This Week in Hydraulic Fracturing

 

Volume 2, No. 43

 

Federal

EIA launches drilling productivity reports. The U.S. Energy Information Administration (“EIA”) issued its first Drilling Productivity Report that will show how efficient oil and gas companies are at developing shale resources. In its initial report, EIA found that the Bakken and Eagle Ford shale plays were responsible for 75% of the country’s crude oil production. Production in these plays increased by 700,000 barrels per day over last year. The Permian Basin is the biggest oil-producing region, with production increasing by 93,000 barrels per day over 2012. The Marcellus Shale play remains the largest gas-producing shale play and its production is also increasing. The reports will be issued each month, compiled from information provided by state agencies and Baker Hughes.

States

Judge rejects doctor’s challenge to chemical disclosure rules. A federal district court found that a Pennsylvania doctor lacked standing to challenge state rules requiring treating physicians to sign a confidentiality agreement before learning the identity of confidential chemicals used in hydraulic fracturing fluids. Dr. Alfonso Rodriguez claimed that being forced to sign a confidentiality order would infringe on his First Amendment rights and his professional ethical obligations by prohibiting him from sharing information about hydraulic fracturing fluid chemicals with colleagues. Although Dr. Rodriguez treated employees exposed to chemicals during a well blowout, the court dismissed his case because the company never asked him to sign a confidentiality agreement or otherwise interfered with his ability to provide medical care. The requirement is part of Pennsylvania’s Act 13, governing hydraulic fracturing. Under the law, chemicals that companies designate as trade secrets are not disclosed to the public but may be disclosed to physicians treating a person believed to be exposed to chemicals in hydraulic fracturing fluids if the physician signs a confidentiality agreement. Dr. Rodriguez’s attorney stated that he would appeal the decision.

Michigan drafting new rules for hydraulic fracturing. The Michigan Department of Environmental Quality (“MDEQ”) announced that it is considering proposing new regulations that would require a driller to collect groundwater samples six months before starting to drill a well in which hydraulic fracturing would be used, estimate the amount of water the well would withdraw from local waterbodies using a water withdrawal assessment tool, and disclose chemicals used in hydraulic fracturing fluid on the FracFocus.org website. A company would also be required to provide two days’ notice to MDEQ before starting hydraulic fracturing, as well as to monitor and report fluid volumes and pressures. Once published, the proposed rules will be available for public comment.

Texas Supreme Court declines to hear Houston drilling ban. The Texas Supreme Court declined to review an appeals court ruling that reversed a $17 million judgment after a trial court found that the City of Houston improperly imposed a ban on oil and gas development near Lake Houston. Trail Enterprises, Inc. sued the city, claiming that the ban on development, first implemented in 1967, was a regulatory taking of property rights without compensation. The trial court sided with Trail Enterprises and awarded $17 million in damages. The Fourteenth District Court of Appeals, however, reversed. It found that the environmental concerns surrounding oil and gas development were legitimate reasons for imposing a ban under the U.S. Supreme Court’s Penn Central test, given that Lake Houston serves as a source for drinking water, and because Trail Enterprises had no reasonable investment-backed expectation of developing its mineral rights given the longstanding ban.

Texas town sues to enjoin gas drilling. Denton, Texas, north of Fort Worth is asking a state judge to halt EagleRidge Energy from drilling oil and gas wells within its jurisdiction, alleging that the company lacks necessary permits. The court denied an application for a temporary restraining order but will soon hear the town’s argument that EagleRidge must first obtain a permit that complies with city ordinances regarding development planning and setbacks. EagleRidge claims that it previously obtained a municipal permit before the town changed its regulations doubling setback distances, and claims that the permit is still valid. The town acknowledged that EagleRidge obtained all of the required permits from the Texas Railroad Commission.

California groups planning for ballot measures. Environmental groups, failing to obtain a statewide ban on hydraulic fracturing from the California legislature, are now gearing up for an initiative to place municipal bans on the ballot. A spokesman for Food & Water Watch stated that local communities are now responsible for implementing moratoria and bans to protect local sources of drinking water. Several cities and counties have implemented bans already, including Santa Cruz County last month, however none of these municipalities are over the Monterey Shale formation targeted by oil and gas companies.

Youngstown hydraulic fracturing ban may return to this year’s ballot. Despite Youngstown, Ohio residents voting down a ban on hydraulic fracturing in May of this year, local environmental groups vowed to put the ban on the November ballot as well. Called a “community bill of rights,” the ban would exempt a local steel pipe manufacturer which would have been shut down under the prior version of the initiative that prohibited all manufacturing products related to hydraulic fracturing as well as shale gas development. Opponents cite the initiative as discouraging business investment in Youngstown, which is still trying to recover after the exit of coal, steel, and automobile manufacturing companies from the area decades ago. If passed, the initiative could trigger a lawsuit by opponents who argue that the Ohio Department of Natural Resources has exclusive regulatory authority over oil and gas development.

International

Train carrying oil and gas derails, explodes. A Canadian National Railway (“CN Rail”) tanker train derailed near Edmonton, Alberta and exploded. The CN Rail train was carrying four tankers of crude oil and nine with liquefied petroleum gas. A spokesman for Greenpeace Canada called railroad accidents involving crude oil “the new normal” and demanded new safety regulations. A spokesman for CN Rail countered that the crude tankers were not damaged during the derailment and did not cause the explosion. The accident occurred while rail shipments of crude oil have faced increasing scrutiny after a July 2013 train derailment and explosion in Lac-Megantic, Quebec. Following that incident, the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration has been considering new oil tanker car regulations.

Ukraine announces imminent shale gas development deal. Government officials in Ukraine stated that the country is on the verge of signing a production-sharing contract with Chevron that would allow the company to begin developing shale gas. Despite political resistance due to environmental concerns, Ukraine’s government has been seeking international partnerships to produce its own shale gas and ease its reliance on Russia’s OAO Gazprom.

Business

Mississippi Lime output disappoints drillers. After an estimated $1 billion in investment, companies such as Shell oil and Tug Hill Operating are pulling out of the Mississippi Lime formation. The promise of significant crude development and the low cost of acreage attracted several independent companies to the area, as Kansas had promoted the Mississippi Lime as the “New Bakken.” Production wells, however, are either underperforming or inconsistent with total crude output in 2012 at 43.6 million barrels. SandRidge Energy, which banked heavily on the Mississippi Lime’s success, saw its board of directors shaken up after disappointing the company’s investors.

BASF, Yara planning ammonia plant on Gulf Coast. BASF and Norway’s Yara International announced plans to construct an ammonia plant to support the companies’ chemical businesses. The companies are currently eyeing the Gulf Coast of Louisiana, which has already seen a number of proposed new plants or plant expansions, including CF Industries’ announced $2.1 billion expansion of a nitrogen complex, EuroChem’s new $1.5 billion fertilizer plant, and Mosaic’s $700 million expansion of its existing ammonia plant. Louisiana’s proximity to cheap shale gas has made it a prime location for new chemical manufacturing facilities.

Research

USGS, Oklahoma issue earthquake warning. The U.S. Geological Survey and Oklahoma Geological Survey warned of an “earthquake swarm” in central Oklahoma. The agencies stated that their study shows earthquakes are now six times more likely than in prior years and no longer follow familiar geological sequences. They stated that deep injection of hydraulic fracturing wastewater may be contributing to the change in earthquake patterns but is not the sole cause. The agencies’ statement noted the 2010 “Jones Swarm,” a series of small earthquakes east of Oklahoma City, was not attributable to underground injection. The agencies recommended that Oklahoma consider modifying its building codes to withstand more frequent low-level tremors.

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This Week in Hydraulic Fracturing

 

Volume 2, No. 42

 

Federal

Environmental group seeks federal moratorium on off-shore hydraulic fracturing. The Environmental Defense Center (“EDC”) has asked the Bureau of Safety and Environmental Enforcement (“BSEE”) to issue a moratorium on the use of hydraulic fracturing to enhance recovery from oil wells off the California coast. EDC claims hydraulic fracturing has been approved for offshore wells 15 times over the past two decades, and argues the practice should not be allowed until proven safe through a programmatic environmental impact statement (“EIS”). EDC is also asking the federal government to rescind categorical exemptions used to approve use of hydraulic fracturing, review the approvals to ensure compliance with the Endangered Species Act, Coastal Zone Management Act, and the Marine Mammal Protection Act, and revise Clean Water Act permits for offshore oil platforms to account for wastewater from hydraulic fracturing.

States

Colorado announces fines for late chemical reporting. The Colorado Oil & Gas Conservation Commission (“COGCC”) has fined 11 companies for allegedly not timely reporting chemicals used in hydraulic fracturing fluid on the FracFocus.org website. Environmental groups have been critical of the reporting website, claiming companies have not filed timely reports, and the Interstate Oil & Gas Compact Commission and Groundwater Protection Council, which operate the site, have responded that they have no power to enforce deadlines and that it is up to states to enforce them. Colorado announced earlier this year that it would begin actively enforcing reporting deadlines starting July 1, 2013. Since then, while noting increased compliance, COGCC initiated actions against 11 companies. Seven cases have settled, with four still pending. The settling companies stated the violations stemmed from technical and clerical errors that will not be repeated.

Wyoming Supreme Court to hear chemical disclosure suit. Environmental groups are appealing the Wyoming Oil and Gas Conservation Commission’s hydraulic fracturing chemical disclosure rule to the Wyoming Supreme Court. Wyoming was the first state to require public disclosure of the list of chemicals used in hydraulic fracturing fluid, but the groups claim the rule improperly protects from disclosure chemicals found to be trade secrets. The groups argue that limiting disclosure prevents landowners from determining whether hydraulic fracturing was responsible for groundwater contamination. The groups filed an open records request seeking a list of all chemicals disclosed to the Wyoming Oil & gas Conservation Commission but were denied a list of those chemicals marked as trade secrets. A district court upheld the denial, prompting the groups’ appeal. Well service company Halliburton Energy Services has intervened in the Supreme Court litigation on behalf of the state.

North Dakota companies look to reduce flaring. The North Dakota Petroleum Council created a task force of companies operating in North Dakota to identify ways to reduce flaring of waste gas that could otherwise be sold. Among the possibilities the task force will investigate is optimizing existing pipelines to carry more gas and building new pipelines and processing facilities. Some studies claim that nearly 30% of all gas produced by Bakken Shale play wells are flared off. The practice prompted mineral rights owners to file class action lawsuits against ten North Dakota oil producers, claiming that flaring gas is wasteful and deprives them of hundreds of millions of dollars in royalties. They argue that state law requires the companies to pay royalties on the gas even if it is never brought to market.

Weather, Bakken development strain North Dakota’s infrastructure. Recent heavy rains caused McKenzie County officials to close roads to heavy equipment, stranding wells in North Dakota’s most productive county for tight oil. Most county roads are gravel and were built for low volumes of farm equipment traffic. As North Dakota’s oil production is poised to reach one million barrels per day in early 2014, the state is committing over half a billion dollars to fix damaged roads. Even without the rains, companies are losing working days due to road closures when they cannot transport water, fuel, and crude oil into and out of well sites. The state’s power grid is also strained by oil production, with power failures shutting down gas processing plants in July, and state officials have expressed concerns a harsh winter could result in further power outages.

Dallas City Council debates ban on hydraulic fracturing. Dallas sits atop a portion of Barnett Shale, making it attractive to gas companies. However, residents, citing fears of air and water pollution as well as truck traffic, are urging the city council to ban hydraulic fracturing within city limits. The Dallas City Planning Commission has recommended an ordinance requiring a 1,500 foot setback from homes, business, and churches, an increase from the current 500 foot setback, but the council has not yet acted on the recommendation. Trinity East Energy, which signed a $19 million lease with the city, has been trying to develop its leasehold and is threatening legal action if it is not allowed to begin work. The council rejected Trinity’s zoning permit application in August 2013 but the company has said it is continuing to negotiate with the city. If the parties do not reach an agreement and Trinity files suit, the litigation could set a precedent establishing whether incorporated cities in Texas have the power to block companies from developing their mineral rights.

Wisconsin bill seeks to stop local ordinances against sand mining. A new bill introduced in the Wisconsin Senate would stop municipalities from regulating non-metallic mining within the state, including sand used for hydraulic fracturing. Sand mining has rapidly expanded in Wisconsin, growing from 10 mines and processing facilities in 2010 to 170 today. Municipal governments have sought to regulate the mines, citing potential health concerns. The bill would overturn a Wisconsin Supreme Court decision from last year that upheld the town of Crooks Valley’s power to restrict sand mining through zoning ordinances. Proponents of the bill argue that the industry needs relief from a patchwork of inconsistent and multi-layered government regulations.

International

Protest against hydraulic fracturing in New Brunswick. Hundreds of protestors from the Elsipogtog tribe gathered to protest against shale gas development in Rexton, New Brunswick. SWN Resources Canada obtained an injunction to prevent protestors from blocking the entrance to its site while it undertakes seismic testing, but the protestors ignored the court order and stopped SWN’s heavy equipment from entering the site. Clashes with the Royal Canadian Mounted Police resulted in 40 arrests as protestors burned police cars. The tribe claims that hydraulic fracturing will pollute drinking water and reservation land.

Romanian shale exploration on hold after protests. Chevron is suspending its shale gas exploration activities in eastern Romania in light of protests by local residents. The company obtained the necessary permits to drill exploratory wells in the town of Pungesti. Country residents, however, held several rallies to block both shale exploration and government plans to open a nearby gold mine. Chevron stated that it will cease operations pending further negotiations with the government and local residents. The Pungesti local council will hold a referendum in late November on whether to ban Chevron’s exploration activities but Chevron stated that the council lacks the power to stop the project. The U.S. Energy Information Administration estimates that Romania shale reserves hold 51 trillion cubic feet of recoverable natural gas.

Saudi Arabia to develop shale gas. Saudi Aramco, Saudi Arabia’s state-owned energy company, announced that it will begin shale gas development within the next few years and use that gas to meet a new supply agreement signed with a large phosphate mining power plant. The company estimates that Saudi Arabia holds up to 600 trillion cubic feet of recoverable shale gas, approximately double its proven conventional reserves. Exploratory drilling is already underway at three sites. Saudi Aramco is still grappling with how to use hydraulic fracturing in an area where water is scarce.

Environmental group vows to fight South Africa’s shale development regulations. The Karoo Action Group warned that the South African government can expect lawsuits challenging proposed regulations that would allow hydraulic fracturing in the Karoo region. The area is estimated to hold nearly 500 trillion cubic feet of natural gas. The group argues that hydraulic fracturing will impact drinking water, which is scarce in the arid Karoo region. South Africa rescinded its ban on hydraulic fracturing last year and is now promoting shale gas development to reduce the country’s reliance on imported energy.

Greenpeace organizing challenges to hydraulic fracturing in the U.K. Greenpeace is urging British landowners to file trespass claims against companies planning to develop shale gas. Greenpeace claims companies cannot drill horizontally under a landowner’s property in the UK without the landowner’s express permission, and they are urging landowners to block exploratory drilling by withholding their consent and threatening suits for trespass. The government is currently trying to incentivize shale development with tax breaks and clear regulation, but environmental groups and some landowners oppose the practice.

Research

FERC: Plenty of gas to get through winter. Federal Energy Regulatory Commission (“FERC”) issued its winter assessment, finding that gas supplies should easily meet the demands of a mild winter predicted by the National Oceanic and Atmospheric Administration. Despite the ready supply of gas, Henry Hub prices have risen slightly, well above the lows of 2012. Gas prices in New England are expected to remain high due to constraints on supply. Although Pennsylvania’s Marcellus Shale play is the country’s largest gas-producing region, existing pipelines cannot carry enough gas to meet demand in the Northeast. New pipelines are under construction, but FERC’s assessment noted that grid operators are wary that the construction may not be proceeding quickly enough to head off grid reliability concerns.

Study: U.S. fifth in “oil security.” Analytical firm Roubini Global Economics ranks the United States fifth out of 13 countries in its Oil Security Index. The metric considers how exposed countries are to price shocks and supply disruptions. Although the United States’ position has improved compared to prior years due to dramatically increased domestic oil production and reduced consumption, the study still finds that the country relies significantly on imported oil, leaving it exposed to short- and medium-term price volatility. The U.S. ranks behind Japan, the U.K., Canada, and Germany.

Colorado State, Carnegie Mellon announce fugitive methane study. Researchers from Colorado State University and Carnegie Mellon University will undertake a six-month study of methane leaks from natural gas processing plants and compression stations. The study will cover 100 processing plants in 12 states and measurements will be used to model fugitive emissions from processing facilities nationwide. Results are expected to be published in a peer reviewed journal in the summer of 2014. The amount of fugitive methane emissions has been the subject of considerable debate among academic and government researchers, with studies reporting different conclusions regarding the percentage of methane that is released during processing.

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This Week in Hydraulic Fracturing

 

Volume 2, No. 41

Federal

Environmental groups challenge U.S. investment in liquefied natural gas (“LNG”) projects. The Center for Biological Diversity and other environmental groups filed suit in the U.S. to block the Export-Import Bank from funding two LNG export terminals in Australia. The Ex-Im Bank invested $2.9 billion in the Australia Pacific LNG export terminal and $1.8 billion in the Curtis LNG export terminal. The groups argue that, even though the projects are outside of the United States, Ex-Im Bank must perform an environmental impact analysis under the National Environmental Policy Act, as well as evaluate the projects’ impact on the Great Barrier Reef under the National Historic Preservation Act, before funding the projects. The groups claim various alleged environmental impacts should cause Ex-Im to withdraw its funding.

Non-governmental organizations (“NGOs”) push for ban in George Washington National Forest. Environment Virginia, Potomac Riverkeeper, and the American Hiking Society jointly urged the U.S. Forest Service to prohibit hydraulic fracturing in the George Washington National Forest. The NGOs claim that hydraulic fracturing would diminish natural views in the Virginia forest, reduce recreational opportunities, and threaten drinking water supplies for area municipalities. The Forest Service is expected to decide later this year whether it will allow hydraulic fracturing in parts of the forest which overlay the Marcellus Shale play. Approximately 12,000 acres have already been leased to oil and gas companies, but only a handful of exploratory wells have been drilled.

States

Zoning laws blocking compressor station preempted. A federal district court judge ruled that Myersville, Maryland zoning laws, used by the town council to block the construction of a compressor station, are preempted by the Natural Gas Act because the project already received a certificate of public convenience and necessity from the Federal Energy Regulatory Commission. Dominion Resources, the project developer, sued the town, seeking an injunction blocking enforcement of the zoning laws. Myersville argued that the compressor station was inconsistent with local development plans and a threat to public health, but the court held that these reasons were not within preemption exemptions found in federal environmental laws. Dominion recently won a separate suit where the D.C. Circuit compelled the Maryland Department of Environment (“MDE”) to process Dominion’s application for an air quality permit by June 2014. Because Dominion cannot begin construction until MDE issues an air quality permit, the district court judge denied Dominion’s request for a permanent injunction against the town of Myersville because the company suffered no irreparable harm.

Group sues to force vote on hydraulic fracturing moratorium. A group called Protect Our Loveland filed suit in state district court to compel the Loveland, Colorado city council to put the question of whether the city should institute a two-year hydraulic fracturing moratorium on the November 5th ballot. The city council rejected the ballot measure 5-4 in September. Protect Our Loveland claims that the city council could not reject the ballot initiative because the group collected the required signatures under state law.

No oil found in Colorado rivers after flooding receded. Despite reports that over 1,000 barrels of oil were released from flooded wellsites, sampling by the Colorado Department of Public Health and Environment (“CDPHE”) in eight rivers found no signs of oil contamination. Earlier reports of oil and produced water flowing into the South Platte River sparked demands by environmental groups for tougher regulations and calls for congressional hearings. Environmental groups criticized the state’s sampling work, claiming that it waited a week after rains ended to conduct the testing. Local group Clean Water Action argued that the pollutants likely flowed into Nebraska by the time the state began its investigation. A CDPHE spokesman stated that its inspectors had to wait until high water receded to avoid safety concerns. The agency stated that high e. coli concentrations from releases of raw sewage continue to be the most serious public health concern and that oil and gas operators were well prepared for flooding.

Plans for Alaska LNG export plant coming into focus. A consortium of Exxon Mobil, BP, ConocoPhillips, and TransCanada announced the selection of the town of Nikiski on Alaska’s Kenai Peninsula as the site of a future LNG export terminal. ConocoPhillips already owns a mothballed LNG export terminal at the town. The LNG export terminal would handle gas produced at the North Slope and shipped by an 800-mile pipeline. The companies previously delayed plans to construct the pipeline, estimated to cost between $45 and $65 billion, after the continental shale gas boom made the project unprofitable. Alaska, however, has been pressing the companies to revive the project as it would lower natural gas prices for state residents. Governor Sean Parnell hailed the export terminal site selection as “real progress.”

Environmental group seeks tighter air regulations for Colorado oil and gas development. Citing increasing ground level ozone concentrations, WildEarth Guardians urged the Colorado Air Pollution Control Division to adopt unidentified measures to reduce air emissions from oil and gas operations. Portions of Colorado have ground level ozone levels in excess of federal ambient air quality standards, and the Environmental Protection Agency (“EPA”) is requiring the state to reduce emissions to bring the areas into attainment by 2015. The Colorado Department of Public Health and Environment previously estimated that nearly half of all ozone precursor emissions are tied to oil and gas development in the Niobrara shale play. The state is looking to propose new emission limitations in November, but WildEarth Guardians charged the state with delay and questioned the need to work with industry. In response, a spokesman for the Colorado Petroleum Association pointed out that WildEarth Guardians, unlike the Environmental Defense Fund, has refused to participate in joint working groups to explore emission reduction strategies.

International

French high court upholds ban on hydraulic fracturing. The Constitutional Council of France, the highest court that reviews legislative actions, rejected a challenge to the country’s ban on hydraulic fracturing. Schuepbach Energy argued that the ban, passed by Parliament in 2011, was illegal as it effectively revoked drilling permits issued before the ban in violation of its property and enterprise rights. President François Hollande supported the decision and stated that it should end the debate on whether hydraulic fracturing should be permitted in France.

New rules for hydraulic fracturing in Europe make headway. The European Parliament passed new regulations that would require extensive “environmental audits” on the direct and indirect effects of hydraulic fracturing before drilling. The proposed revisions to the EU Environmental Impact Assessment Directive would impose stringent study requirements before hydraulic fracturing could commence. European business groups bemoaned the ruling as adding even more bureaucratic obstacles to shale development that was already facing significant legal hurdles in Europe. BusinessEurope, a business advocacy group, stated that the EU should be seeking to minimize regulations at a time of stagnant economic growth and high energy prices. As a result of the vote, Italian MEP Andrea Zanoni was authorized to develop final regulatory language with the European Union Council before the regulations become law. A spokesman for the European Commission stated that a final version should be promulgated before the end of the year.

Diplomats urge U.S. to export LNG. At a House committee hearing, representatives from Japan, India, Haiti, Singapore, and Hungary asked Congress to speed up the current process for reviewing LNG export applications to countries without a free trade agreement with the United States. The representatives argued that LNG exports would lower global carbon emissions, increase international security, and raise the United States’ standing among other countries. Witnesses also warned that the U.S. is competing with other countries to supply LNG and the long, uncertain process of reviewing export terminals could leave U.S. exporters without buyers. The Industrial Energy Consumers of America criticized the hearing and argued that easing the LNG approval process would lead to higher costs for domestic manufacturers and undermine the country’s ability to negotiate free trade agreements in the future.

Shale gas providing U.S. industry with significant competitive advantage. CEOs for European energy companies Total and Eni recently cited the impacts of shale development on European industry while speaking at the Council on Foreign Relations. They stated that European gas prices are three times those in the United States and that electricity is twice as expensive, giving U.S. manufacturers a competitive advantage from which it will take several years to recover. They pointed to the U.S. legal structure that assigns mineral rights to property owners, a structure which does not exist in Europe, as a key driver behind shale gas development. Because European governments would have to turn over mineral rights to land owners, the CEOs were pessimistic about shale development in Europe.

South Africa issues hydraulic fracturing regulations. The South African Ministry of Mineral Resources proposed regulations for hydraulic fracturing in order to promote shale gas development. The country’s Karoo region, once the subject of a moratorium, may hold one of the world’s largest shale gas reserves. Minister Susan Shabangu stated that shale gas development could trigger South Africa’s re-industrialization and relieve dependence on coal. Environmental groups in South Africa are wary of water consumption and the potential for drinking water contamination, given that Karoo is semi-arid. Minister Shabangu stated that proposed regulations would protect water quality, regional wildlife, and area fossil deposits.

China exceeds U.S. energy consumption. The International Energy Agency (“IEA”) issued a report finding that China is now the world’s largest consumer of energy, reflecting its rapid growth as an industrial nation as China’s consumption is largely driven by heavy industry and infrastructure projects. The U.S. has consumed more energy than any other country since the early twentieth century, and as of ten years ago, China consumed half as much energy as the U.S. According to the IEA, the change has implications for U.S. foreign policy, energy prices, and U.S. energy security, as well as Chinese policy on greenhouse gas emissions. Organization of the Petroleum Exporting Countries member states, expecting that future U.S. oil imports will be flat, are constructing refineries and storage facilities in China, which is now Saudi Arabia’s largest oil customer.

U.K. shale developer abandons exploratory drill site. Citing concerns that drilling could harm migrating birds, Cuadrilla Resources agreed to abandon its Lancashire exploratory well site. Cuadrilla had been exploring the Bowland Hodder shale formation, estimated to hold 1,300 trillion cubic feet of natural gas. Cuadrilla previously conducted an environmental assessment that examined the potential impact on migrating birds, making local environmental groups skeptical of Cuadrilla’s stated rationale. Those groups claim that local opposition drove Cuadrilla’s decision.

Business

OriginOil announces first contract water recycling technology. OriginOil signed its first contract to provide a new technology to recycle hydraulic fracturing wastewater. The system uses a process called electro-coagulation, where electric current separates contaminants from wastewater, allowing hydrocarbons to be captured and treated water to be reused. Colorado-based Industrial Systems, a well field service company, will pay a fee to OriginOil for each barrel of wastewater treated with the technology. If the technology performs as advertised, Industrial Systems will begin using it in the Permian Basin, where water is scarce, as well as in the Bakken Shale play. OriginOil believes that its new technology can dramatically reduce the volume of freshwater used and wastewater disposed of, while also improving overall oil recovery.

Icahn targets Talisman Energy. Calgary’s Talisman Energy is likely due for a shakeup after investor Carl Icahn disclosed holding a major stake in the company. Icahn announced he would hold discussions with company management, likely centering on the company’s heavy reliance on natural gas, which makes up 70% of the company’s assets. Analysts depict Talisman as overspending on large projects with little near term return and possibly needing to divest assets in Algeria, Columbia, Sierra Leone, and Kurdistan in order to take a more focused approach on North American shale production. Both Fitch and S&P recently revised their outlook for Talisman to “negative.” Icahn has a reputation for forcing major management changes at the companies in which he invests, and he was part of an investor group that ousted CEO Aubrey McClendon from Chesapeake Energy. Analysts are now wondering whether Icahn will push management to sell the company off or commit to restructuring the company for higher profitability.

Jordan Cove LNG signing contracts with buyers. Veresen, Inc.’s proposed Jordan Cove LNG export facility announced supply agreements with India, Indonesia, and other Asian buyers. The deals are a sign of confidence that the facility, along with its Pacific Connector Gas Pipeline, will be constructed despite opposition from environmental groups who are challenging construction permits issued by Oregon’s state government. Veresen’s applications to construct are still pending with the Department of Energy’s Office of Fossil Energy, which must approve LNG gas exportation to countries without a free trade agreement with the U.S., and the Federal Energy Regulatory Committee. The company touts that, unlike other proposed U.S. export facilities, Jordan Cove will receive nearly all of its natural gas supply from Canada.

American Energy raises $1.7 billion for Utica shale. American Energy, the new company created by Chesapeake Energy founder Aubrey McClendon, raised $1.7 billion from several private equity firms. The money will finance the acquisition of approximately 110,000 acres in the southern Utica shale play with the company’s subsidiary, American Energy Utica, starting to drill with twelve rigs over the next few years. Energy & Minerals Group was American Energy Utica’s lead equity investor, along with First Reserve Corporation. Debt investors included GSO Capital Partners, Magnetar Capital and BlackRock.

Research

Study: Modeling the economic or climate benefits of the natural gas boom. A group called the Energy Modeling Forum, consisting of representatives from Stanford University, EPA, and the U.S. Department of Energy, claims that modeling shows that low gas prices will not necessarily improve the economy or provide climate benefits. The group ran 14 different models simulating future energy supply and demand to estimate economic impacts and emissions. According to the models, natural gas would rise to between $4.03 and $6.24/ MMBtu by 2020, adjusting for inflation, as demand catches up to supply. According to the models, shale gas development would contribute $1.1 trillion (in 2010 dollars) to the economy by 2020. The study also claimed that, while switching from coal- to gas-fired generation would reduce carbon dioxide emissions, it would also limit the adoption of new nuclear or renewable energy generation.

First Energy: Gas exports to Mexico will rise sharply. An analyst for Ohio-based First Energy, speaking at a Petroleum Club panel in Calgary, predicted that U.S. natural gas exports to Mexico will rise from less than a billion cubic feet per day to over four billion cubic feet per day by 2018. New pipelines connecting the U.S. to Mexico will allow for the increased exports, contributing to new demand for gas. First Energy also predicts increased use of natural gas for electricity generation and that LNG terminals will export up to 100 billion cubic feet per day by 2017. To accommodate the new demand, natural gas supply may need to grow aggressively over the next year or two, but current natural gas prices are keeping capital investment down.

Studies duel over environmental risks from shale development. Two studies, released nearly simultaneously, paint opposing pictures of air quality in Texas’ Barnett Shale play. Industry group Barnett Shale Energy Education Council, published its study in the Science of the Total Environment, finding that natural gas production in the Barnett Shale play has not caused significant increases in air pollution. Using eleven years’ of air quality monitoring data, consultant ToxStrategies found only one incident where shale gas development was linked to volatile organic compound (“VOC”) emissions exceeding federal and state air quality standards. Overall, however, VOC emissions did not rise with shale gas development, and benzene emissions actually decreased over time. Activist group Environment Texas countered with its own report, compiling various journal and newspaper articles and concluding that hydraulic fracturing wastewater poses extreme risks to rivers and sources of drinking water. It also questioned shale developers for consuming approximately 250 billion gallons of fresh water despite a long-standing drought. The group seeks an immediate statewide moratorium on hydraulic fracturing, citing these potential environmental risks.

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This Week in Hydraulic Fracturing

 

Volume 2, No. 40

 

Federal

Government shutdown has had a limited impact to date on drilling on federal lands. The government shutdown resulted in the furlough of most Bureau of Land Management (“BLM”) employees, some of whom process oil and gas drilling permits for federal lands and Indian reservations, including the Fort Berthold reservation in the Bakken Shale play. A spokeswoman for industry group Western Energy Alliance shrugged off the delays, noting that most companies can wait a year or more for permits to drill on federal land, limiting the impact of a relatively short shutdown. Several environmental groups have criticized the National Park Service for allowing oil and gas companies that have permits to continue operating in national parks that are closed to the public. Industry and the Park Service, however, responded that many operators have shut wells during the shutdown or are operating from private lands within the parks.

NGOs ask BLM to stop California leasing. A group of environmental NGOs have asked the U.S. Bureau of Land Management to cancel all existing oil and gas leases on federal land in California until BLM finishes an analysis of hydraulic fracturing. BLM previously cancelled all California oil and gas leasing from May through September 2013, citing the budget sequester. The NGOs want BLM to extend this stoppage until an environmental impact statement and scientific review on hydraulic fracturing in California is completed. The Western States Petroleum Association disputed the claims by NGOs that hydraulic fracturing presents unknown hazards, noting the practice has been done safely in California for decades and that the state just passed legislation providing for new regulation.

Offshore hydraulic fracturing challenged. The Center for Biological Diversity is urging the federal Bureau of Ocean Energy Management and the Bureau of Safety and Environmental Enforcement to shut down offshore operators that use hydraulic fracturing or face a lawsuit. The group claims that any authorization for offshore hydraulic fracturing must be vetted through the National Environmental Policy Act and other federal laws, arguing that hydraulic fracturing threatens ocean wildlife.

U.S. will pass Russia as the top oil & gas producer this year. The Wall Street Journal reports that Russia, facing declining output from conventional oil and gas fields, is expected to lose its title as the top oil and gas producing country. Although the U.S. is not currently exporting oil or gas in significant numbers, the amount it imports has dramatically declined over the past few years, making more available for other countries. Increases in U.S. gas exports, through liquefied natural gas (“LNG”) export terminals and increased pipeline shipments to Mexico, could further erode the clout of the Gazprom (owned by the Russian government) and other producers. At the same time, Russia has shale formations that may be developed in the future, while the U.S. could see its shale production impacted by lower prices, increased regulation, and NGO opposition.

States

Ohio chemical reporting law yields to federal reporting regulations. The Ohio Environmental Protection Agency (“Ohio EPA”) has agreed with US EPA that a 2001 state law, requiring oil and gas drillers to report chemicals used in hydraulic fracturing fluid to the Ohio Department of Natural Resources, did not satisfy federal reporting requirements under the Emergency Planning and Community Right-to-Know Act (“EPCRA”). Under EPCRA, a site that stores at least 10,000 pounds of any chemical designated as “extremely hazardous substances” by OSHA must report to local first responders. Oil and gas companies were informed they need to begin reporting covered chemicals under EPCRA, while Ohio EPA considers whether its own rules require a legislative or regulatory amendment to satisfy federal law.

Oklahoma disposal well closed after seismic activity. The Oklahoma Corporation Commission (“OCC”) ordered an underground injection disposal well near Marietta, Oklahoma to shut down after OCC recorded a series of tremors near Marietta, Oklahoma. The well had only started operations two weeks before the tremors which peaked at magnitude 3.4 and damaged nearby buildings. The Oklahoma Geological Survey stated that earthquakes increased as the well’s injection volumes increased, but that further investigation is needed. The well operator stated the well was also shut down because it was uneconomic. Before start-up, OCC had severely limited wastewater injection volume and pressure as part of a cautious approach to regulating new wells.

Colorado inspectors continue to monitor spills in flood’s wake. Inspectors from the Colorado Oil & Gas Conservation Commission (“COGCC”) continue to review the integrity of nearly 1,900 wells previously underwater from flooding. COGCC has reported 15 spills that released approximately 43,000 gallons of oil and 18,060 gallons of wastewater. Damaged roads have slowed the inspectors, who still need to assess some wells in the Wattenberg Field. Companies are also starting to put dollar values on the flood damage, with Noble Energy, the state’s biggest oil producer, putting its losses at $7-17 million in damaged equipment and lost production. Rep. Jared Polis (D-Colo.) is seeking Congressional hearings to investigate the impact of drilling site releases. By contrast, Colorado Gov. John Hickenlooper, Colorado environmental officials, and an EPA Region 8 spokesman characterized them as small when compared to the large amounts of raw sewage and household chemicals released during the floods.

Business

Shell selling off Eagle Ford shale assets. Shell is putting its Eagle Ford Shale play assets up for sale, as the company has failed to profit consistently from these assets. Its relatively late entry left it with areas that were more challenging to develop and produced more natural gas than oil at a time of low gas prices. The sale comes after the company wrote down $2 billion in value for its shale assets and prompted an earlier sell-off of its Mississippi Lime formation assets. The assets include 106,000 acres across three Texas counties and 192 wells that also produce approximately 32,000 barrels of oil and natural gas liquids per day.

Devon Energy takes pipeline spinoff public. Devon Midstream Partners LP, a new master limited partnership, will soon go public, hoping to raise $400 million. The new MLP will own approximately 20% of Devon Energy’s existing pipeline assets and will acquire more of Devon’s assets over time. Devon Energy currently transports 2.9 billion cubic feet of gas per day through its 3,600 miles of pipeline and owns gas processing plants throughout Texas and Oklahoma.

Some private equity groups still bullish on U.S. shale. Private equity deals for shale assets reportedly reached $30 billion in 2012. Yet, while some private investors have cooled to new shale investments in 2013 due to low gas prices, industry consolidation, and the maturing of shale plays, others reportedly see significant additional investment opportunities, particularly as hydraulic fracturing provides access to new deposits through new and evolving technologies. Some suggest hydraulic fracturing could revitalize conventional reservoirs, such as Prudhoe Bay. Others predict that shale plays could attract large upstream and midstream investments in the next 20 years, including significant private equity investors. Private equity managers typically seek out investments in smaller drilling, service, or equipment manufacturing companies, but some analysts believe there will be larger private deals in coming years.

Research

Natural Gas Supply Association forecasts a mild winter will depress gas prices through 2014. A forecast of natural gas demand over the winter of 2013 to 2014 predicts that gas prices will stay relatively low. The Natural Gas Supply Association (“NGSA”) estimates that gas demand will be comparable to last winter, where gas prices averaged $3.47/ MMBtu. This would likely result in a continued reduction in rig counts for dry gas shale plays as companies shift to more profitable crude oil and gas liquids plays. The forecast also sees electricity production slightly shifting back to coal-fired generation which becomes more competitive when gas prices hit approximately $3.50/ MMBtu. Coal-fired generation has already increased by 14% in the first half of 2013. NGSA’s long-term forecast predicts a major spike in natural gas demand by 2020 due to increased pipeline shipments to Mexico, LNG exports, and new industrial facilities coming on-line. Under this demand “super cycle,” gas prices could increase to as high as $7/MMBtu in the short term until companies can ramp up dry gas production.

Study: Radioactive isotopes found near Pennsylvania treatment plant. A Duke University study published in Environmental Science & Technology found Radium-226 and Radium-228 in creek sediment downstream of the Josephine Brine Treatment Facility. The authors conclude that hydraulic fracturing wastewater, which was previously treated at the Josephine facility, was responsible for the isotopes’ presence based on chemical fingerprinting. The Pennsylvania DEP discovered the isotope in the sediments in July 2011. Fluid Recovery Services, which owns and operates the Josephine facility, is currently remediating the creek under a consent order with DEP. Fluid Recovery also agreed to spend up to $30 million in plant upgrades, and settled Clean Water Act claims brought by U.S. EPA for $83,000. Pennsylvania has prohibited treatment plants from accepting hydraulic fracturing wastewater since September 2011.

Study: Hydraulic fracturing improvements could yield big gains. A preliminary report by Higgs-Palmer Technologies shows that companies are leaving a substantial quantity of natural gas in shale formations due to inefficient hydraulic fracturing techniques. Microseismic data show a significant decrease in permeability occurs between well stimulation and gas production. Its analysis postulates that more proppant should be used during the well completion stage, and that the proppants used should be smaller, as data in some instances suggest up to 90% of available gas is being left in the rock. Higgs-Palmer is developing software that could better measure shale permeability during various phases of well stimulation and completion.

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This Week in Hydraulic Fracturing

Volume 2, No. 39

Federal

Third Circuit affirms lower court ruling overturning drilling ban in National Forest. The U.S. Court of Appeals for the Third Circuit affirmed a lower court ruling that the U.S. Forest Service lacked the authority to enter into a settlement agreement with environmental groups in which the agency imposed a drilling moratorium in the Allegheny National Forest pending a multi-year environmental impact study. The court held that the Forest Service lacked control over private mineral rights owners’ access to surface lands and that the moratorium was a “sea change” in agency policy that could not be accomplished by a settlement agreement but required notice and comment rulemaking. Further, the court held, requesting approval for developing private mineral rights does not require environmental review for the entire forest, as environmental groups argued.

GAO: Incomplete data frustrates estimates of BLM permit processing times. Congress asked the Government Accountability Office (“GAO”) to study how long it takes the U.S. Bureau of Land Management (“BLM”) to process oil and gas drilling permit applications. According to GAO, an internal BLM memorandum acknowledged that the agency does not process completed applications within 30 days, as required by the Energy Policy Act of 2005. However, GAO found that because BLM’s data was often incomplete, the agency does not know how long it typically takes to process applications. GAO also questioned the accuracy of the data as some permits were listed as being issued on the same day BLM deemed the applications complete. The difficulty in tracking applications comes at a time when applications are actually down; BLM received twice as many applications in 2007 as it did in 2012. GAO also learned that, for oil and gas wells that are already operating on federal lands, BLM does not keep a history of environmental inspections or prioritize inspections based on compliance history. Over a third of wells have no record of ever being inspected. BLM responded that it will implement a new application processing procedure and database.

EPA guidance on use of diesel fuel in hydraulic fracturing goes to White House. The U.S. Environmental Protection Agency (“EPA”) sent its draft guidance for hydraulic fracturing that uses diesel fuels to the White House Office of Management and Budget (“OMB”) for review, over a year after the public comment period closed. EPA issued the draft guidance after it agreed in a settlement to take down from its website language stating that companies were required to obtain injection permits under the Safe Drinking Water Act before using hydraulic fracturing fluid containing diesel fuels. Environmental groups largely welcomed the guidance but wanted a formal rulemaking with more restrictive measures. Industry groups have stated that service companies no longer use diesel fuels in hydraulic fracturing fluid, but are concerned that EPA may pursue enforcement actions against companies that used diesel fuels in the past.

Manufacturers demand clear LNG approval criteria. America’s Energy Advantage, an association of companies that use natural gas as fuel or feedstock, filed comments on the liquefied natural gas (“LNG”) export application for Freeport LNG asking the U.S. Department of Energy (“DOE”) to outline clear, objective standards for approving applications. DOE must determine whether LNG exports to countries without a free trade agreement is in the national interest, but the group argues that DOE has not provided a clear explanation of how it applies the “national interest” standard. The association submits that the absence of clear standards creates uncertainty for companies interested in investing in natural gas-intensive manufacturing projects which may face higher prices if domestic supplies of natural gas are reduced because of increased LNG exports.

States

California passes hydraulic fracturing bill. Governor Jerry Brown signed S.B.4 establishing new requirements for hydraulic fracturing in California. The law requires companies to disclose chemicals used in hydraulic fracturing fluid even if claimed as trade secrets, test nearby groundwater before stimulating wells, and notify surrounding landowners, among other requirements. The bill exempts permits for hydraulic fracturing from the California Environmental Quality Act, which often subjects projects to lengthy environmental reviews. Gov. Brown also added a signing statement directing the California Department of Conservation to “develop an efficient permitting program for well stimulation activities that group permits together based on factors such as known geologic conditions and environmental impacts, while providing for more particularized review in other situations where necessary.” This is not in SB. 4 and Gov. Brown’s office declined to elaborate on what the direction will mean. Environmental groups denounced the signing statement, while industry group Western States Petroleum Association issued no comment except to state that companies are looking forward to developing California’s shale potential.

International

Japan looks to Canada for LNG supply. In a joint press conference with Prime Minister Stephen Harper, Japan’s Prime Minister Shinzo Abe announced that the countries will work closely to ensure that Japan receives a steady supply of liquefied natural gas. Prime Minister Abe previously portrayed Japan as teetering on the verge of massive blackouts now that its once robust nuclear power supply has been reduced to a single plant in the wake of a 2011 tsunami that resulted in the Fukushima nuclear incident. Japan, the world’s largest LNG customer, paid an average of $15.74/ MMBtu in July 2013, making cheap natural gas from Canada especially attractive. Prime Ministers Harper and Abe are negotiating a free trade agreement governing LNG supply. Canada previously awarded export licenses to three LNG export terminals that are expected to be on-line by 2020.

French court to rule on hydraulic fracturing ban. Dallas-based Schuepbach Energy LLC appealed France’s ban on hydraulic fracturing to the country’s Constitutional Council, the highest court that rules on the legality of legislation. Schuepbach argued that France instituted the ban without any study establishing that hydraulic fracturing was a risk to public health or the environment. The company held two exploration permits when the legislature prohibited hydraulic fracturing in 2011. A ruling is expected next month.

Business

Valero subsidiary enters logistics business with IPO. Valero Energy Corporation’s new subsidiary, Valero Energy Partners LP, will use an initial public offering to begin its acquisition of logistics assets, such as pipelines and terminals. A spokesman for the master limited partnership stated that the company is hoping to raise $345 million from the IPO.

New LNG plant would supply U.S. trucking. Applied Natural Gas Fuels Inc. announced plans to construct an LNG liquefaction facility in Midlothian, Texas, near the Barnett Shale play, to provide fuel for trucking companies that currently use heavy duty diesel engines. The company is also targeting railroad companies and manufacturers of heavy industrial equipment. The plant would be able to produce 86,000 gallons of LNG per day and is expected to come on-line by 2015. Other companies are similarly looking to develop LNG plants and distribution infrastructure for transportation, including Honeywell UOP in a joint venture with engineering company Black & Veatch, and Eagle LNG Partners.

Research

Mixed views on the future of gas-fired electricity generation. At a recent conference, a panelist from NERA Economic Consulting was optimistic about the future of gas-fired generation, stating that even if prices rise by a few dollars per MMBtu, natural gas will remain the most affordable option for the power industry as large numbers of coal-fired power plants retire. PJM Interconnection, the Mid-Atlantic grid operator, expects gas-fired generation to surpass coal-fired generation by 2015, rising from 50,000 megawatts of generation today to 65,000 megawatts. Despite the optimism, the U.S. Energy Information Administration reported that gas generation is down 14% in 2013, compared to 2012 which saw the lowest spot prices in a decade. Slight increases in natural gas prices have closed the gap with the cost of coal-fired generation.

Study: Barnett Shale play holds more gas than previously believed. Modeling by the University of Texas Bureau of Economic Geology predicted that the Barnett Shale play, a nearly 4,000 square mile formation in Texas, could produce an additional 45 trillion cubic feet of gas by 2050. As the oldest shale play of the new oil and gas boom, the Barnett has been drilled extensively already, which provided researchers with extensive data for their modeling. The results should allay concerns that shale gas development will not be able to keep up with rising demand over the long-term as a large portion of the economy begins to center around natural gas as a fuel and feedstock.

<lt;P>Study: Lesser prairie chicken population declined. Western Eco Systems Technology’s study, performed at the behest of several western state wildlife agencies and energy companies, found that the lesser prairie chicken population was cut in half in 2012, primarily from drought and reductions in breeding ground acreage. Several states with shale development, including Texas, New Mexico, Oklahoma, Kansas, and Colorado, are trying to keep the bird off of the endangered species list to avoid stringent regulation of critical habitat under the Endangered Species Act. The Western Association of Fish and Wildlife Agencies are releasing a conservation plan in hopes of persuading the U.S. Fish & Wildlife Service that states can protect the species without federal intervention. Environmental groups urged that the study means the lesser prairie chicken must be listed as endangered and that its critical habitat must be protected from development. The dispute over listing the species dates back almost 20 years.

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