Hydraulic Fracturing and Shale Gas Report

Volume 2, No. 47

Federal

House passes energy-friendly regulatory bills, White House threatens veto. The U.S. House of Representatives passed a trio of bills that would accelerate permitting times for drilling and pipeline projects and prohibit the U.S. Bureau of Land Management (“BLM”) from finalizing proposed regulations for hydraulic fracturing on federal lands. Under the first bill, H.R. 1965, the Federal Lands Jobs and Energy Security Act, would require automatic approval of drilling permit applications if BLM has not issued a decision within 60 days and prioritizes the leasing of federal lands with the greatest potential for energy development, with five auctions being required by 2016. H.R. 1900, the Natural Gas Pipeline Permitting Reform Act, would require Federal Energy Regulatory Commission (“FERC”) to issue or deny a certificate of public convenience and necessity for pre-filed pipeline projects within 12 months of receiving a completed application. Lastly, H.R. 2728, the Protecting States’ Rights to Promote Energy Security Act, would require BLM to defer to state oil and gas permitting regulations for projects on federal lands. Even if the bills passed the Senate, which seems unlikely, the White House has said the President would veto the bills.

Group threatens suit over prairie dog listing decision. WildEarth Guardians issued a notice of intent to sue the U.S. Fish & Wildlife Service over its decision not to list the Gunnison prairie dog as endangered or threatened under the Endangered Species Act. The group claims that oil and gas development and urbanization threaten prairie dog populations in Arizona, Colorado, New Mexico and Utah. The Fish & Wildlife decision was made as part of a legal settlement with environmental groups forcing the agency to make listing decisions for 757 candidate species. Several of those are active in areas of shale development. Decisions for the Greater sage grouse, Gunnison sage grouse, and Lesser prairie chicken could all impact shale development in the Southwest and Rocky Mountain states.

Environmental groups threaten challenge to BLM policy on nominations. Several environmental groups, including the Western Environmental Law Center and Citizens for a Healthy Community, are threatening a suit to overturn a new BLM policy that protects the names of companies nominating federal lands for oil and gas leasing. Although the nomination forms will be posted on a BLM website, nominating companies will not have to list identifying information. The groups argue that full disclosure is necessary for government transparency, citing a recent district court case finding that the identifying information is relevant to reviewing the environmental impacts of leasing. Industry group Western Energy Alliance, however, argues that the land a particular company chooses to nominate is a trade secret and that disclosure would chill interest in leasing federal land.

California Representative seeks moratorium on offshore hydraulic fracturing. Representative Lois Capps (D-Cal. 24th Dist.) issued letters to Environmental Protection Agency (“EPA”) Administrator Gina McCarthy and Interior Secretary Sally Jewell seeking a moratorium on hydraulic fracturing at offshore oil platforms off the coast of California. Although companies have used the process over the past 20 years, Rep. Capps asserted regulators do not know about the chemicals used or their impact on the marine environment. She also criticized the process by which the Bureau of Safety and Environmental Enforcement, and its predecessor agency, permitted the companies to use hydraulic fracturing.

DOE partially approves expansion to Freeport LNG export terminal. Freeport LNG received approval from the U.S. Department of Energy (“DOE”) to sell a higher volume of LNG to customers in countries without a free-trade agreement from its planned Quintana Island, Texas export terminal. DOE previously authorized Freeport to export 1.4 billion cubic feet of LNG per day to non-free-trade countries and the new approval increases its limit to 1.8 billion. Freeport CEO Michael Smith, however, expressed disappointment as the company sought to sell a billion cubic feet of LNG more than what DOE approved. Smith said that by only approving a portion of Freeport LNG’s request, the company will now have excess capacity and may not go ahead with future expansion plans.

FERC approves Eagle Ford gas pipeline to Mexico. Houston’s NET Mexico Pipeline Partners received FERC-issued presidential permit to construct a 2.1 billion cubic foot per day gas pipeline to Mexico. The buyer will be MGI Supply Ltd., a subsidiary of Mexico’s state-owned gas company, Pemex. Although Mexico has substantial natural gas reserves, Pemex lacks the technical expertise to develop them fast enough to meet the country’s rapidly increasing energy demands. The pipeline is expected to be completed in October 2014.

States

Colorado to regulate oil and gas methane emissions. With Governor John Hickenlooper’s support, the Colorado Department of Public Health & Environment (“CDPHE”) announced proposed regulations that would require oil and gas operators to detect and limit fugitive methane emissions throughout the lifecycle of oil and gas drilling, production, and transportation. To do this, oil and gas companies would be required to institute a leak detection and repair program for tanks, pipelines, and processing facilities using infrared cameras. CDPHE estimates compliance with the regulations would cost the industry approximately $30 million annually. The proposal resulted from negotiations among the state, the Environmental Defense Fund, and the state’s largest oil and gas producers, Anadarko Petroleum, Encana, and Noble Energy. Before being officially proposed, the rules must first be approved by the Colorado Air Quality Control Commission.

Illinois proposes hydraulic fracturing regulations. The Illinois Department of Natural Resources (“DNR”) issued proposed regulations implementing the state’s new Hydraulic Fracturing Regulatory Act. The proposed regulations would cover all aspects of shale gas development, including site preparation, well construction and operations, chemical disclosure water quality monitoring, well plugging, permit fees, bonding, and proof of insurance coverage. DNR will hold at least two public hearings and take comments on the proposal through the end of this year.

Wyoming Supreme Court hears hydraulic fracturing trade secret case. The Wyoming Supreme Court heard arguments in a case challenging a state law protecting the identity of hydraulic fracturing fluid chemicals designated as trade secrets. The Powder River Basin Council and other NGOs argued the chemicals cannot be designated as trade secrets under Wyoming’s open records law, while the Wyoming Oil & Gas Conservation Commission (“WOGCC”) and service company Halliburton argued that using specific chemicals provide a competitive advantage over other service companies and should be afforded appropriate protections. Reports from the argument indicated that the NGOs argued WOGCC was not checking trade secret claims, noting that the agency had approved 201 of 202 trade secret approvals, including long lists of chemical names. Counsel for Halliburton countered that lax trade secret protections would discourage companies from experimenting with and implementing safer chemicals.

Industry group challenges county hydraulic fracturing ban. The Independent Petroleum Association of New Mexico and two landowners filed a federal lawsuit challenging Mora County, New Mexico’s ban on hydraulic fracturing, enacted by referendum earlier this month. The ordinance also prohibits the use of water withdrawn from within the county for hydraulic fracturing elsewhere, the shipment through or storage within the county of wastewater, rejects any notions of state or federal preemption of local law, and purports to strip corporations of their rights to challenge the ban. The ordinance was modeled on The Community Environmental Legal Defense Fund’s “Community Bill of Rights,” which targets both hydraulic fracturing and a 2010 U.S. Supreme Court decision, Citizens United v. FEC, ruling that corporations have free speech rights. The Independent Petroleum Council argues in its complaint that the ordinance is preempted by federal and local law, is contrary to Citizens United, violates Constitutional guarantees of free speech, due process, and the right to petition government, and enacts a regulatory taking without just compensation.

Environmental groups pushing to block oil sand rail projects. Several environmental groups are organizing an effort to block rail shipments of oil sands crude oil through appeals to state officials and lawsuits. The groups succeeded in persuading the Shorelines Hearings Board in Washington to block permits for two crude terminal projects, pending additional environmental study. They are now targeting Valero Energy’s planned Benicia, California crude terminal and Tesoro’s planned Vancouver, Washington crude terminal. Industry representatives note that it is difficult to identify how much oil sands crude terminals may receive. Many of the targeted terminal projects will mostly receive tight oil from the Bakken shale play. The campaign was largely undertaken in an attempt to discredit the State Department’s finding that authorizing the Keystone XL pipeline would not increase greenhouse gas emissions as oil sands would be shipped by rail in the pipeline’s absence.

International

Canada passes new regulations on crude rail transportation. Transport Canada issued an order requiring all railroads to provide advanced warning to all municipalities through which a train will travel carrying crude oil. The railroads also must issue annual reports on shipments of hazardous materials and the routes they use. The new regulations were issued in response to the explosion in Lac Mégantic, Quebec earlier this year. The U.S. Federal Railroad Administration is reviewing the regulations, although a spokesman stated that U.S. railroads already report similar information to emergency first responders.

Polish Environment Minister fired for failure to issue shale regulations. Poland’s Prime Minister, Donald Tusk, fired the country’s Environment Minister, Marcin Korolec, after Korolec failed to issue regulations that would allow for shale gas development. Korolec will be replaced by Deputy Finance Minister Maciej Grabowski who announced that developing the country’s shale gas resources will be his top priority. Deputy Environment Minister Piotr Wozniak had blamed the lack of a clear regulatory framework for Exxon Mobil, Marathon, and Talisman abandoning shale development in Poland last year.

Business

Devon buys Eagle Ford acreage for $6 billion. Oklahoma’s Devon Energy announced that it will purchase approximately 82,000 acres in the Eagle Ford Shale play from GeoSouthern Energy for $6 billion. The assets currently produce about 53,000 barrels of oil per day with an estimated peak production of 140,000 bpd. Devon has been working to accrue more oil-producing assets, which industry analyst Canaccord Genuity estimated makes up about 12% of Devon’s assets. The deal is expected to close early next year.

Research

Study: Researchers model gas well productivity. Researchers from the University of Texas published an article estimating gas production over a well’s life using their model, which could prove to be an important tool for estimating technically recoverable reserves. Using data from approximately 8,300 Barnett shale wells, the article reports they predicted correctly how much the wells could produce before requiring re-completion. Prior applications of the UT model reportedly correctly estimated production from wells in the Haynesville and Fayetteville shale plays. The model has provided some insights into why some shale gas wells have seen declining production, sometimes within the first year after completion.

USGS: Bakken development may threaten wetlands and streams. The U.S. Geological Survey (“USGS”) began mapping wetlands and streams in North Dakota, South Dakota, and Montana in 2007. Now, it has enough data to conclude that many wetlands and streams are located within one mile of Bakken shale oil and gas wells. According to USGS, certain of these wetlands, referred to as “prairie pothole” wetlands, are waterfowl breeding grounds. The mapping project also reportedly located a 12 square mile plume of briny wastewater migrating towards an aquifer that USGS claims it has linked to a faulty injection well casing.

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This Week in Hydraulic Fracturing

Federal

BLM issues new compromise policy on lease nominations. The U.S. Bureau of Land Management (“BLM”) issued new guidance on how it will handle nominations of federal land for oil and gas leasing. According to BLM, the Expression of Interest forms will be published on-line for the public to access, but will exclude the name and address of the company nominating land, as well as other information the company claims as proprietary. Environmental NGOs oppose the policy, arguing the public has a right to know who is interested in drilling on public land. BLM characterized the policy as a compromise, since it previously disclosed only the location of parcels planned for lease auctions. The policy responds to a February 2013 federal court ruling requiring BLM to disclose the entity that nominated federal lands for leasing in Colorado. Industry groups argue the areas that companies hope to develop is confidential business information and that further disclosure would mean less competition for lease sales.

U.S. Manufacturers: No more LNG export approvals. America’s Energy Advantage, a trade association of U.S. businesses and organizations, urged the U.S. Department of Energy (“DOE”) to stop approving liquefied natural gas (“LNG”) exports to countries without a free trade agreement, arguing the country is now in a “danger zone” where natural gas price increases could cause economic harm. In a letter to DOE Secretary Moniz, the group urged DOE to establish clear standards for any future LNG export approvals and to drop its economic study in support of LNG exports, arguing the study is out of date due to changes in the market. The group’s proposal found some support from Sen. Ron Wyden (D-Ore.), Chair of the Senate Energy and Natural Resources Committee, who suggested that DOE may want to “pause” processing LNG export applications to re-assess the potential economic impacts of additional LNG exports.

BLM defers leasing federal land in Utah. After environmental NGOs protested the leasing of federal lands in Utah for oil and gas development, BLM announced it will defer leasing 100,000 acres identified as having wilderness characteristics even though the lands were classified as open for multiple uses. The groups withdrew their formal protests and praised the decision, claiming it spares sensitive lands from development. Industry group, the Western Energy Alliance, criticized the decision as being inconsistent with the area’s resource management plan. BLM stated the deferred acreage will be the subject of additional environmental reviews to determine if oil and gas development is consistent with the area’s cultural resources, species habitat, and potential impacts on the Old Spanish Trail.

States

California issues new draft hydraulic fracturing regulations. The California Department of Conservation has proposed regulations for hydraulic fracturing that it claims are the most stringent in the U.S. The regulations would implement SB 4 enacted last September. The proposal would require well operators to obtain permits to drill and notify the public before they use hydraulic fracturing, as well as to disclose the chemicals used in the hydraulic fracturing fluids (with protections for trade secrets), the amount of water used, and the source of that water. The rules would also address well construction and cementing standards, pressure-testing, seismic analysis, and monitoring procedures. The public comment period will last for 60 days. The Department of Conservation anticipates that final rules will be issued by early 2015, after the Department’s Division of Oil, Gas & Geothermal Resources and the Natural Resources Agency complete a study of hydraulic fracturing.

Landowners, trade association challenge municipal ban in New Mexico. A group of landowners and the Independent Petroleum Association of New Mexico filed suit in federal court seeking to overturn Mora County’s ban on hydraulic fracturing. Entitled, “The Mora County Community Water Rights and Local Self-Government Ordinance,” the law not only bans hydraulic fracturing but prohibits extracting water from anywhere within the county for use in hydraulic fracturing anywhere, forbids the construction of pipelines through the county, and bans the storage of wastewater within or transportation of wastewater through the county. The ordinance further purports to eliminate all legal rights from companies that extract hydrocarbons, including the right to challenge the ordinance in court. It also provides that the town will refuse to recognize any court decision invalidating the ordinance. The plaintiffs argue the ordinance is unconstitutional and a regulatory taking of the landowners’ mineral estates.

Wyoming approves new water testing regulations. The Wyoming Oil & Gas Conservation Commission approved final regulations that require well operators to test at least four streams or private wells within a half-mile before and after well drilling and completion. Baseline sampling must be conducted before drilling begins with additional testing within one to two years after a production well’s casing is installed and once again within three to four years. Operators must test for a specified set of parameters that include benzene, toluene, and dissolved methane. The rule prohibits courts from using the test results to create a presumption for or against liability in any future lawsuit over water contamination, although the sampling may be used as evidence. Industry groups generally supported the rule but raised concerns about distinguishing naturally occurring compounds from those caused by drilling. Environmental groups praised the rule as a model for other states. The rule takes effect on March 1, 2014.

Alaska proposes revised regulations to protect trade secrets. The Alaska Oil & Gas Conservation Commission is proposing changes to its existing regulations which would protect the identity of hydraulic fracturing fluid chemicals that companies deem to be trade secrets. Existing regulations failed to provide such protections, requiring the disclosure of all chemicals. Under the proposed rules, parties may challenge trade secret designations in state court. Industry groups support the revision but are also seeking additional changes. They object to Alaska’s requirement that companies notify property owners and test all water wells within one-half mile of a proposed well site. Other states that require pre-drilling water well sampling limit the radius to one-quarter mile.

After recount, Broomfield ban passes. Broomfield became the fourth Colorado municipality to block hydraulic fracturing within city limits through a ballot initiative, imposing a five-year moratorium. Although initiative opponents had a 13 vote lead going into the recount, the initiative passed by 17 votes out of over 20,000 cast. Fort Collins and Boulder also approved a five-year ban, while Lafayette, Colorado imposed a permanent ban on hydraulic fracturing.

Landowner group plans suit seeking to end New York’s moratorium on hydraulic fracturing. A coalition of landowners is preparing to file suit alleging the state’s continued moratorium on hydraulic fracturing is illegal. The group argues oil and gas is regulated by the Department of Environmental Conservation (“DEC”), making the state’s slow-moving study on hydraulic fracturing by the Department of Health irrelevant to DEC regulations. The complaint will also allege the state’s Environmental Quality Review Act does not permit Governor Cuomo to interfere with DEC’s decision and that he has delayed a decision on hydraulic fracturing for political reasons, violating the law’s requirement that reviews take place with “minimum procedural and administrative delay.” The landowners are seeking damages, alleging a regulatory taking of their mineral rights without compensation. A spokeswoman for Riverkeeper, Inc., which opposes any use of hydraulic fracturing, denied there is any legal barrier to developing shale in New York, and asserted that companies want to avoid performing an environmental impact statement for each planned well.

New Ohio reporting requirements will provide information on Utica Shale play. As part of Ohio’s new budget law, shale developers must report oil, gas, and natural gas liquids production volumes to the state every three months. Until now, production numbers were provided publicly on a voluntary basis, and the state produced annual production numbers. The state is hoping that the requirements will provide better information on the productivity of the Utica Shale to the public, including potential investors.

Business

Investors putting money into tankers. As the U.S. gears up to be a major exporter of refined petroleum products, investors and asset managers are making significant investments in tanker ships. A spokesman for Blackstone’s Tactical Opportunities Fund stated the company invested significantly in shipping assets since 2011, with the fund acquiring portions in nine gasoline tankers and a company that owns liquefied petroleum gas (“LPG”) tankers. Navigator Holdings, a LPG shipping company, announced an initial public offering and market analysts report that companies that ship petroleum products, LNG, and other chemicals have become attractive investments. Increased demands for the tankers, which can haul propane, butane, gasoline, and other refined products, have caused charter rates to climb steadily since 2008 and London’s Baltic Exchange predicts that they will soon reach all-time highs.

Analysts anticipate increase in oil and gas deals. Financial services company EY (formerly Ernst & Young) released the results of its survey of oil and gas industry executives, finding that 39% expect to be involved in mergers and acquisitions over the next 12 months. This is an increase from last year’s survey, which only found 28% of executives giving serious consideration to oil and gas deals. Although the survey shows less enthusiasm than in 2011, those surveyed showed increasing confidence in the global economy. They cited reductions in economic and regulatory uncertainty and greater confidence in stock market valuations for other oil and gas companies. Nearly half of survey respondents anticipate asset prices to increase in the next 12 months, attracting more potential buyers, but more are looking to purchase in cash than in previous years due to many companies’ high debt loads.

Carlyle Group reveals plans to invest $7 billion in energy assets. The Carlyle Group informed investors that it will look to add $7 billion in new energy assets for its global energy funds by 2015. The investments are planned to include $4 billion in North American energy projects, $1.5 billion in North American power projects, and $1.5 billion in international energy holdings. Most of the investment will be in shale exploration and production companies.

Research

IEA: U.S. won’t reign as the world’s top oil producer for long. The International Energy Agency (“IEA”) predicts the United States will be the world’s largest oil producer by 2015, at 11 billion barrels per day, but that the Middle East will soon take back the title. IEA expects U.S. oil production to decline in the next decade, while Middle East production will increase, in part in order to satisfy its own energy needs. The IEA’s annual World Energy Outlook predicted the Middle East will consume as much oil as China by 2020 and use more gas than the EU. Increasing oil consumption in the Middle East, Asia, and India are expected to keep global oil prices well above $100 per barrel for many years.

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This Week in Hydraulic Fracturing

Volume 2, No. 45

Federal

Senate Panel questions EPA on oil & gas methane emissions. During a recent hearing, members of the Senate Environment & Public Works’ oversight subcommittee wanted to know when the Environmental Protection Agency (“EPA”) will regulate fugitive methane emissions from the oil and gas sector. Sen. Sheldon Whitehouse (D-RI) urged EPA to consider the direct regulation of methane under the oil and gas sector New Source Performance Standards (“NSPS”). NGOs and a group of 15 state Attorneys General have asked EPA to reconsider its 2012 update to the NSPS, as they are dissatisfied with EPA’s position that methane emission reductions are a co-benefit of reducing VOC emissions. EPA representative Sarah Dunham testified that by requiring “green completions,” the NSPS will eliminate more than 1 million tons of methane while providing industry with additional revenue through the capture of salable gas. Ms. Dunham deflected questions regarding whether EPA was contemplating new regulations for methane, stating only that EPA is still studying the question.

Industry group wants change to LNG export revocation policy. The Industrial Energy Consumers of America, a trade association representing energy intensive manufacturers, criticized congressional testimony by Department of Energy (“DOE”) deputy assistant secretary Paula Gant stating that DOE would only revoke an LNG export license under “extreme circumstances.” In a letter to Energy Secretary Ernest Moniz, the group said the policy was “anti-manufacturing” and would benefit gas exporters over American consumers. The group has previously urged a cautious approach to LNG exports, fearing that increased exports could lead to price spikes for manufacturing facilities that rely on gas for fuel and feedstock. The group demanded “a full review of this policy” and argued that LNG exporters do not deserve “greater investment protection” than domestic manufacturers.

BLM to consider restricting oil and gas drilling in Colorado valley. As the Bureau of Land Management (“BLM”) updates its Uncompahgre Field Office resource management plan governing 3.1 million acres of federal land in southwestern Colorado, it has agreed to consider NGO and landowner demands to stop all oil and gas drilling in the North Fork Valley. BLM’s draft plan, to be released in 2014, will include a ban on oil and gas development as one of its alternatives. Drilling opponents claim the area is unsuited for development, as it would disturb existing farms and wineries which are increasingly a draw for tourists. The groups previously persuaded BLM to defer lease sales in the valley and won a lawsuit forcing the agency to divulge the identities of companies that nominated the parcels.

NGOs criticize BLM proposals to conserve Greater sage grouse. Several NGOs, led by WildEarth Guardians, criticized BLM’s proposals to conserve the Greater sage grouse population across five Western states. The NGOs argue the proposed plans would allow too much oil and gas development near grouse habitat and breeding areas and impose protections that are too weak. The three plans, covering portions of California, Idaho, Montana, Nevada, and Utah, would impact land use on 31 million acres of federal lands. Although the plans would effectively prohibit oil and gas exploration on federal lands in Idaho and southwestern Montana and severely restrict drilling in California, the groups argue the prohibitions are stated as vague and unenforceable goals and seek more specific restrictions on parcels already leased. The U.S. Fish & Wildlife Service has a court-ordered deadline to make an ESA listing decision in 2015 and the proposed plans are part of a National Greater Sage-Grouse Planning Strategy intended to avoid a listing.

States

Three Colorado moratoria ballot measures pass; fourth too close to call. Ballot measures imposing or extending moratoria on hydraulic fracturing in three Colorado cities passed. More than 75% of Boulder voters supported a five-year extension of the city’s current moratorium on hydraulic fracturing. Voting was closer in Fort Collins, where a five-year moratorium passed with just over 55% approval. Lafayette, Colorado passed a municipal charter amendment with 57% support. Entitled “The Community Bill of Rights and Obligations,” the amendment bans hydraulic fracturing within city limits as well as wastewater storage, the construction of oil and gas pipelines, and withdrawing water from within the city’s jurisdiction that could be used for drilling operations. The Lafayette amendment also purports to invalidate any federal or state permits allowing oil and gas activities and to strip corporations of all Constitutional rights to challenge the charter amendment. A fourth ballot measure, to impose a five-year moratorium on hydraulic fracturing in Broomfield, was too close to call and is undergoing a recount that could continue until the end of November. Oil and gas companies previously hinted that they would challenge any local moratorium on hydraulic fracturing, citing a 1992 Colorado Supreme Court case that prohibits local governments from regulating oil and gas operations. Litigation challenging a ban on hydraulic fracturing in Longmont, Colorado is ongoing.

Youngstown hydraulic fracturing moratorium rejected again. For the second time in a year, Youngstown, Ohio voters rejected a ballot initiative to ban hydraulic fracturing. The vote was somewhat closer this November, failing 55% to 45%; in May, the same initiative lost 57% to 43%. A spokesman for the Community Bill of Rights Committee, the group that organized both indicatives, stated that the group will continue to seek a moratorium. The plumbers and pipefitters union had opposed the initiative, arguing it threatened jobs. In less publicized elections, voters in Bowling Green overwhelmingly rejected an initiative to ban hydraulic fracturing while a similar initiative passed in Oberlin with strong voter support.

International

Newfoundland and Labrador imposes hydraulic fracturing moratorium. The Newfoundland and Labrador Ministry of Natural Resources stated that it will not process permit applications for oil drilling using hydraulic fracturing until they have reviewed the regulations of other jurisdictions, performed technical geological studies, and taken public comments on the issue. The Green Point shale deposit, which may hold up to 50 billion gallons of oil, lies on Newfoundland and Labrador’s western coast, near Gros Morne National Park. The government had previously allowed Shoal Point Energy to perform exploratory drilling in the Green Point shale, prompting objections from the public and UNESCO, given the Gros Morne National Park’s UNESCO heritage designation.

Shale gas development designated “key strategic industry” by Chinese government. China’s National Energy Administration included shale gas development among the country’s “key strategic industries,” entitling developers to financial incentives and more lenient regulations. The policy is intended to encourage foreign companies to enter into joint ventures or cooperative agreements with Chinese companies to develop shale gas. The “key strategic industries” designation is provided to select industries where the government wants to encourage development under its five-year plans. Shale production will be entitled to accelerated permitting, subsidies, and exemptions from the value-added tax, mineral resource fees, and corporate income taxes.

Business

Newfield announces new shale play. Newfield Exploration Company announced the discovery of a new shale play in Oklahoma’s Anadarko Basin. The company has named it the “Stack play” due to its stacked shale layers. The company stated that initial wells are producing significant amounts of crude oil. Newfield has approximately 150,000 acres in the Anadarko Basin under lease which it plans to develop by the end of 2014.

Devon Energy profits after focusing on shale production. Oklahoma City’s Devon Energy posted a third-quarter profit, as compared to a loss the previous year. Devon has sold off assets in the Gulf of Mexico and Brazil and wrapped up its pipeline and processing business into a master limited partnership with Crosstex Energy, which will receive a $4.8 billion investment from Devon. These changes freed Devon to focus on its North American onshore assets, which saw increased oil production, especially from its Permian Basin and Rocky Mountain-area wells.

Research

Study: Opportunities to reduce water usage. Energy industry consultant IHS published an analysis finding that new technologies and adjustments to state regulation could reduce hydraulic fracturing water usage by 30-40%. Although shale development uses much less water than agriculture or other industrial facilities, NGOs and regulators have raised concern about water consumption where water is scarce, such as Texas and Oklahoma. Some oil and gas companies are taking measures to reduce their water consumption and secure supplies. For instance, Antero Resources is spending $525 million to lay 200 miles of water pipelines in the Marcellus Shale play. Large well service companies are also introducing gels, foams and surfactants that can be used with recycled water. The report, however, also found that some state laws prevent the re-use of wastewater or prohibit large wastewater storage pits. These laws would likely need to be changed to accommodate widespread wastewater re-use.

Report: More hydraulic fracturing disclosure to investors needed. The As You Sow Foundation, a group that advocates for increased corporate environmental and social responsibility, and three socially conscious investment groups, released a report arguing that oil and gas companies are not disclosing sufficient information about the risks of hydraulic fracturing to investors. According to the report, no large oil and gas company disclosed information on half of the indicators that the report deems essential to investors, such as chemical management, air and water pollution, noise, traffic, and crime. The groups stated that such disclosure is important to a company’s reputation, access to capital, and its “social license to operate.”

Linking gas to oil prices fades but gains ground in Asia. A study by the International Gas Union found that pegging natural gas prices to those of crude oil has increased in parts of Asia, especially in China and India who are signing more import contracts where gas is pegged to crude prices. These countries continue to see increasing demand for scarce gas, providing leverage to suppliers. By contrast, “gas-on-gas” pricing, where gas suppliers compete with each other regardless of crude oil prices has become the norm in the United States, and the IGU study reports this pricing method has gained ground elsewhere, particularly in Europe. Some European countries especially benefitted where they have been able to use increased LNG supplies to de-couple gas prices from crude prices in re-negotiations of long-term contracts.

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This Week in Hydraulic Fracturing

 

Volume 2, No. 44

 

Federal

Coast Guard proposes new policy for shipping wastewater. The U.S. Coast Guard is proposing a new policy that would allow companies to ship hydraulic fracturing wastewater over inland waterways by barge. If finalized, the policy would require companies shipping wastewater to analyze it for hazardous or radioactive materials. Wastewater deemed to be hazardous or radioactive would be subject to requirements for venting, cleaning, and re-using the barges. Although the Coast Guard currently allows some hazardous chemicals to be transported under a general classification known as “listed cargo,” this option will not be available because the composition of wastewater can vary from well to well. The Coast Guard has asked for public comments on its proposal, including specifically regarding the disclosure of proprietary information present in the wastewater and the applicability of certain testing requirements. Comments are due November 29.

Environmental group asks BLM to stop permits in Greater sage grouse area. WildEarth Guardians petitioned the Bureau of Land Management (“BLM”) to stop work on permit applications submitted by Chesapeake Energy to drill on federal lands in the Douglas Core area of eastern Wyoming because it includes habitat for the Greater sage grouse, a candidate for listing under the Endangered Species Act. The group objects to an agreement between Wyoming and Chesapeake allowing the company to drill several hundred oil wells in the area, while imposing well construction and operating restrictions wells. The petition argues that BLM must stop all drilling and construction of new roads or well pads until the Bureau adopts restrictions on work during Greater sage grouse nesting and breeding seasons. BLM stated that it is reviewing the petition and has not yet begun processing Chesapeake’s permit applications.

BLM proposes Greater sage grouse management plans. BLM published new resource management plans covering 31 million acres in California, Idaho, Montana, Nevada, and Utah with the aim of protecting the Greater sage grouse. The Administration has stated that it would amend dozens of management plans in western states to protect priority and general habitat for the animal, including Colorado and North Dakota. Both habitat classifications include land use restrictions, but BLM has declined to propose “Areas of Critical Environmental Concern” that would have virtually prohibited shale resource development.

DOE: Department can revoke LNG export licenses. In a letter to the Senate Energy and Natural Resources Committee, Paula Gant, the deputy assistant secretary for the Department of Energy’s (“DOE”) Office of Oil and Gas, stated that DOE has the power to revoke LNG export licenses over the objections of the license holder. In the past, DOE has only revoked import or export licenses when they went unused and with the consent of the license holder. The letter cautioned that revocation authority without consent would only be used in “extraordinary circumstances” because DOE must protect the “investment-backed expectations of private parties….” Any suspension or revocation of an export license would be subject to an adjudicatory hearing. The letter did provide assurances to both LNG exporters and their customers that “extraordinary circumstances” do not mean that DOE would use revocations as “a price maintenance mechanism.” The letter also noted that the President has the power under the Energy Policy and Conservation Act, to restrict commodities exports “under such terms and conditions as he determines to be appropriate and necessary.” This power has been delegated to the Commerce Department.

House members urge OMB to quickly release diesel guidance. Representatives Henry Waxman, the ranking member of the House Energy & Commerce Committee, and Diana DeGette, the ranking member of the Subcommittee on Oversight and Investigations, are urging the White House Office of Management and Budget (“OMB”) to quickly approve EPA’s proposed guidance on the use of diesel fuels in hydraulic fracturing fluids without weakening the guidance from the proposal. EPA sent the guidance to OMB at the end of September, over a year after the public comment period on the guidance closed. It is not yet known what changes EPA made to the guidance in response to public comments, if any. OMB does not have any deadlines by which it must act on the guidance.

States

Four ballot initiatives on hydraulic fracturing voted on this week. Four municipalities in Colorado’s Front Range will vote this week on ballot initiatives to institute bans or moratoria on hydraulic fracturing. If their initiatives are adopted, Lafayette, Colorado would ban the practice while Boulder, Broomfield, and Fort Collins would stop hydraulic fracturing for some period of years pending further studies. Initiative proponents characterize their efforts as a “community rebellion” against energy companies, while developers have said proponents greatly exaggerate the purported risks from development using hydraulic fracturing and, if passed, the initiatives could deal a significant blow to Colorado’s economy. The Lafayette initiative, which if passed would also bar oil and gas companies from transporting equipment, water, or wastewater through the city on public roads, and would likely face litigation.

ConocoPhillips to explore shale in Northwest Territories. Canada’s National Energy Board announced that it is allowing ConocoPhillips to drill the first exploratory wells in the Northwest Territories’ Canol shale formation. Some have estimated that the Canol shale could hold two to three billion barrels of recoverable light sweet crude oil, but the area imposes unusual challenges on developers. ConocoPhillips’ exploratory wells will be just 100 miles south of the Arctic Circle and well north of the closest major city, Yellowknife, presenting both technological and logistical challenges. Several other major companies have purchased land in the Northwest Territories, including Shell and ExxonMobil.

New Mexico collects information on “frack hits.” The New Mexico Oil Conservation Division is collecting information from companies drilling on New Mexico’s side of the Permian Basin on accidental communication between horizontal well bores. These incidents are referred to by drillers as “frack hits,” cases in which a fracture travels from one well to another well. In late September, a frack hit from a horizontal shale well reportedly caused a conventional oil well to discharge 200 barrels of crude oil and produced water. New practices may be required to minimize the risk of these occurrences, such as additional well spacing requirements and sealing off older perforations.

Environmental group sues wastewater treatment company. Clean Water Action sued Waste Treatment Corporation alleging that its Pennsylvania wastewater treatment plant illegally discharged 200,000 gallons of shale gas wastewater into the Allegheny River per day in violation of the Clean Water Act, Endangered Species Act, and the state Clean Streams Law. The complaint cites a 2012 Pennsylvania Department of Environmental Protection (“PDEP”) study which allegedly found increased salts, metals, and radioactive materials downstream from the facility that reportedly was indicative of drilling wastewater. The plaintiff claims the discharges killed off Northern Riffleshell mussels, an endangered species. PDEP stated that it is negotiating a settlement with the company, but Clean Water Action accused the state of trying to protect the company. Waste Treatment Corporation denied that it processed or discharged shale gas wastewater because PDEP banned wastewater treatment plants from accepting the wastewater in May 2011.

California environmental review of hydraulic fracturing could take 18 months. California Governor Jerry Brown stated that an Environmental Impact Report by the Division of Oil, Gas, and Geothermal Resources (“DOGGR”) should be completed within 18 months. Governor Brown promised that it would be the most comprehensive review of potential environmental, health, and safety risks ever performed. The California legislature passed a law in September regulating how hydraulic fracturing may be conducted in the state, including a provision requiring DOGGR to complete an environmental review under the California Environmental Quality Act by July 1, 2015 before it develops a permitting process. California’s Monterey Shale formation is estimated to hold 15.4 billion barrels of oil – twice as large as estimates for North Dakota’s Bakken Shale play.

Wyoming abandons flaring tax proposal. Citing the potential for lawsuits, the Wyoming legislature will not pass a tax on flared gas. The legislature’s Joint Revenue Committee estimated that a 6% tax on the value of flared gas could raise $300,000 per year and reduce flaring emissions. The Petroleum Association of Wyoming argued that the Wyoming Constitution prohibited taxes on products that are not processed or sold and that a tax on flared waste gas would violate that prohibition.

International

Russia may end Gazprom’s monopoly on LNG exports. Citing increased competition, a bill in Russia’s Federal Assembly would end the monopoly on exporting natural gas currently held by state-controlled OAO Gazprom. President Vladimir Putin has announced he supports the bill. The bill would allow privately-owned gas company OAO Novatek, as well as another government-controlled company, OAO Rosneft, to construct their own LNG export terminals. Gazprom currently owns one LNG export terminal, Sakhalin-2, which exports oil and gas to Japan and Korea. Currently planning an Arctic LNG export terminal, Novatek believes the bill would give it regulatory certainty, as well as a series of tax breaks. Rosneft is partnering with Exxon Mobil to design its own LNG export terminal that it hopes to begin operations in 2018.

Sinopec looking for Western Canadian shale play investors. Chinese state-owned oil company Sinopec announced that it intends to sell a share in approximately half of its 500,000 acres in Western Canada’s Montney and Duvernay shale plays, which it acquired in 2011 for over $2 billion. A company spokesman characterized the sales as seeking joint venture partners to help Sinopec develop the assets.

Business

Louisiana well service company declares bankruptcy. Lafayette, Louisiana’s Green Field Energy Services, which marketed energy-efficient drilling equipment that partially operated on natural gas, is declaring Chapter 11 bankruptcy. The firm’s failure is significant given that many industry experts saw gas-fired field equipment as providing a substantial savings and environmental benefit over diesel-fueled equipment. A company spokesman cited Green Field’s rapid expansion followed by a nationwide drop in rig counts as the cause for it missing a loan payment in September, leading investor services firm Moody’s to downgrade its credit rating. Larger well service companies, such as Halliburton and Baker Hughes, have used some gas-fired or bi-fueled equipment (running on a mix of natural gas and diesel), but most equipment still run exclusively on diesel fuel.

Research

U.K.: Hydraulic fracturing poses a low risk to public health. Public Health England (“PHE”) released its review of hydraulic fracturing, concluding that the practice carries a low risk to public health if it is properly regulated. Since hydraulic fracturing has yet to begin in the U.K., PHE examined practices in the United States. It found that good construction, operation, and maintenance standards can preclude groundwater contamination, the most prominent concern cited by British environmental groups opposing the practice.

Oklahoma continues to study tremors but recommends earthquake insurance. The Oklahoma Geological Survey (“OGS”) will study a wastewater injection well that will soon resume operations to determine if it triggers seismic activity. The study is part of ongoing effort by Oklahoma to determine if shale gas wastewater injection, including injections at the studied well, caused a series of tremors in September 2013. The state is expected to shut down the well if it is linked to tremors reaching a magnitude of 1.8 on the Richter scale. Although Oklahoma has thousands of injection wells, OGS believes this particular well may have led to a magnitude 3.4 earthquake that damaged nearby buildings. Fears that both natural and man-made factors have caused a recent increase in seismic activity prompted the Oklahoma Insurance Commissioner to recommend that state residents buy earthquake insurance for the homes and businesses.

NGO report: Shale gas more water-intensive than previously estimated. Citing public databases documenting water withdrawals, fluid injections, and waste recovery and disposal, a report prepared for Earthworks concludes that Marcellus Shale gas drilling consumes more water for every thousand cubic feet of gas produced in West Virginia and Pennsylvania than previously reported. Among other things, the authors recommend that states expand reporting requirements, enforce new rules governing surface water withdrawals, and increase oversight of those activities. Regulators in both states responded that new laws require companies to file water use plans before they begin drilling and that neither state is facing a shortage of water.

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