. government estimates of shale reserves in China are overstated. Chevron is reportedly now more pessimistic about the quantity of shale gas available in potentially accessible Chinese reserves. Chevron is both drilling in China and building LNG export terminals in Australia to supply Chinese demand.

Repsol looking for North American shale investments. Spanish oil company, Repsol S.A., is reportedly seeking to invest between $5 and $10 billion on shale assets in the United States or Canada. The press reports that the company is discussing the matter with investment banks, hoping to gain more stable oil production assets. The company currently produces oil in high risk areas, such as North Africa, and Argentina’s government recently seized its subsidiary, YPF S.A. Repsol has been buying up stakes in the Gulf of Mexico, Oklahoma, Kansas, and Alaska.

Study: biggest shale fields are outside U.S. Industry research firm IHS released a study finding that many of the biggest tight oil fields are in countries like Argentina, Russia, and Algeria. Major oil companies have shown interest in Argentina’s Vaca Muerta shale play, with some estimating that it could produce more oil than the Eagle Ford or Bakken shale plays. According to IHS, the top 23 shale plays outside of the United States could hold up to 175 billion barrels of oil. The company warns that geological data is only preliminary and that oil development in other countries is often much more expensive than within the U.S. Yet, IHS estimates that these shale plays could realistically produce 5 million barrels per day within a decade.

Business

Companies plan increase in gas gathering from Bakken. Calgary-based Aux Sable Midstream LLC and Dallas’ Summit Midstream Partners announced that they will upgrade capacity on their pipeline systems to ship 30 million cubic feet of gas per day from the Bakken Shale play. The increased capacity may allow for a reduction in flaring, which has drawn increasing scrutiny from North Dakota regulators. Oil companies operating in the Bakken Shale play frequently flare off gas as a waste, citing the lack of infrastructure available to capture the gas. The companies anticipate that the upgrades will be completed by mid-2014.

BNSF pledges investments for Bakken oil shipments. BNSF Railway Co. CEO Matt Rose stated BNSF would spend $4.3 billion to upgrade tracks and follow more stringent safety standards in order to increase the amount of crude oil it ships out of the Bakken Shale play. At 600,000 barrels per day, BNSF ships more crude oil out of the Bakken than any other railroad but is facing increased scrutiny after the Montreal, Maine & Atlantic Railway train derailment in Quebec. In addition to the infrastructure improvements, BNSF is reviewing how it handles, labels, and ships hazardous materials.

Research

Study: fugitive methane from well sites is minimal. A University of Texas study, performed in conjunction with the Environmental Defense Fund, determined that natural gas wells were releasing approximately 0.42% of the methane they produced, equivalent to 48 million metric tons of carbon dioxide. The finding is somewhat lower than EPA’s estimate of 0.47% but far less than what many environmental groups feared to be released to the atmosphere. The study, published in Proceedings of the National Academy of Sciences, rebuts a recent National Oceanic and Atmospheric Administration (“NOAA”) study where scans of methane leakage from an airplane estimated fugitive emission rates as high as 9%. The Texas study authors stated that NOAA measured all methane emissions in Utah’s Uinta Basin, regardless of whether they were coming from wells, processing equipment, pipelines, or sources unrelated to oil and gas production, whereas the Texas study was restricted to on-the-ground measurements of 529 hydraulically fractured wells in several different producing areas. It also included 27 wells subject to green completions and pneumatic controllers and pumps at 489 producing wells. NOAA researcher Colm Sweeney criticized the Texas study’s sample size as being too small and averaging out what he calls “super emitters,” wells that can emit methane 100% above background levels or more. Environmental groups criticized the study for being funded by industry and allowing participating companies to identify the wells for sampling.

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This Week in Hydraulic Fracturing

Volume 2, No. 37, September 9, 2013 to September 15, 2013

Federal

Dep’t of Energy approves Cove Point LNG export terminal. Dominion Cove Point LNG’s application to export liquefied natural gas (“LNG”) was the fourth approved by the U.S. Department of Energy’s (“DOE”) Office of Fossil Energy. The company proposed to convert its Lusby, Maryland LNG import terminal into an export terminal at a cost of $3.8 billion. Cove Point could begin construction as early as 2017, provided the company obtains FERC approval and several state permits over expected opposition from the Sierra Club and other environmental groups. Sen. Ron Wyden (D-Or.), Chair of the Senate Energy & Natural Resources Committee, noted that 6.37 billion cubic feet of gas per day has been approved for export and suggested additional approvals may face resistance from Congress unless applicants establish that further export terminals are in the public interest. Sen. Wyden and others have expressed concerns that gas prices could increase for domestic manufacturers unless exports are limited.

EPA withdraws rule that would have disclosed trade secrets. EPA withdrew a proposed rule under the Toxic Substances Control Act which would have disclosed the identity of all chemicals in health and safety studies, even if they were protected as confidential trade secrets. Currently, all new chemicals must be registered with EPA, along with related health and safety studies, but when a company designates a chemical as a trade secret, its identity is redacted from studies released to the public. This protection is important to the oil and gas service industry, which frequently creates new chemicals for use in their processes to improve hydraulic fracturing fluid. Environmental groups criticized EPA’s decision, arguing that redactions make the health and safety studies less valuable to the public.

House Members comment on proposed hydraulic fracturing rule. Over a dozen House Members urged the Department of Interior to adopt components of the prior draft U.S. Bureau of Land Management (“BLM”) rule on hydraulic fracturing on federal lands. Claiming that the prior proposed rule struck a better balance between development and protecting public health, the Members urged BLM to prohibit the use of lined pits to contain wastewater, require chemical disclosure before wells are stimulated, impose more stringent well cement logging requirements, and ban hydraulic fracturing in “sensitive areas.” By contrast, Rep. Rob Bishop (D-Utah) wrote the National Park Service (“NPS”) arguing that NPS comments on methane leakage at hydraulically fractured wells were not based on the best available science and presented opinions as facts, contrary to federal policy. NPS had cited in its comments an op-ed for the New York Times by Cornell professor Anthony Ingraffea claiming that methane leakage was as high as 17%. Claims of high methane leakage have been disputed in other academic studies and by DOE.

Water providers resist development in George Washington Nat’l Forest. The U.S. Forest Service is considering whether to ban hydraulic fracturing in the George Washington National Forest, which spans portions of Virginia and West Virginia. Local water providers support a ban, arguing that too little is known about the potential for hydraulic fracturing to contaminate groundwater to allow development in the National Forest and that the Forest’s proximity to the Potomac and James River headwaters is a further reason to support a ban. The oil and gas industry has opposed the ban, contending that it would set a bad precedent and needlessly prevent the development of a valuable resource.

States

California passes bill regulating hydraulic fracturing. The California legislature passed a bill regulating hydraulic fracturing in the State, and Governor Jerry Brown is expected to sign the bill. Among other requirements, companies using hydraulic fracturing would have to notify nearby landowners, test groundwater before starting a fracturing job and disclose chemicals used in fracturing fluids that are not confidential trade secrets. Four large environmental groups pulled their support from the bill, however, after an amendment (sought by Gov. Brown) was adopted that would streamline review of individual well permits under the California Environmental Quality Act. An Environmental Impact Report (“EIR”) will not be required for every well permit; rather, the California Department of Conservation’s Division of Oil, Gas and Geothermal Resources will do a state-wide EIR that examines the potential effects of hydraulic fracturing. The Western States Petroleum Association has also publicly opposed the bill.

XTO Energy indicted for wastewater disposal. The Pennsylvania Attorney General obtained an indictment charging that XTO Energy illegally discharged wastewater containing chlorides, barium, strontium, and aluminum. XTO allegedly stored wastewater at a well site in mobile storage tanks without the proper equipment to safely store or process it in violation of the state’s Clean Streams Law and Solid Waste Management Act. A Pennsylvania Department of Environmental Protection inspector allegedly found that wastewater had discharged from an open storage tank valve onto the ground. The indictment also claims XTO allegedly failed to properly secure the site from unauthorized access, implement a spill containment system, and discharged wastewater without a permit. XTO has responded the spill was a minor accidental release resulting in no environmental harm. XTO had already entered into a federal consent decree arising out of the incident, agreeing to pay a $100,000 civil fine and spend $20 million to upgrade its wastewater handling practices.

Ohio town reconsidering ordinance banning hydraulic fracturing. Three weeks after passing an ordinance prohibiting hydraulic fracturing within city limits, the Niles, Ohio City Council may rescind the ban. During a town meeting, council members opined that the ordinance might violate state and federal law and lead to unintended consequences, such as prohibiting the city from selling water. The council will consider whether the ordinance should be rescinded or amended to avoid legal action.

No timetable for hydraulic fracturing decision in New York. Testifying before the New York Assembly’s Environmental Conservation Committee, the New York Department of Environmental Conservation (“DEC”) deputy commissioner, Anne Reynolds, stated that the DEC is still reviewing comments from its 2011 draft Supplemental Generic Environmental Impact Statement (“SGEIS”) for hydraulic fracturing. The draft SGEIS attracted over 100,000 public comments and DEC does not know when it will complete its review of those comments. Even when that review is completed, the state Department of Health (“DOH”) is still conducting its own study on hydraulic fracturing. DOH announced in February 2013 that its study would be completed within a few weeks but it has yet to issue a draft. New York has now effectively had a moratorium on hydraulic fracturing for six years.

International

British Minister: shale gas is vital to energy mix. British Secretary of State for Energy and Climate Change, Ed Davey, stated that shale gas development is vital to energy diversity in Britain and could bring a major economic boost as well. Although he warned that shale gas is not a “silver bullet,” it could ease the country’s heavy reliance on imported natural gas. The UK’s Department of Energy and Climate Change recently released a report finding that overall carbon emissions from UK shale gas would be lower than importing LNG from Qatar, and Davey stated the findings should “reassure environmentalists” that domestic shale gas development would reduce overall GHG emissions. The UK has not yet moved beyond preliminary exploration despite recent tax cuts for developers and the promise of abundant gas. Because there are no privately-owned mineral rights local planners must approve development, making protests against hydraulic fracturing a more effective way to influence municipal decision makers.

Environmental groups move to block shale development in Argentina. Despite facing an energy crisis, activists are seeking a 10-year ban on shale development in Argentina, claiming hydraulic fracturing will pollute groundwater and cause earthquakes. The Argentine Association of Environmentalist Attorneys, one of the groups seeking the moratorium, also cited the $19 billion judgment against Chevron in Ecuador for environmental contamination as a reason to ban shale exploration. The group claims hydraulic fracturing cannot be done safely and is rallying municipal lawmakers to block drilling and lead protests, including one that led to a significant clash with police. The U.S. Energy Information Administration (“EIA”) estimates that Argentina has the world’s second largest shale gas reserve, enticing Chevron to sign a $1.24 billion development deal with the country despite Argentina’s recent re-nationalization of YPF S.A., seizing the company from Spain’s Repsol S.A. Chevron and YPF will jointly drill over 100 exploratory wells in the Vaca Muerta field over the next year. Argentina is currently importing up to $15 billion in oil and gas per year.

Business

LNG exporters targeting small shipments. Argent Marine Management is the next company up for DOE review for exporting LNG. Unlike other applicants, however, it will not use a multi-billion dollar LNG export terminal to move product. Argent Marine, working with shipping company A.P. Moller Maersk, will export up to a billion cubic feet of LNG per year in truck-sized cargo containers. Pivotal LNG will compress the gas from its existing Trussville, Alabama plant and the containers will be hauled to ports in Houston, Jacksonville, and Norfolk. The containers would be destined for smaller LNG markets, such as the Dominican Republic, instead of Asia or Europe. Further, Argent Marine is only seeking to do business in countries that have a free-trade agreement with the U.S., bypassing the controversial review required for non-free trade countries. Similar approaches were submitted by Advanced Energy Systems (which pulled and then re-submitted its export application) and Venture Global LNG.

Shale gas prompted $84 billion in U.S. investment. The American Chemistry Council, which keeps a database of new chemical plants and expansions, touted shale gas development as leading to 126 new projects and $84.4 billion in U.S. investments. According to the trade association’s Weekly Chemistry and Economic Report, over half of that investment came from foreign companies.

Research

Fed: Permian Basin driving regional economy. The Federal Reserve Bank of Dallas issued a report on the economies of Texas and New Mexico, concluding that Permian Basin shale development has led to two of the best performing economies in the nation. Eddy and Lea Counties in New Mexico, underlying the Permian Shale play, outperformed the rest of the state. Unemployment in those counties was 3.7%, compared to the New Mexico state average of 6.7% (national unemployment is at 7.4%). Both showed job growth more than double the national average of 1.6%. Texas also experienced job growth well above the national average with state-wide unemployment at 6.5%. The lowest unemployment rates in the state were near the Permian Basin.

Academic predicts downturn in shale development. University of California-Davis professor, Amy Myers Jaffe, has published a paper predicting a steady decline in oil prices within three to five years. She predicts that continued unrest in the Middle East will prevent large oil producers like Saudi Arabia from cutting production because they will need revenue for military preparation and deployment. Combined with declining international demand due to a rising dollar, increasing fuel economy standards, and reduced driving in the U.S., Jaffe predicts that oil prices could fall below the threshold which makes shale development profitable. Jaffe is best known for correctly predicting oil prices would fall dramatically in the 1980’s, contributing to large losses and a number of mergers between large North American oil companies.

EIA: U.S. crude production highest since 1989. In its latest Short-Term Energy Outlook, EIA reported that August crude oil production hit an average of 7.6 million barrels per day, the highest output since 1989. EIA analysts predict that average daily production should rise to 8.4 million barrels per day by the end of 2014. Increasing U.S. crude oil production was welcomed by the International Energy Agency, which has reported not only more demand for oil than it had previously anticipated, but 2.7 million barrel per day decrease in crude oil output in August from Libya and other OPEC countries.

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This Week in Hydraulic Fracturing

Volume 2, No. 36

Federal

Comments sought on new crude oil tank car regulations. The Pipeline and Hazardous Materials Safety Administration (“PHMSA”) announced that it would take public comments on petitions seeking new crude oil rail car integrity standards, citing a July explosion in Quebec when an unattended train derailed. The train was hauling several DOT-111 crude oil tank cars from the Bakken Shale play. Among the options PHMSA is considering will be to make the American Association of Railroads’ new industry standards for DOT-111 cars mandatory. Companies have been building DOT-111 cars to that standard since October 2011. It will also take comment on requiring modifications to older DOT-111 cars. The American Association of Railroads has publicly opposed requiring the modifications, calling them technically infeasible and costing over $1 billion. The comment period will close in 60 days.

Employee pleads guilty to illegally pouring hydraulic fracturing wastewater down storm drains. Michael Guesman, an employee of Youngstown, Ohio’s Hardrock Excavating LLC, pleaded guilty in federal court to illegally pouring thousands of gallons of hydraulic fracturing wastewater down a storm drain which flowed to the Mahoning River. Charges are still pending against Hardrock Excavating and its owner, Benedict Lupo. According to the indictment, Lupo ordered employees to pour wastewater from the company’s storage facility down the storm drains after dark. The practice lasted for at least three months until the Ohio Department of Natural Resources received an anonymous tip. Inspectors found puddles of oil in a tributary to the Mahoning River and traced it to Hardrock Excavating’s storage facility.

Suit challenges BLM leases in Michigan under NEPA. Two Michigan residents filed suit in federal court asking a judge to prohibit the U.S. Bureau of Land Management (“BLM”) from leasing blocks of federal land for oil and gas development, arguing BLM failed to review alleged environmental issues related to hydraulic fracturing under the National Environmental Policy Act (“NEPA”). Specifically, the suit argues that BLM failed to examine the impacts of water usage by hydraulic fracturing and the management of wastewater. According to the suit, BLM also violated NEPA by not examining the potential impacts of oil and gas development on the endangered Indiana bat and Karner blue butterfly. The Center for Biological Diversity has also sent BLM a 60-day notice letter stating it likewise intends to filed suit in an attempt to stop the lease sale.

States

Antero Resources appeals decision prohibiting Lone Pine orders. Antero Resources petitioned the Colorado Supreme Court to review a lower court decision striking down the use of Lone Pine orders, arguing that the decision stops trial courts from exercising discretion to tailor discovery proceedings in toxic tort cases. Lone Pine orders can require plaintiffs to provide basic evidence supporting their allegations before discovery commences. In this case, the trial court ordered plaintiff William Strudley to provide preliminary medical testimony establishing that his alleged injuries exist and that they could be attributed to drilling by defendants Antero Resources, Frontier Drilling, and Calfrac Well Services Corporation. When Strudley failed to provide sufficient evidence, the trial court dismissed the case. The Court of Appeals reversed, finding Colorado law did not provide for Lone Pine orders and that trial courts do not have the discretion to modify basic discovery procedures.

Loveland Colorado rejects challenge to hydraulic fracturing ballot initiative. The Loveland, Colorado city clerk issued an order upholding the city’s approval of a ballot initiative that seeks to impose a two year moratorium on hydraulic fracturing within Loveland. A resident had challenged the approval, arguing it violated the city’s single-subject rule. Unless the resident appeals the ruling, the ballot initiative will go forward in November 2013.

California hydraulic fracturing bill passes out of committee. California Senate Bill 4, which would regulate hydraulic fracturing, passed out of the Assembly Appropriations Committee by a 12-5 vote. Among other things, the bill would require companies to disclose the chemicals used in hydraulic fracturing fluid, require notification of nearby residents before drilling begins, and mandate groundwater testing. Acid stimulation, a well stimulation method used in California, would also be covered by the bill. Environmental groups generally support the bill, but are still lobbying to exclude confidentiality protections for hydraulic fracturing fluids that are company trade secrets. The Western States Petroleum Association opposes this bill. The current legislative session ends on September 13, 2013.

International

Dutch ministry study supports hydraulic fracturing. The Dutch Ministry of Economic Affairs released a study finding that environmental concerns from hydraulic fracturing can be “easily controlled” and that the government should consider allowing exploratory drilling to gauge the country’s potential for shale development. The Netherlands is heavily dependent on natural gas but hydraulic fracturing is opposed by environmental groups, a group of university professors, and Netherlands’ largest water supplier. Dutch bank Rabobank previously stated that it would not provide any financing for gas development using hydraulic fracturing due to claims of environmental harm, but the bank announced that it is now re-assessing its position. The Netherlands Commission for Environmental Assessment will evaluate the study and make recommendations on exploratory drilling to Parliament. The country imposed a moratorium on hydraulic fracturing in 2011.

Business

Fourth Circuit sides with Chesapeake in waste disposal suit. The Fourth Circuit held landowners failed to provide sufficient evidence that Chesapeake Appalachia’s waste disposal pits imposed a substantial burden on their property. Chesapeake owned the mineral rights for the land owned by Martin and Lisa Whiteman. Under a permit issued by the West Virginia DEP, Chesapeake disposed of drilling wastes in pits on ten acres of the Whitemans’ 101 acre property without paying for the use of that property. The Whitemans alleged the pits constituted a trespass, but the court ruled that, as the mineral rights owner, Chesapeake was entitled to use a portion of the surface land for its operations unless it caused a “substantial burden.” Chesapeake presented expert testimony that the disposal pits would not endanger the Whitemans or the sheep raised on their ranch, and both the trial and appellate court found the Whitemans’ testimony that they feared future contamination insufficient to establish the necessary showing of burden.

Chesapeake settles class action over royalty deductions. A class of Pennsylvania landowners won $7.5 million in a settlement with Chesapeake Appalachia LLC for what they claimed were excessive deductions from their royalty payments. Chesapeake had charged landowners for post-production costs, such as gathering, processing, and transporting the gas for sale. Under the settlement, reached after a two month mediation, landowners will pay reduced processing and transportation costs. Chesapeake is facing similar suits in Kansas, Texas, and Ohio.

Chesapeake settles leasing dispute with New York landowners. New York landowners and Chesapeake Energy Corporation have settled a dispute over the company’s attempt to extend leases providing development rights. Plaintiffs had claimed that Chesapeake sought to extend the lease terms, citing the state-wide moratorium on the use of hydraulic fracturing as a force majeure event that allowed for an extension without re-negotiating lease terms. The landowners filed suit disputing Chesapeake’s claim and prevailed in federal district court. Chesapeake appealed to the Second Circuit before the negotiations led to the settlement. The terms have not been disclosed, but the landowners had argued Chesapeake had gained rights to 12,000 acres at low prices because the leases were signed before the Marcellus Shale boom and that they could negotiate much better terms with other companies, despite the moratorium.

Carrizo sells off dry gas assets. Houston’s Carrizo Oil & Gas, Inc. agreed to sell its dry gas assets to unnamed buyers for $268 million. The sale was part of the company’s strategy to liquidate its dry gas holdings and invest more in oil-rich shale plays such as Texas’ Eagle Ford play and Colorado’s Niobrara Formation. Carrizo previously sold off its Barnett and Marcellus assets to raise money for its new investments.

Company to experiment with using natural gas to stimulate wells. New York’s Expansion Energy LLC is working toward field testing the use of hydraulic fracturing with a foam made primarily of natural gas instead of hydraulic fracturing fluid. The company stated that its experimental method would not require large amounts of water, which is scarce in the American Southwest, and would eliminate wastewater that must be treated or injected underground for disposal.

Institute may set training and assessment standards for well workers. The International Association of Drilling Contractors announced the formation of The Well Control Institute which will develop training and assessment standards for well service company employees. The Institute would begin training next year, covering safety and environmental practices for workers at both onshore wells and offshore rigs. Training would be provided for all positions in a well service crew, ranging from floor hands to supervising engineers.

Research

Natural gas development provides significant benefits to low income families. Natural gas brokerage firm Mercator Energy has prepared an analysis showing that the decline in natural gas prices, dropping from an average of $7.20/MMBtu during 2003-2008 to $2.80/MMBtu in 2012, produced $32.5 billion in savings in 2012 on the roughly 7.4 billion MMBtus used for home heating and electricity. Mercator also found the savings disproportionately benefitted lower low-income households who spend a higher portion of their family income on heating and electricity, estimating that low income families in the U.S. saved approximately $10 billion in 2012 as a result of lower energy costs. When industrial users are included, the analysis found the savings to all natural gas consumers was approximately $110 billion.

Sustainability Institute study: hydraulic fracturing will provide little economic boost. The University of Michigan’s Graham Sustainability Institute released a study concluding that the potential environmental impacts of hydraulic fracturing make whatever economic benefits to the state inconsequential. Hydraulic fracturing has been used in Michigan for years in about 12,000 vertical wells but the state’s Antrim Shale play brings the prospect of widespread horizontal drilling. Despite Michigan’s 8.8% unemployment rate, the fifth highest in the country, the study asserts the potential for environmental harms from the practice “significant,” citing potential for surface water contamination, habitat fragmentation, groundwater depletion, air pollution, increased traffic accidents, and stress to surrounding residents. By contrast, it estimated that any new employment from the oil and gas industry would be modest, citing low natural gas prices as the reason why there is unlikely to be substantial investment in the state.

Barclays: oil prices to stay high in 2014. Barclay’s Capital released its Global Energy Outlook which anticipates that oil prices are likely to stay between $100 and $120 per barrel in 2014, citing volatility in the Middle East and Nigeria. It predicts a turnaround for struggling energy companies despite predicting that U.S. natural gas prices will remain below $4 per MMBtu. It recommended investing in North American oil companies, well service companies and pipeline developers as it estimated that U.S. oil production will increase by 1 million barrels per day in 2014.

Wood Mackenzie: Bone Spring and Wolfcamp plays could be major oil producers. According to a new report by research and consulting firm Wood Mackenzie, the Permian Basin’s Bone Spring and Wolfcamp shale plays could boost the area’s oil production by 38%. The two plays are seeing increased investment by Apache Corporation and ConocoPhillips, believing the plays could produce up to one million barrels of oil per day with stacked horizontal wells. Wood Mackenzie warned, however, that the shale plays are complex and there is still uncertainty surrounding the method of stacking horizontal wells.

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This Week in Hydraulic Fracturing

Volume 2, No. 35

Federal

Federal safety inspection of crude oil railways. Safety inspectors from the Federal Railroad Administration (“FRA”) and the Pipeline and Hazardous Materials Safety Administration are conducting unannounced safety inspections of railroads carrying Bakken crude oil. The officials cited last month’s railroad explosion in Lac-Megantic, Quebec as the reason for the inspections. Railroads have doubled the carloads of crude oil they carried in the first half of 2013, compared to the same timeframe in 2012, mostly from the Bakken shale play. FRA is also considering proposals to require retrofits to a type of tanker car involved in the Lac Megantic explosion, as well as to require a minimum of two engineers per train.

DOE gets new deputy assistant secretary for oil and natural gas. U.S. Department of Energy Secretary (“DOE”) Ernest Moniz named Paula Gant, formerly of the American Gas Association, a trade association representing gas utilities, as the Deputy Assistant Secretary for Oil and Natural Gas. Working out of the Office of Fossil Energy, Gant will supervise DOE’s research on hydraulic fracturing and will be involved in LNG export policy. The American Gas Association has supported LNG exports.

OSHA proposes new rules for silica dust exposure. The Occupational Safety & Health Administration (“OSHA”) announced proposed rules to reduce the permissible exposure limit for crystalline silica dust. OSHA claims the lower limit would reduce deaths from silicosis, lung cancer, and other diseases. The rule also proposes methods for controlling worker exposure, training for workers on silica-related hazards and recordkeeping measures. Oil and gas service companies that use silica sand as a proppant in hydraulic fracturing fluids would be subject to the new rules under the proposal. Industry groups have opposed aspects of the rule, questioning, among other things, OSHA’s analyses of expected costs and benefits, particularly given the substantial reductions in silica-related deaths and illnesses over the past several decades.

States

New York Court of Appeals to hear appeal of municipal ordinances restricting hydraulic fracturing. New York’s highest court agreed to review two intermediate appellate court decisions upholding the right of municipalities to prohibit hydraulic fracturing within their jurisdictional boundaries. Land owners and developers seeking the right to drill in New York’s portion of the Marcellus Shale play challenged bans on hydraulic fracturing passed by the upstate towns of Dryden and Middlefield. They argued that ordinances prohibiting hydraulic fracturing are preempted by the state’s oil and gas law, but the lower courts rejected those challenges. New York is still effectively under a state-wide moratorium while state officials continue to study the alleged effects of hydraulic fracturing.

Initial approval given for new Pennsylvania regulations. The Pennsylvania Department of Environmental Protection (“PDEP”) announced that the state’s Environmental Quality Board gave its initial approval for new regulations governing Marcellus Shale gas drilling. The new rules include a duty to notify federal agencies when drilling will be near federal lands, require developers to survey an area 1,000 feet from the well pad for abandoned wells, establish contingency plan guidelines, and impose new requirements for the drilling of wastewater from hydraulic fracturing operations, such as pit liner thickness and PDEP approval for storage tanks. The proposed rules still must be reviewed by the Office of the Attorney General, the Governor, a General Assembly committee and the Independent Regulatory Review Commission before they could become final.

Dallas rejects hydraulic fracturing permit within city limits. The Dallas City Council denied Trinity East Energy’s request for a special use permit that would allow it to employ hydraulic fracturing within the city limits. Dallas sits on a portion of the Barnett Shale and Trinity leased the parcel of land from the city for $19 million. The council voted 9-6 in favor of the permit, short of the 12 votes required to overrule the city planning commission, which opposes the permit. Mayor Mike Rawlings urged the council to overrule the planning commission, citing the possibility that Trinity could sue the city for refusing to let it develop the lease. The Dallas City Council is still debating a new set of rules governing hydraulic fracturing and anticipates a vote on the fall.

International

U.S. companies seeking partnerships in Brazil. According to Brazil’s Undersecretary of Commerce for International Trade, several U.S. companies have approached the Brazilian government offering their expertise to help develop the country’s shale gas reserves. Brazil’s National Oil Agency (“ANP”) plans to hold its first shale gas auction in November of this year. ANP has estimated that Brazil has approximately 515 trillion cubic feet of natural gas reserves, although the International Energy Agency has recently published a lower (266 trillion cubic feet) estimate. The Undersecretary welcomed bids by U.S. companies and praised the importance of trade with the U.S. Brazil officials, speaking at a recent energy conference, acknowledged the country may require additional infrastructure to transport equipment, water, and gas before Brazil could experience a natural gas boom similar to that of the United States.

Business

Dow will invest over $1 billion in Louisiana chemical plants. Dow Chemical Company announced that it would spend over $1 billion to build two new ethylene plants in Iberville and West Baton Rouge, Louisiana, as well as make major capital improvements to its Plaquemine Parish ethylene plant. Ethylene is a chemical feedstock refined from natural gas used for plastics manufacturing. The projects are part of a $4 billion investment in the Gulf Coast where Dow can access cheap natural gas from nearby shale plays.

Chesapeake, BHP Billiton settle Arkansas suits. Chesapeake Energy Corporation and BHP Billiton settled suits by five Arkansas residents alleging that the use of underground injection during 2010 and 2011 to dispose of hydraulic fracturing wastewater from Chesapeake and BHP operations caused earthquakes that damaged their homes. The suits were the first to claim damages from the companies that produced the wastewater, despite the fact that neither Chesapeake nor Billiton owned or operated the injection wells at issue. The settlement amounts are confidential. Both companies are defending similar suits in Arkansas federal court and purportedly may face additional suits in state court.

Research

Federal study attributes endangered fish kill to hydraulic fracturing fluid spill. A joint U.S. Geological Survey and U.S. Fish & Wildlife Service study attributed the deaths of endangered Blackside dace in a Kentucky creek to a 2007 release from a gas well site. The agencies reported that samples taken shortly after the release showed the creek’s pH dropped below 6, and asserted that high stream conductivity evidenced that significant concentrations of dissolved metals were present in the creek. Some fish developed gill lesions and liver and spleen damage, according to the study which was published in the journal Southeastern Naturalist.

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