Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 13

Federal

White House issues methane reduction strategy. As part of the President’s Climate Action Plan, the White House has directed the Environmental Protection Agency (EPA) to determine whether it should regulate directly methane emissions from oil and gas production, processing and distribution operations. According to an interagency guidance document, EPA will evaluate whether new regulations are necessary, and if so, finalize them by the end of 2016. EPA issued New Source Performance Standards for natural gas production wells in 2012 that reduced volatile organic chemical emissions that had the co-benefit of also reducing methane emissions. Environmental groups have sought the direct regulation of methane and argued the rules should extend to oil production wells. Industry groups have countered the sector has already made substantial reductions, as it has the financial incentive to capture as much natural gas as possible; additional capture of methane is a matter of creating new infrastructure, such as pipelines, not imposing new regulations. In addition to oil and gas, the guidance calls on the Departments of Agriculture, Energy, Interior, Labor, and Transportation to consider regulations and voluntary measures to reduce GHG emissions in other sectors, such as coal mines, farming and landfills.

Prairie Chicken designated as “threatened.” The U.S. Fish & Wildlife Service (FWS) announced that the prairie chicken will receive protection under the Endangered Species Act as a “threatened” species. The prairie chicken’s habitat spans portions of Colorado, Kansas, New Mexico, Oklahoma and Texas. States, industry, farmers and ranchers had been working to create voluntary conservation measures that would limit the impact of oil and gas drilling, agricultural operations, and wind turbines on the prairie chicken’s habitat in order to avoid an FWS designation. To date, the five states and over 30 companies collectively agreed to protect 3.6 million acres of habitat. The FWS final rule, however, stated that it will allow for special flexibility where those voluntary state programs are in place. A further study is still to be done to delineate the extent of the prairie chicken’s critical habitat.

BLM hydraulic fracturing rule anticipated by year end. Testifying before a House Committee, Secretary of the Interior Sally Jewel stated that the Department of the Interior (DOI) expects the Bureau of Land Management (BLM) will finalize its proposed regulations governing hydraulic fracturing on federal and Indian lands before the end of 2014. Secretary Jewell noted that BLM must review 1.3 million comments received on the proposed rule and that its final regulations will be informed by more recent scientific studies on well integrity and seismic activities.

Wastewater treatment owner pleads guilty. Benedict Lupo, the former owner of Hardrock Excavating, pled guilty to violating the Clean Water Act for ordering employees to illegally discharge hydraulic fracturing wastewater into a storm drain leading to the Mahoning River. The Ohio Environmental Protection Agency had received an anonymous tip about the dumping, leading to a federal indictment. Former employee Michael Guesman admitted to the illegal discharges and received three years’ probation in exchange for his cooperation. Sentencing for Lupo is scheduled for June 16, 2014. Lupo could receive a maximum prison sentence of three years along with $3 million in restitution and $1 million in criminal fines.

States

California: Culver City considering moratorium. The City Council of Culver City, California, is preparing an ordinance that would impose a moratorium on hydraulic fracturing and other unconventional well development methods within the city. This marks a third city in California to take up the issue publicly, as the City Council of Los Angeles likewise previously voted to prepare an ordinance imposing a ban, and the City of Carson imposed a 45-day moratorium. Culver City council members stated the city would likely look to language developed by Los Angeles. A portion of the Inglewood Oil Field sits in Culver City with 26 active wells within the city’s jurisdiction, but those wells would not be covered by the proposed moratorium.

California: NGOs sue to stop crude oil rail shipments. Earthjustice, representing several environmental groups, filed suit in San Francisco Superior Court seeking to halt shipments of crude oil in the Bay Area by rail, claiming the practice is too dangerous. In their complaint, the groups assert the Bay Area Air Quality Management District allowed Kinder Morgan to transport Bakken crude through the area without public notice and comment or complying with the California Environmental Quality Act. They characterize Bakken crude as dangerous and that the shipments will add to GHG emissions.

International

China: Sinopec brings China’s first commercial shale gas field on-line. Sinopec announced it had begun commercial operations at its Fuling shale gas field. Companies attempting to develop China’s substantial shale gas reserves have faced challenges, due to difficult geology, limits on water resources and lack of needed infrastructure. Sinopec, however, has begun commercial operations in Fuling ahead of schedule. The company is seeking to produce 10 billion cubic meters of natural gas by 2017.

<strong>gt;South Africa: Government to issue hydraulic fracturing regulations. South Africa’s Mineral Resources Department announced it would issue final regulations to allow for the use of hydraulic fracturing to develop the country’s shale gas resources. Several companies had been planning to apply for permission to drill exploratory wells, but the Parliament passed a law earlier this month claiming 100% ownership of any natural gas recovered. Most companies following South Africa’s regulatory development had planned on 20% government ownership and are now evaluating whether they will move forward. The country’s Karoo region is estimated to hold 40 trillion cubic feet of shale gas.

Business

Oil rig counts hit high. Well field services company Baker Hughes reported that oil rig counts hit 1,473 rigs, the highest number since the company began recording the metric in 1987 and up by nearly 150 since this time last year. The number shows how far energy companies have swung towards producing tight oil – which still trades at around $100 per barrel – and away from shale gas, which totaled only 326 rigs across the country. The Permian Basin continues to dominate shale development with 513 total rigs (oil and gas), more than twice the number working in the next most productive area, the Eagle Ford shale play (219 rigs). Baker Hughes counted 186 rigs in Williston, North Dakota, home of the Bakken Shale play, along with 78 rigs in the Marcellus Shale, 73 in the Mississippian, and 55 off-shore.

If you have any questions regarding this Report, please contact us.

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 12

Federal

EPA seeks advice on addressing recent methane emissions data. EPA has requested public comments on how it can incorporate a series of ongoing studies of methane emissions from natural gas sources into its annual GHG Inventory. In contrast to EPA’s current reliance on emissions estimates, the studies conducted by the Environmental Defense Fund (EDF) and the University of Texas at Austin (UT) provide actual measurements of methane emissions leaks during well development and flowback. The emissions reported by the EDF and UT studies are significantly lower than EPA’s emissions estimates and may undercut calls for EPA to regulate methane emissions from the oil and gas sector.

BLM holds first public forum to discuss methane emissions from oil and gas development. On March 19, 2014 the Bureau of Land Management (BLM) held a public forum in Colorado to discuss options to address methane emissions released during oil and gas development. Developing rules for methane emissions has been on BLM’s regulatory agenda since 2010, and the Administration’s Climate Action Plan has targeted reducing methane emissions as part of its overall efforts to address climate change. In presentations at the forum, BLM explained that it believed existing rules were out of date and provided a range of options that could be considered in a future rulemaking. BLM plans to hold additional listening sessions during May in North Dakota, New Mexico and Washington, D.C.

States

California: Carson issues temporary moratorium on oil drilling. The city council of Carson, California, which sits above the Dominguez field, unanimously voted to prohibit oil development temporarily. The moratorium is for 45 days, but the council can extend it to last as long as two years. The city council vote marks the first time that a California city with oil reserves has issued such a moratorium. Reportedly, the city council adopted the temporary moratorium to allow it to consider for itself the potential effects associated with using hydraulic fracturing to develop oil resources, as well as the content of the state regulations that are to be issued in response to California’s hydraulic fracturing legislation.

Illinois: Johnson County voters defeat effort to ban hydraulic fracturing. In a March 18, 2014 referendum, voters in Johnson County, Illinois defeated a non-binding ballot measure that would have directed the county commissioners to ban hydraulic fracturing within the county. Proponents had argued that hydraulic fracturing is contrary to Johnson County residents right to a safe and clean environment. The referendum was the first local vote involving a ban on hydraulic fracturing since Illinois passed the Hydraulic Fracturing Regulatory Act in 2013.

Oklahoma: New rules would increase data collection from oil and gas disposal wells. The Oklahoma Corporate Commission has proposed new rules that would require daily recordkeeping of volume and pressure data for oil and gas disposal wells. The rules require approval by the Oklahoma legislature and governor. The Commission believes the increased data will help the state evaluate whether disposal wells are contributing to recent increases in seismic activity in the state. The rules have widespread support, and the Oklahoma Independent Petroleum Association has stated that, while burdensome, additional data would ultimately help to alleviate public concern over hydraulic fracturing.

Minnesota: Minnesota EQB approves silica mining regulations. The Minnesota Environmental Quality Board (EQB) approved model regulations that could be used by local governments seeking to regulate silica mining. While an earlier draft had included some mandatory requirements, such as the enclosure of silica mining operations, the final regulations provide a “toolbox” of standards as guidelines that local governments can consider when developing their own regulations. The EQB was required to issue the guidance under the terms of legislation passed in 2013.

North Dakota: State to issue regulations to track radioactive waste. North Dakota Governor Jack Dalrymple has directed the state’s health department to prepare regulations requiring the tracking of radioactive waste generated during oil and gas development. The directive came after potentially radioactive filter socks were found in Watford City and Noonan, North Dakota earlier this month. Radioactive waste is a natural byproduct of oil and gas development in North Dakota, but the state prohibits in-state disposal. The draft rules are expected to be released for public comment in June.

Texas: City of Denton to hold vote on hydraulic fracturing moratorium. Frack Free Denton, a grassroots organization opposed to hydraulic fracturing, announced that it has collected enough signatures to place its proposal to ban hydraulic fracturing on the November ballot. Landowners in the Denton area recently filed lawsuits regarding alleged emissions from gas wells and royalties from gas production. Last fall, the City of Denton unsuccessfully sought an injunction barring new gas wells within the city limits.

International

EU excludes shale gas operations from environmental assessment directive. The European Parliament voted recently to strengthen an environmental assessment directive that will apply to approximately 200 types of projects including bridges, ports and landfill sites. Shale gas operations, however, were excluded from the revised directive. Analysts observed that the EU’s decision reflects an increased concern over energy security which has been exacerbated by the ongoing conflict in Ukraine.

Studies

ICF: North American oil and gas industry must invest more than $30 billion per year in infrastructure. A recent ICF International study projects that over the next twenty years, the oil and gas industry in the United States and Canada will need to invest $641 billion on midstream infrastructure. The $30 billion per year projection is more than double what ICF projected in 2011 and nearly three times more than current investments. Necessary infrastructure would include new pipelines, pumping stations, gas compressors and other equipment. While natural gas will require the most significant expenditures, oil and natural gas liquids account for a large and growing share of the total costs. ICF found that the necessary investments would create more than 432,000 jobs and generate $300 billion in taxes. ICF also noted that political issues, including U.S. approval of liquefied natural gas exports and international conflicts in places like Ukraine will also influence the market and infrastructure needs for domestic oil and gas.

CATF: Oil and gas industry have cost-effective options to reduce methane emissions. The Clean Air Task Force (CATF) released a report suggesting that new technology would allow the oil and gas industry to cost effectively reduce methane emissions from gas processing plants, compressor stations and well sites. The report highlighted the use of infrared cameras, as opposed to visual inspection, to detect leaks, claiming that the costs to use infrared cameras are low and in 90% of cases, offer a payback period of less than one year by preventing the loss of saleable product. The report focused on annual inspections, finding that the costs associated with more frequent monitoring programs would not be cost effective. CATF is using the study as part of a campaign urging EPA to adopt regulations that include expanded leak detection requirements.

Wood Mackenzie: U.S. is leader in world ethylene market. According to a recent report by Wood MacKenzie, a worldwide shift from oil to natural gas as a feedstock for plastics production has put the United States in the forefront of this field. Shale gas development has produced an abundance of low-cost ethane which has fueled expansion and investment in plastics production in the United States. At the same time, previously strong markets in Europe and East Asia that rely on naphtha for ethylene production are struggling to compete with newly available feedstocks. The Wood MacKenzie report projects strong growth in the ethylene market with worldwide production increasing from 130 million metric tons to 230 million metric tons by 2030.

If you have any questions regarding this Report, please contact us.

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 11

Federal

EPA: Advanced notice of proposed rulemaking on TSCA reporting for chemicals used in hydraulic fracturing sent to OMB. On March 11, the Environmental Protection Agency (EPA) sent to the Office of Management & Budget for regulatory review a draft Advanced Notice of Proposed Rulemaking (ANPR) related to reporting on the health and safety of chemicals used in hydraulic fracturing fluid under sections 8(a) and 8(d) of the Toxic Substances Control Act (TSCA). EPA prepared the ANPR in response to petitions for a rulemaking submitted by environmental groups urging EPA to require disclosure of more information on hydraulic fracturing fluid chemicals. EPA previously rejected the groups’ request TSCA Section 4 rule that would have required manufacturers and processors to undertake toxicity testing for hydraulic fracturing fluid chemicals. EPA reported previously that it intends to use the ANPR to conduct a stakeholder outreach process to gather input on any TSCA reporting requirements before issuing a proposed rule. EPA may seek input on, for example, the need for a rule, as EPA stated it is not committed to a particular outcome. The ANPR would also likely seek input on the scope and type of information that users might be expected to gather and report, the ways in which information already collected may be used to avoid duplication of effort, and how to address information that contains confidential business information.

DOE: Updated study reports LNG exports still an economic benefit. NERA Economic Consulting updated its December 2012 macroeconomic study of the economic costs and benefits of LNG exports commissioned by the Department of Energy (DOE). The update, using more recent data on domestic natural gas usage, confirmed its initial finding that unlimited LNG exports will provide the greatest economic benefit to the U.S. It predicted that LNG exports would increase natural gas prices by about $1 per thousand cubic feet of gas, but that the increase would not dampen the ongoing revitalization of the U.S. chemical manufacturing industry, in part because of increases in natural gas liquid supplies that would not be exported. The update was funded by Cheniere Energy, which received approval for one LNG export terminal and is seeking approval for a second.

Congress: Bill would speed gas gathering lines. The Natural Gas Gathering Enhancement Act, proposed last week in the Senate, would speed consideration under the National Environmental Protection Act of new gathering pipelines that would cross most federal and tribal lands. The bill also proposes to require the Interior and Agriculture Departments to issue rights of way for gathering lines within 30 days of any request. The primary reason for seeking an expedited approval process for these gathering lines is to reduce flaring in North Dakota’s Bakken shale play and other tight oil fields where less valuable natural gas is often flared due to a lack of available infrastructure to take the gas. NGOs, state officials and mineral rights owners have criticized flaring practices in the Bakken where approximately 300 million cubic feet of natural gas is flared off as waste each day instead of sold. Flaring practices in Wyoming and Texas have also been questioned for similar reasons.

States

Wyoming: Supreme Court sends trade secret case back to trial court. NGOs challenging designations by Halliburton that its hydraulic fracturing fluid chemicals were trade secrets won a reprieve from the Wyoming Supreme Court. The petitioners had challenged the Wyoming Oil & Gas Conservation Commission’s determination that Halliburton’s designations protected the chemicals’ identities from disclosure. The lower court dismissed the case, but the Wyoming Supreme Court held that the trial court must perform a chemical-by-chemical review applying the federal definition of “trade secret,” as used under the Freedom of Information Act. This would, according to the Wyoming Supreme Court, require Halliburton to demonstrate a “direct relationship” between the chemicals as trade secrets “and the productive process.” This is a narrower standard than that initially adopted by the lower court.

Pennsylvania: Act 13 hydraulic fracturing regulations in doubt. Industry groups are pushing back against proposed regulations that would govern surface operations at wells, arguing that the Pennsylvania Supreme Court’s decision struck down the authorizing legislation for the rules, Act 13, as unconstitutional. The groups argue the Court’s opinion invalidated Chapter 78, the section of Act 13 that delegates authority to the Department of Environmental Protection and Environmental Quality Board to issue regulations. The groups also raised a number of substantive concerns with the proposed Chapter 78 regulations, including requirements to improve the quality of water wells above their initial condition when drilling began, special authorization where “species of special concern” may be present, and the general costs of the regulations on smaller oil and gas companies.

Ohio: State investigating seismic activities. The Ohio Department of Natural Resources (DNR) is searching for the cause of four small earthquakes in Poland Township. Ohio DNR ordered Hilcorp Energy to shut down seven nearby gas drilling operations until the agency can conduct further study. Although Hilcorp complied, it stated that there was no evidence that its drilling was the cause. Some have linked underground injection wells used to dispose of wastewater to increases in seismic activity in Ohio and other states, but in this instance Ohio DNR determined that there were no underground injection wells in the vicinity. The incident comes as the Utica shale play is increasing its production, producing more than 2 ½ times more natural gas in 2013 than it did in 2012 and with oil production doubling over that same period.

DRBC: NGOs push for permanent ban on development in Delaware River watershed. Environmental groups are lobbying the incoming executive director of the Delaware River Basin Commission (DRBC) to make permanent the current restrictions on hydraulic fracturing in the Delaware River watershed. The DRBC, created by a regional compact, has five voting members – one from each of the governments of Pennsylvania, Delaware, New York and New Jersey, as well as the federal government (the U.S. Army Corps of Engineers is the federal representative). The DRBC effectively imposed a moratorium on permitting natural gas development using hydraulic fracturing within the watershed in 2010, pending the issuance of new regulations governing development.

Business

Shell plans to reduce spending and divest assets in shale. Shell announced its intention to reduce its capital spending by 20% this year and to divest $15 billion in assets in the Americas by the end of 2015, including investments in U.S. tight oil and gas shale plays. Among the North American assets Shell may sell are holdings in Kansas, Texas and western Canada. Executives reported the company intends to focus on projects in Malaysia and the Gulf of Mexico, among others. The announcement came shortly after BP stated that it would reorganize its U.S. onshore operations as a separate business unit with independent management.

International

European nations seek expedited approval of U.S. LNG exports. In a letter to House Speaker John Boehner (R-Ohio) and Senate Majority Leader Harry Reid (D-Nevada), ambassadors from the Czech Republic, Hungary, Poland and Slovakia urged the U.S. Congress to adopt fast-track approval for LNG exports to Central and Eastern Europe. Concerned with the situation in Ukraine, the four countries are seeking to reduce their dependence on Russian natural gas to supply their energy needs. Amendments were introduced in the House and Senate last week as part of an aid package to Ukraine that would allow for faster approval of LNG exports to countries belonging to the World Trade Organization, but the amendments were ultimately dropped.

If you have any questions regarding this Report, please contact us.

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 10

Federal

Sen. Murkowski: President has power to increase crude oil exports. Senator Lisa Murkowski (R-AK) is continuing her efforts to convince the Obama Administration that it has the power to authorize increased crude oil exports. In a report released last week, Sen. Murkowski catalogued actions taken by past administrations to allow targeted crude oil exports over the past 30 years. At a recent IHS CERA conference Murkowski argued that increased ability to export crude oil will promote economic and political stability in Europe, Asia, and across the world. While there is some support in Congress to reverse a 1970’s law that largely prohibits the export of crude oil, others have suggested that administrative action may prove to be a more viable option in the near term.

Ukraine crisis prompts calls for LNG exports. Congressional supporters of Liquefied Natural Gas (LNG) exports are pointing to the conflict in Ukraine as a reason to fast-track permitting of LNG terminals to facilitate exports to U.S. allies. Members on both sides of the political aisle have argued that increased export capacity is needed to counter the leverage Russia currently wields in Ukraine and parts of Europe where it is the primary natural gas supplier. Members of Congress are proposing legislation and appealing directly to the Department of Energy (DOE) to simplify the process for LNG projects so that the United States can respond to international crises. Speaker of the House, Rep. John Boehner (R-OH), noted in a press briefing that DOE had only approved permits for 6 LNG facilities in the last 3 years, while 24 more permits are still pending. Although the Ukraine crisis has provided a sense of urgency, LNG supporters assert there is a much broader need for secure energy sources for U.S. allies throughout Europe and Asia. At the same time, analysis by Barclays Capital suggests that the stakes of natural gas trade were too high for all parties involved for the Ukraine crisis to pose any concerns for grid stability in Europe.

SEAB makes recommendations for disclosure of hydraulic fracturing fluids. In a March 5, 2014 report, the Department of Energy Secretary of Energy Advisory Board (SEAB) recommended “full disclosure of all known constituents” of hydraulic fracturing fluids. The report assessed FracFocus, a commonly used web-based registry of chemicals used in hydraulic fracturing. The SEAB asserted that trade secrets could be adequately protected if companies reported a list of all chemical constituents separately from the commercial products that contain them because the information would not permit a competitor to reverse engineer the protected products. The SEAB also made recommendations to improve FracFocus’ website interface, its data quality protocols, and its funding structure. The SEAB’s recommendations are not binding on FracFocus.

Railroad representative testifies that shale oil is more volatile than conventional oil. In a March 6, 2014 hearing before the House Energy and Commerce Committee, Edward Hamberger, president of the Association of American Railroads (AAR) testified that oil from shale formations is more volatile than conventional oil because it contains more national gas liquids including methane and butane. Hamberger’s statement was based on conversations with the Pipeline and Hazardous Materials Safety Administration (PHMSA). Hamberger’s statement was supported by a recent report by the Canadian Transportation Safety Board, which reported that samples from crude in the Lac Megantic tragedy had a flash point similar to gasoline. PHMSA is currently working to develop new regulations for railroad tanker cars. Hamberger also defended the rail industry’s safety record, noting that 99.98 percent of carloads reached their destination without incident.

States

Colorado: Court upholds vote to ban hydraulic fracturing in Broomfield. A court in Colorado affirmed the legality of the voting process used to enact a 5-year moratorium on hydraulic fracturing activities within the city of Broomfield. The vote had been challenged by a number of groups who had challenged the legality of moratoria. The moratorium was passed last November by a very narrow margin. A number of local moratoria have been passed recently in Colorado, and several have been challenged in court, based on the argument that such moratoria are preempted by state law.

Colorado: City enacts short-term ban on hydraulic fracturing. Brighton, Colorado enacted a four-month moratorium on any permitting activity associated with hydraulic fracturing. The city claims the moratorium is needed to address “issues of local concern” and designed to give staff adequate time to educate government leaders about oil and gas development as well as regulatory changes adopted or under consideration by the state. Under the moratorium, the city will begin processing applications again on July 15, 2014.

Colorado: State to surpass 60-year record for oil production. Oil production in Colorado increased by more than 17% from 2012 to 2013. Total output is expected to exceed the record 58.6 million barrels produced in 1956. The increase in oil production is due in part to changing market conditions, as low gas prices have resulted in a 12% reduction in gas production over the same time period.

California: Los Angeles moves forward with efforts to ban hydraulic fracturing. In a 10-0 vote, the Los Angeles city council voted on February 28, 2014 to draft an ordinance banning hydraulic fracturing. The ordinance would be expansive, banning both well stimulation and the use of waste disposal wells within city limits. Los Angeles, which has 1,880 active and 2,932 abandoned oil and gas wells, would be the first city in California with active oil and gas development to ban hydraulic fracturing. Critics have pointed out that by banning waste disposal wells, the proposed ordinance would also have a detrimental effect on conventional oil and gas development.

Michigan: Attorney General files antitrust charges against Chesapeake and Encana. Michigan Attorney General Bill Scheutte has charged Chesapeake Energy Corp. and Encana Oil and Gas USA, Inc. with criminal antitrust violations based on allegations that they colluded to limit bid prices in oil and gas auctions on public land. The auctions involved land in northern Michigan’s Collingwood shale formation. The charges carry a fine of up to $1 million. The companies are also defendants in a civil antitrust suit filed by Northstar Energy LLC. Chesapeake and Encana representatives stated that internal investigations revealed no violations.

North Dakota: Industrial Commission announces plan to reduce natural gas flaring. The North Dakota Industrial Commission has adopted a new plan to reduce natural gas flaring. Beginning June 1, 2014, drilling permit applicants must prepare a gas capture plan and must also make the plans available to natural gas gathering companies working in the area. Currently, one third of the natural gas produced in the state is flared, and the commission hopes to reduce that to five percent by 2020. In related action, Governor Jack Dalryple highlighted the importance of increasing investments in processing plants and chemical manufacturing to provide a market for the natural gas that is currently being flared in the state.

International

China falls behind targets for shale gas production. Recent analyses suggest China will fall short of its goal of producing 6.5 billion cubic meters of natural gas from unconventional sources by 2015. Projections from China National Petroleum Corp. and China Petrochemical Corp., the two largest producers in China, indicate the production will be closer to 3.0 billion cubic meters. China, which potentially has larger shale reserves than the United States, is seeking to reduce its reliance on coal and turning to natural gas as an alternative.

Studies

ACC study projects shale gas will fuel investment boom in chemical industry. A recent study by the American Chemistry Council (ACC) projects that more than $100 billion in new chemical facilities will be constructed in the United States over the next decade in response to low natural gas prices caused by increased shale gas production. ACC estimates that this growth will result in $81 billion in annual chemical output, along with 600,000 permanent jobs. This contrasts with the situation 10 years ago when high natural gas costs were driving investments abroad. Potential challenges to continued growth cited in the report include local moratoriums on hydraulic fracturing and the need for additional infrastructure to connect chemical facilities in the Gulf Coast to natural gas supplies, such as in the Marcellus Shale.

EDF reports control options available to reduce methane emissions. A study commissioned by the Environmental Defense Fund (EDF) reports that methane emissions from the oil and gas sector could be reduced by 40% using available control methods. ICF International concludes for EDF that the majority of methane emissions came from oil wells as a byproduct of oil production. According to the report, improved leak detection and repair, replacement of pneumatic devices with low-bleed alternatives, reduced venting from wells and equipment, and capturing gas using wet-seal compressors would require an investment of $2.2 billion, but would result in annual savings of $108 million per year.

Research paper asserts 2011 Oklahoma earthquake attributed to underground injection. Scientists from the United States Geological Survey (USGS) and several universities published a research paper supporting their hypothesis that a 2011 earthquake near Prague, Oklahoma which registered 5.7 on the Richter scale was triggered by the underground injection of oil and gas wastewater. Oklahoma now ranks second behind only California in the lower 48 states for seismic activity, leading to speculation that injection of flowback from oil and gas production into deep disposal wells is causing or contributing to the change in seismic activity.

If you have any questions regarding this Report, please contact us.

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 9

Federal

EPA: Cattle methane emissions top oil and gas industry. The Environmental Protection Agency (“EPA”) published its draft greenhouse gas inventory, issued under the United Nations Framework Convention on Climate Change. The inventory identifies the cattle industry (141 million metric tons CO2e) as the country’s largest source of methane emissions, with the oil and gas industry estimated at 127.1 million metric tons CO2e. EPA noted that oil and gas methane emissions have decreased 17% since 1990, despite the nearly decade-long boom in production. EPA cited voluntary methane controls and the replacement of old cast-iron distribution lines for the reduction. Overall, U.S. greenhouse gas emissions decreased by 3.3% in 2012 compared to the prior year. EPA attributed the reduction, in part, to increasing reliance on natural gas over coal for electricity generation.

EPA: Revisions to GHG reporting for oil & gas sector proposed. EPA posted a pre-publication version of amendments to Subpart W, the regulations governing how the oil and gas sector calculates and reports its GHG emissions. The draft proposes to eliminate by January 1, 2015 the use of “best available monitoring methods,” an alternative emissions methodology allowing covered entities to use an array of available data, such as supplier information or engineering calculations, to estimate emissions. Instead, the sector would have to use more stringent monitoring and quality assurance methods. Covered entities would also be required to report individual GHG emissions instead of reporting only the total carbon dioxide-equivalent of those emissions. Revisions also included changes to the source definition, the sub-basin category definition, and calculation methods for individual equipment used at oil and gas well sites. EPA stated that the changes would improve consistency in the data it collects for its GHG inventory. The proposed rule will be open to public comments for 45 days after it is published in the Federal Register.

DOT: Emergency order for crude oil testing. The U.S. Department of Transportation (“DOT”) issued emergency orders requiring rail shippers to test crude oil to ensure proper shipping classification and prohibiting crude oil from being classified under the Class 3, Packing Group III category, which is reserved for relatively safe cargo. Instead, crude oil would be classified as Packing Group I or II. Although this will not impact how crude oil is handled or shipped, it will require railroads to prepare for worst-case accident scenarios. The order comes after the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) issued a safety alert determining that light Bakken crude oil is more flammable than heavier crude oils. Concerns have been raised that the language of the emergency order was too vague to inform companies how to conduct the testing, but PHMSA responded that shippers will determine the proper testing methods, because the composition of tight oil can differ from shale play to shale play.

DOT: New voluntary regulations for crude oil rail shipping. DOT and the railroad industry negotiated a new set of voluntary standards for tanker cars hauling crude oil. Under an agreement between DOT and the Association of American Railroads, railroads will perform an additional internal rail inspection and two additional track geometry inspections each year for main line routes and install two-way telemetry braking devices, allowing easier application of emergency brakes. Those measures will go into effect next month. By July 1, 2014, railroads will adopt new wheel bearing detectors, a government-developed risk analysis tool called the Rail Corridor Risk Management System that will evaluate the safety and security of routes for trains hauling crude oil, and inventory emergency resources for responding to emergencies involving crude derailments. Additional standards, such as those for tank cars and shipper classifications, will be addressed in the future.

BLM: San Juan Basin plan will be reviewed. The U.S. Bureau of Land Management will update the resource management plan (“RMP”) for northwest New Mexico’s San Juan basin in light of increased shale development. Oil and gas development have been a major part of the Basin for over 90 years, but companies are now exploring the underlying Mancos Shale and Gallup Sandstone formation, which some estimate to have significant oil production potential. Exploratory drilling and plans for further development prompted BLM to announce that it will examine the potential impacts on air quality, roadless lands, wildlife, recreation, and water supplies. Based on this examination, the RMP will evaluate whether areas should be closed to shale development and what mitigation measures would be necessary for drilling operations. The RMP was last updated in 2003.

EPA: NGO petitions for changes to off-shore discharge practices. The Center for Biological Diversity submitted a petition to the EPA Administrator requesting that the general permit covering California offshore oil and gas operations be amended to prohibit the discharge of chemicals used in hydraulic fracturing fluids. The petition alleges off-shore oil operators discharge these chemicals into habitat for endangered species. To date, approximately 12 platforms off the coast of California have been authorized to discharge hydraulic fracturing wastewater. The general permit at issue was recently amended to require operators using hydraulic fracturing fluids to inventory the chemicals and report any released into the marine environment.

States

California: Investigation launched into produced water storage. California’s Central Valley Regional Water Quality Control Board issued investigative orders to 78 companies conducting hydraulic fracturing in the Central Valley. The investigation began after a YouTube video surfaced showing a truck allegedly discharging produced water into an unlined pond in violation of the Water Quality Control Board’s regulations. Vintage Production was fined $60,000 and ordered to study the pit and determine if groundwater was impacted. The Water Quality Control Board is now investigating how common the practice is among area drilling companies.

Colorado: State approves methane regulations. Colorado became the first state to directly regulate methane emissions from oil and gas operations. The new rules will require, among other things, monthly inspections for larger gas processing operations, as well as a methane leak detection and repair program for pipelines, storage tanks, and various process equipment. Overall, they impose a wide array of new emission rules and practices governing glycol dehydrators, pneumatic devices, and other process components. The new regulations are also expected to reduce 92,000 tons of volatile organic chemical emissions, which contribute to ground level ozone formation. The Colorado Air Quality Control Commission worked with the Environmental Defense Fund and drilling companies heavily invested in the state to negotiate the rules. A spokesman for the Environmental Defense Fund touted the regulations as a model for other states to adopt; however, industry trade associations that were not involved in the negotiations stated that the rules were unnecessary, based on outdated information, and had no health benefits.

Pennsylvania: PA Supreme Court denies trial in Act 13 litigation. The Pennsylvania Supreme Court denied a motion by the Commonwealth’s solicitor general to remand the case that invalidated Pennsylvania’s Act 13 to a lower court for a trial on undeveloped factual issues. The court previously struck down the law, in part, a law which established comprehensive state oil and gas regulations for environmental protection, fees, and chemical disclosure, as unconstitutional. The case was remanded so the lower court could determine if any surviving portions of the law can operate independently of those sections that were invalidated.

Business

Chesapeake may spinoff or sell oil field services division. Reportedly, in its drive to continue paying down debt, Chesapeake Energy is contemplating the fate of its oil field services division. Chesapeake previously considered an IPO for the division in 2011, but a drop in gas prices saw other well field service companies crowding into the oil market. Now, with $2.2 billion in revenue last year, Chesapeake stated that a spinoff or sale of the division can reduce complexity within the company while maximizing shareholder value.

If you have any questions regarding this Report, please contact us.