Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 8

Federal

EIA increases projections for crude oil production from shale formations. Citing the increased adoption of cutting edge technologies and processes, the Energy Information Administration (EIA) increased its projections for productivity in shale oil plays. EIA projects that producers will exceed the agency’s prior projections of 5.7 million barrels per day (bpd) for 2013 and increased its 2015 projections to 7.1 bpd. However, the EIA reduced its overall crude oil production forecast by 100,000 bpd to account for projected weather-related production delays.

States

California: Coastal Commission seeks additional oversight of outer continental shelf permits. The California Coastal Commission has requested additional authority to review federal applications for drilling permits in the outer continental shelf. Currently the commission reviews initial outer continental shelf permits submitted to the Bureau of Safety and Environmental Enforcement for consistency with state law, but has no oversight of the subsequent drilling permits. Asserting a need for more transparency and a lack of information about hydraulic activities off of California’s coast, the commission is requesting that existing review programs be extended to the drilling permits.

Colorado: Opponents of hydraulic fracturing seek to intervene in challenges to Fort Collins moratorium. In a motion filed by the University of Denver Environmental Law Clinic, the Sierra Club, Earthworks, and Citizens for a Healthy Fort Collins are seeking to intervene in a lawsuit challenging the legality of Fort Collins’ 5-year moratorium on hydraulic fracturing. The moratorium was enacted last year through a general election. The groups assert that the City of Fort Collins cannot adequately represent their interest in upholding the moratorium because the city council opposed the moratorium during the election and has since raised concerns regarding the costs of defending the lawsuit. The groups argue that the moratorium should be left in place so that additional studies of hydraulic fracturing can be completed before any drilling occurs.

New York: Landowners file lawsuit to compel New York to end moratorium on hydraulic fracturing. On February 14, 2014 the Joint Landowners Coalition of New York sued the state of New York in an effort to compel the state to complete its review of high volume hydraulic fracturing and end the effective moratorium on hydraulic fracturing in the state. Until New York completes an environmental review that was begun in 2008 and a health review that was begun in 2012, the state will not issue a permit to allow the use of high volume hydraulic fracturing to produce natural gas. The complaint alleges that Governor Cuomo has unlawfully placed himself in the middle of the environmental review process and has delayed it for political reasons. The complaint requests that the court order the state to complete the reviews or, alternatively, to hold a hearing and jury trial where state officials can testify as to the reasons for the delay.

Kansas: Task force to study cause of earthquakes. A governmental task force in Kansas announced plans to study the cause of earthquakes occurring along the Kansas Oklahoma border. The task force will include representatives from the Kansas Geological Survey, the Kansas Corporation Commission, and the Department of Health. Over the past six months, Kansas has experienced several earthquakes strong enough to be felt. Drilling activities in the Mississippi Lime field have expanded recently, leading some to question whether the earthquakes are linked to hydraulic fracturing and the underground injection of wastewater.

Louisiana: Research projects increased demand for natural gas in Louisiana. A recent white paper released by consulting firm ICF International projects that Louisiana’s demand for natural gas could nearly double by 2020. The white paper concludes that the primary demand drivers will be an expansion of LNG export facilities, construction of new petrochemical facilities, and increased demand throughout the Southeast. At the same time, ICF projects that natural gas supplies from Texas and the Gulf of Mexico will decrease, resulting in an increased reliance on the Marcellus Shale to keep pace with demand.

Michigan: Court of Appeals affirms decision excluding hydraulic fracturing from injection well regulations. A Michigan Court of Appeals affirmed the state Department of Environmental Quality’s (DEQ) decision to exclude hydraulic fracturing activities from regulations governing underground injection wells. The Court agreed with DEQ’s reasoning that differentiates between well injection for “initial stimulation” of oil and gas well injections for disposal, storage, or secondary recovery. One of the Plaintiffs in the case, Ban Michigan Fracking, is also pursuing a ballot initiative to prohibit hydraulic fracturing in the state.

Wyoming: Former regulator reverses position on cause of pollution in Pavillion. Robert Johnson, a former employee of the Wyoming State Engineer’s Office is no longer asserting that groundwater contamination was caused by the use of hydraulic fracturing techniques. Johnson had previously asserted that the contamination was caused by the use of unlined pits to hold hydraulic fracturing flowback. Johnson explained that the Wyoming Oil and Gas Conservation Supervisor convinced him that his prior conclusions were incorrect. State officials in Wyoming have consistently rejected claims that any groundwater contamination in Pavillion is related to hydraulic fracturing.

Governors form bipartisan group to promote state regulation of hydraulic fracturing. In a bipartisan effort to promote states as the primary regulators of oil and gas drilling, the governors of Alabama, Alaska, Colorado, Kentucky, Montana, Mississippi, Nevada, North Dakota, Oklahoma, Pennsylvania, Texas, and Utah have formed the States First Initiative in conjunction with the Interstate Oil & Gas Compact Commission and the Groundwater Protection Council. In a press release, the States First Initiative asserts that states are “the primary and appropriate regulators of oil and gas development.” While no formal lobbying activities are currently planned, the Initiative is expected to advocate against a new federal regulations in the field.

International

Russia: Siberian shale reserves could fuel hydraulic fracturing boom. The discovery of significant shale reserves in Siberia could allow Russia to rival the United States for shale oil and gas production. Recent estimates for the Bazhenov formation in western Siberia range up to 2 trillion barrels, with 22-360 billion barrels potentially recoverable using hydraulic fracturing. While some concerns regarding the geology of the Bazhenov formation remain, the plentiful water and existing pipeline and processing infrastructure are expected to aid in development. Further, Russia’s decision last year to eliminate its mineral tax for the Bazhenov formation for the next 15 years has resulted in investments by international producers such as Exxon and Shell, along with Russian producers. If estimates prove correct, the Bazhenov formation would rival the Bakken formation for productivity.

Business

Occidental announces plan to spin off California business. On February 14, 2014 Occidental Petroleum Corp. announced that it would spin off its California business unit, which includes assets in California’s Monterey Shale. The decision follows a number of recent shareholder friendly actions that included selling $1.4 billion in shale assets in the central United States, raising dividends, and announcing a plan to stock purchase plan. Occidental projects that the new California business will be the state’s largest gas producer and the largest holder of oil and gas mineral acreage.

Research

Study finds that methane leakage exceeds EPA estimates. A recent study published in Science entitled “Methane Leaks from North American Natural Gas Systems” reported that methane leakage from natural gas lines could exceed EPA estimates by as much as 50%. The study found that a significant portion of the leakage may come from locations at conventional well sites, gas processing plants, storage tanks, and distribution facilities. The study did not find any increase in methane leakage as a result of hydraulic fracturing. In a second phase of the study, researchers are seeking to identify automated sensing technologies to pinpoint methane leaks.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 7

Federal

EPA Inspector General begins study of agency authority over water resources. In a memorandum to the Environmental Protection Agency’s (“EPA”) Assistant Administrator for Water, the EPA Office of the Inspector General (“OIG”) stated that it is beginning preliminary research on the agency’s “ability to manage potential threats to water resources from hydraulic fracturing.” OIG stated that it will gather information from state agencies, environmental groups, and industry to determine how to improve “preventative and response measures” in responding to “the impacts of hydraulic fracturing.” The memorandum could be the start of EPA developing a strategy to increase its regulation over oil and gas production, which has traditionally been regulated at the state level. </p>gt;

DOE approves new LNG export terminal as applications mount. The Department of Energy’s (“DOE”) Office of Fossil Energy approved the sixth application to export LNG to countries without a free-trade agreement with the United States. The approval allows Sempra Energy’s Cameron LNG to export up to 1.7 billion cubic feet per day from its proposed Cameron, Louisiana terminal, pending approval from the Federal Energy Regulatory Commission. The next project for review is the Jordon Cove Energy Project, which would export up to 2 billion cubic feet per year from a greenfield site in Oregon. Collectively, approved LNG projects are now authorized to sell up to 40 billion cubic feet per day. LNG export proponents, however, continue to urge DOE to move faster on applications. There are currently 25 pending applications seeking authorization to export LNG to countries without free-trade agreements. The latest is a proposal by Texas LNG to construct two floating terminals that would sell 270 million cubic feet per day.

BLM cancels South Park, Colorado oil and gas leases. After protests by environmental groups, BLM agreed to withdraw six oil and gas lease parcels in South Park, Colorado from auction and committed to developing a master leasing plan that would guide where oil and gas may be developed in the area. The groups have argued that the South Park region slated for leasing is untouched wilderness area and that development would harm wildlife habitat pronghorn, mule deer, and elk. The region in question rests atop of the Niobrara Shale formation, which is rich in tight oil and gas. Master leasing plans typically take several years to develop, putting oil and gas leasing off the table for the near future.

States

California raises objections to prior Federal approvals for off-shore hydraulic fracturing. The Bureau of Safety and Environmental Enforcement (“BSEE”) approved three requests to allow hydraulic fracturing at off-shore oil platforms in March 2013. California officials, however, recently questioned whether the approvals were provided with the proper prior notice to the California Coastal Commission even though the Commission had previously raised concerns to the federal government about the potential environmental impacts of off-shore hydraulic fracturing. The Commission is trying to convince BSEE to allow the state more oversight of off-shore hydraulic fracturing, arguing that federal reviews do not collect enough data about the practice and there is little understanding of the potential environmental impacts. Although BSEE regulates off-shore operations occurring more than three miles from the coast, the Commission argues that hydraulic fracturing could raise environmental concerns within the three mile area. The Commission acknowledged, however, that even if it were granted additional oversight authority, it still would lack the authority to ban off-shore use of hydraulic fracturing.

North Dakota likely to create oil pipeline inspection program. The Chairman of the North Dakota Public Service Commission stated it was “very likely” that the Commission will seek a budget from the state’s legislature to create a new oil pipeline inspection program. The Commission already handles siting for all pipelines as well as inspections of natural gas pipelines. The Pipeline and Hazardous Materials Safety Administration (“PHMSA”) already met with the Commission to discuss delegating the inspection of nearly 1,855 miles of crude oil pipeline in North Dakota. As much as 80% of the state’s inspection program can be reimbursed from PHMSA.

International

Poland drops idea of government fund for shale gas licenses. In order to spur foreign investment in Polish shale gas reserves, Prime Minister Donald Tusk announced that the government would scrap plans to create a government owned and operated fund that would hold stakes in all shale gas licenses. Several companies were concerned that the proposed fund would muddy the understanding of the government’s rights in exploration projects. Poland is currently Europe’s most active country in exploring its shale gas potential and its legislature is expected to consider a new law to promote development in the next few weeks.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 6

Federal

EPA releases final guidance for the use of diesel fuel in hydraulic fracturing. On February 11, 2014 the Environmental Protection Agency (EPA) issued a final Permitting Guidance for Oil and Gas Hydraulic Fracturing Activities Using Diesel Fuels: Underground Injection Control Program Guidance #84. Under the Safe Drinking Water Act’s Underground Injection Control (UIC) Program, EPA’s regulatory authority over hydraulic fracturing is limited to operations that include diesel fuels in hydraulic fracturing fluids. The new Guidance defines diesel fuel by reference to five specific chemicals, CAS Registry Nos. 68334-30-5, 68476-34-6, 68476-30-2, 68476-31-3, and 8008-20-6. While drafted specifically for hydraulic fracturing operations that use diesel fuels, EPA asserts that the Guidance incorporates what EPA describes as best practices for all hydraulic fracturing activities, including technical recommendations for well casing integrity and background water quality sampling, as well as other provisions. EPA also indicates that it expects the Guidance’s recommendations will be used by permit writers in states that have been delegated authority to implement the UIC program.

EPA’s Inspector General to evaluate EPA’s regulation of hydraulic fracturing. In a February 5, 2014 memorandum, EPA’s Inspector General (IG) announced plans to evaluate how EPA and the states have used their regulatory authority to address potential impacts of hydraulic fracturing on water resources. Specifically, the IG will “evaluate what regulatory authority is available to the EPA and states, identify potential threats to water resources from hydraulic fracturing, and evaluate the EPA’s and states’ responses to them.” The evaluation will be conducted concurrently with EPA’s ongoing assessment of potential water quality impacts of hydraulic fracturing.

Interest groups ask EPA to require oil and gas sector to report chemical releases to the Toxics Release Inventory. In a January 30, 2014 letter to the acting director of the Toxics Release Inventory (TRI), a number of interest groups asked EPA to include the oil and gas sector in the TRI reporting requirements under the Emergency Planning and Community Right to Know Act (EPCRA). The letter follows a formal petition that the same organizations submitted to EPA in October 2012. To date, EPA has declined to expand the TRI program to the oil and gas sector, as very few wells exceed the 10,000 pounds per year threshold for reportable releases. The interest groups assert that recent data show that certain oil and gas sector facilities, such as compressor stations, processing plants, and facilities used to separate natural gas liquids during processing exceed EPA’s release thresholds and, therefore, should be required to report their releases.

PHMSA sent violation notices to oil companies for rail shipments in North Dakota. As part of a so-called “Bakken Blitz,” the Pipeline and Hazardous Materials Safety Administration (PHMSA) announced that it was seeking nearly $100 million in civil penalties for allegedly assigning improper safety packing categories to crude oil shipments. PHMSA stated that notice letters were sent to Hess Corp., Whiting Petroleum Corp., and Marathon Oil Co. PHMSA’s enforcement initiative comes on the heels of several train derailments involving crude oil in the past year.

Senators ask EIA to study potential impacts of lifting ban on crude oil exports. In a February 3, 2014 letter, Senators Wyden (D-Ore) and Cantwell (D-Wash.) asked the Energy Information Administration (EIA) to evaluate how domestic gasoline prices would be impacted if the ban on crude oil exports were lifted. The senators also asked the EIA to evaluate potential routes and methods for transporting crude oil to ports for export. The senators cited possible concerns over increased rail transport of crude oil to the Pacific Northwest for export to Asia.

States

Iowa: Think tank report on silica mining warns of risks to water resources. The Iowa Policy Project asserts that silica mining may pose risks to water quantity and quality in Iowa. Silica is mined in several counties in northeast Iowa, and the report states the geology that produces high-quality silica also makes the region more susceptible to water depletion and groundwater contamination. The authors recommended that counties considering expanded silica mining should complete hydrologic mapping, monitor local wells to establish baseline conditions, and provide setbacks for trout streams and other hydrologic resources. Silica sand is often used as a proppant in hydraulic fracturing.

Nevada: Draft rules for hydraulic fracturing. In response to a growing interest in exploring unconventional oil reserves in Nevada, the state has drafted regulations to address hydraulic fracturing. The draft regulations would require background water quality sampling, additional well casing requirements, and above-ground storage tanks for flowback. The Nevada Commission on Mineral Resources intends to hold a series of workshops and a public hearing on the draft regulations later this spring.

North Dakota: Proposed natural gas pipelines could curtail flaring in Bakken Shale. WBI Energy Inc. has proposed building a $650 million dollar natural gas pipeline in North Dakota that could provide well operators with the means to collect and transport natural gas that is produced along with oil in the Bakken Shale. The 400 million cubic feet per day Dakota Pipeline would start near gas processing plants in Williams and McKenzie Counties and extend 375 miles into Minnesota, where it would connect with existing pipelines. WBI Energy is currently gauging interest, but could begin construction as soon as 2016. If built, the pipeline would provide new opportunities for natural gas, which is often flared due to the lack of transport opportunities.

Ohio: American Energy Partners L.P. adds to its stake in the Utica Shale. American Energy Partners LP (American Energy), a firm founded by the former head of Chesapeake Energy Corp. Aubrey McClendon, has dramatically increased its stake in the Utica Shale. At the end of January, American Energy purchased 74,000 acres held by Hess Corp. for $924,000. A week later, American Energy added another 56,000 acres held by ExxonMobil Corp. and Paloma Partners, LLC for an undisclosed sum. The company plans to drill as many as 2,700 wells in the Utica Shale in the next decade.

Texas: ExxonMobil increases holdings in the Permian Basin. ExxonMobil subsidiary XTO Energy Inc., recently acquired a stake in 34,000 acres in the Wolfcamp Shale formation in the Permian Basin in Texas. XTO will work with co-owner Endeavor Energy Resources L.P. to develop the property. The acquisition increases XTO’s holdings in the Permian Basin to more than 1.5 million acres.

International

Hydraulic fracturing banned in Catalonia, Spain. In a January 27 vote, the legislature in Catalonia, Spain amended its Urban Planning Law to prohibit hydraulic fracturing on undeveloped lands. This position contrasts with Spain’s official position in support of hydraulic fracturing. While hydraulic fracturing would be regulated at the national level, each region in Spain has a number of regional permits that are also required. Thus, by using Urban Planning Laws and related programs, each region has effective veto power over the national government’s policy with respect to hydraulic fracturing.

Business

Reports suggest that shale gas boom is fueling growth in manufacturing sector. Recent reports suggest that the expansion of natural gas production in the United States is fueling growth in the manufacturing sector. The American Chemistry Council recently reported that increased natural gas production has prompted more than $91 billion in domestic corporate investments, and in a separate report, projected that 13,000 new jobs will be created in Arkansas, largely due to the Fayetteville Shale play. IHS Global Insight similarly projects that 3.8 million new jobs will be created by 2025 that directly or indirectly related to the natural gas sector.

Ceres report highlights water sourcing risks of hydraulic fracturing. In a February 5, 2014 report, Ceres reported on the risks to hydraulic fracturing stemming from water supply issues. Many areas with significant shale plays, including California and Texas, are in the midst of droughts, and hydraulic fracturing operators must compete with other water users for scarce supplies. The Ceres report singled out Anadarko Petroleum Corp., Encana Corp., Pioneer Natural Resources Co., and Apache Corp. as having the highest exposure to water sourcing risk. Representatives from Anadarko, Pioneer, and Apache each responded to the report by highlighting their implementation of recycling programs to reduce their overall water demand.

Shareholder resolutions seek greater disclosures regarding hydraulic fracturing activities. Citing insufficient information to make informed investment decisions, a group of shareholders including Green Century Capital Management, As you Sow, the Investor Environmental Health Network, the sisters of St. Francis of Philadelphia, and two financial comptrollers from New York filed shareholder resolution. The resolutions seek greater disclosure with respect to hydraulic fracturing’s impacts on ground and surface water, air quality, and local communities. To date, Exxon Mobil Corp., Chevron Corp., EOG Resources, Inc., Occidental Petroleum Corp., and Pioneer Natural Resources Co. have been targets of such resolutions.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 5

Federal

President Proposes “Shale Zones.” A White House fact sheet released for the State of the Union included a proposal for “Sustainable Shale Gas Growth Zones.” According to the proposal, which was not part of the State of the Union speech, the federal government would provide technical assistance and planning for shale-producing regions to avoid “boom-bust” cycles that can occur when an area becomes too dependent on a single industry. A White House official stated that details would be fleshed out in the near future.

NTSB Suggests More Stringent Crude Oil Rail Standards. The National Transportation Safety Board (“NTSB”), issued recommendations to the U.S. Department of Transportation (“DOT”) to avoid crude oil spills from trains. Among the recommendations are that railways adopt hazardous materials route planning that would take trains around populated or environmentally sensitive areas, ensure adequate spill response capabilities that could handle worst-case spill scenarios, and have DOT institute audits to ensure that crude oil is being properly classified and subject to appropriate safety and security plans. The suggestions came shortly after the Federal Railroad Administration issued final rules strengthening railroad inspection standards.

NGOs Seek Uinta Basin Non-Attainment Designation. The Uinta Basin in Colorado and Utah is home to extensive conventional and unconventional gas drilling operations. Environmental groups claim that these activities are responsible for violations of federal ozone ambient air quality standards and have filed a petition asking the Environmental Protection Agency (“EPA”) to designate the Uinta Basin as a non-attainment area. If EPA grants the designation, it could significantly restrict new drilling in the area. Colorado has already proposed new regulations to reduce fugitive emissions that contribute to ozone formation, estimating that the proposed changes could cut those emissions by one-third. The groups previously lost a challenge to EPA’s refusal to designate the Uinta Basin as being non-attainment after finding that the air quality data cited by the environmental groups was unreliable.

States

NGO Suit to Block Hydraulic Fracturing in California Dismissed. A California state court dismissed claims by the Center for Biological Diversity and other NGOs alleging that the Department of Oil Gas & Geothermal Resources (“DOGGR”) unlawfully authorized the use of hydraulic fracturing without performing an environmental impact review under the California Environmental Quality Act. The court held that the case was moot, citing passage of S.B.4 which requires DOGGR to issue permits for hydraulic fracturing until it completes a study of potential environmental impacts by January 1, 2015.

Hydraulic Fracturing Decision in New York Delayed Until 2015. New York’s Environmental Department Commissioner announced that the state’s 2014 budget includes no funding for hydraulic fracturing rulemaking or enforcement. This means that the New York Department of Environmental Conservation cannot lift the current de facto ban until April 2015, when a new fiscal year begins.

New York Assessing Crude Rail Shipments. Citing recent train derailments in Quebec and North Dakota, Governor Andrew Cuomo signed an executive order requiring state agencies to assess the safety practices of railroads shipping crude oil through the state and submit the results of the assessment by April 30, 2014. Approximately 65,000 barrels of oil move through Albany per day en route to east coast refineries. Environmental group Hudson Riverkeeper is urging the Governor to impose a moratorium on shipping crude oil through the state.

Colorado ballot initiative seeks authorization for local bans. The Colorado Community Rights Network filed a proposed state-wide ballot amendment that would allow local governments to impose moratoria or bans on the use of hydraulic fracturing techniques to develop shale oil and gas. Although several towns have already imposed moratoria and bans, some are being challenged in court where the state and industry groups argue that local laws on oil and gas operations are preempted by state law. The proposed ballot initiative would amend Colorado’s constitution to allow for local control over industrial activities, including shale oil and gas development. The proponents must collect over 86,000 signatures to get the question put on the state ballot.

Landowner Suit Delays Drilling in Michigan. A landowner near Pere Marquette State Forest in Cadillac, Michigan, obtained a temporary judicial stay of drilling by Encana Oil & Gas in the Forest. Citing a published report, the landowner claimed the possibility of “frack hits,” a phenomenon where fracturing from one well may breach the integrity of another well, creates an environmental risk and threatens mineral rights of adjacent owners. The landowner has also petitioned the Michigan Department of Environmental Quality to require companies to determine how far well fractures will travel before drilling. Encana has already drilled exploratory wells in the forest, seeking to tap into the Utica-Collingwood shale formation, and is seeking permits for 16 more. Under current Michigan law, Encana is required to survey the area within 1,320 feet of the well pads to determine if any abandoned wells are present.

International

Spain Challenges Provincial Ban on Hydraulic Fracturing. The Spanish government filed suit against the province of Cantabria, arguing that its ban on the use of hydraulic fracturing ban is illegal. Cantabria is home to Spain’s most promising shale formation, but the provincial government banned shale development in April 2013, citing the threat of adverse impacts to local scenery and the potential for groundwater contamination. The national government, however, argues that the ban is inconsistent with new rules requiring environmental reviews that will speed up permitting for hydraulic fracturing.

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