Sidley Shale Gas and Hydraulic Fracturing Report

Volume 3, No. 34

Federal

BLM rejects administrative challenges to Thompson Divide lease sales. The U.S. Bureau of Land Management (“BLM”) denied administrative appeals filed by environmental groups and local governments challenging an extension of 25 oil and gas leases in Colorado’s Thompson Divide. BLM found that leases could be extended for two years while the agency addresses deficiencies identified in the original Environmental Impact Statement (“EIS”) for the leases. The challengers had argued that oil and gas leases are inappropriate for the White River National Forest in the Thompson Divide, citing the area’s agricultural nature and appeal to tourism, and that the leases were invalid and could not be extended because of the changes required in the EIS.

Securities & Exchange Commission pursues “clean fracking” company. The Securities & Exchange Commission (“SEC”) has charged that Chimera Energy, which began touting a breakthrough technology to fracture wells without using water in 2011, was a “pump and dump” stock scam. The SEC’s complaint, filed in U.S. District Court, alleges that the technology never existed and Andrew Farmer, a man involved in the alleged scheme, used two fake CEOs and a series of press releases touting the “clean fracking” technology while dumping his own shares of Chimera for a $4.5 million profit. Before the SEC suspended trading on Chimera’s stock, the company had claimed to have licensed the technology to Mexican and French energy businesses, and a fictional Chinese company.

States

City of Lafayette moves to dismiss industry challenge to its hydraulic fracturing ban. Lafayette, Colorado passed a “Community Bill of Rights” via ballot initiative that, among other things, prohibits hydraulic fracturing within city limits, purports to strip corporations of any right to challenge the ban, and declares that any state or federal laws inconsistent with the ban are null and void in Lafayette. The Colorado Oil & Gas Association (“COGA”) filed suit in December last year to overturn the ban, arguing that it is inconsistent with the Colorado Oil and Gas Act. Two Lafayette residents filed a class action countersuit in Boulder County District Court seeking a preliminary injunction to bar COGA from relying on the Colorado Oil and Gas Act, alleging that the law is unconstitutional for violating the City of Lafayette’s right to “home rule.” According to the residents’ motion for a preliminary injunction, the court should decide the constitutional issue raised in their suit before hearing COGA’s challenge to the hydraulic fracturing ban.

NGOs challenge drilling permits in Pennsylvania. PennFuture, an environmental group opposed to hydraulic fracturing in Pennsylvania, has filed a challenge to permits issued by the Pennsylvania Department of Environmental Protection (“DEP”) authorizing Anadarko E&P to construct a natural gas well pad in Lycoming County. The group alleges DEP issued the permit without an appropriate best management practices plan to insure that Anadarko would not impact a neighboring stream and wetland during the construction and failed to examine the cumulative impacts of other well construction activities in the area. The case will be heard before the Pennsylvania Environmental Hearing Board.

International

China reduces its shale gas goals. Previously anticipating that China would be able to produce between 60 and 100 billion cubic meters of shale gas by 2020, China’s National Energy Administration has had to revise this goal downward to 30 billion cubic meters. Reportedly, China expects additional natural gas could be produced instead by increasing gas production from coal seams. Analysts report that the rate of shale gas production has been slower than anticipated in part due to the more difficult geology overlaying China’s shale formations and the wetter shale that makes it harder to fracture. China recently signed a 30-year natural gas supply agreement with Russia and is continuing to import liquefied natural gas from Qatar, Australia and Yemen.

Litigation

Companies win summary judgment in Texas personal injury suit. Marathon Oil and Plains Exploration and Production won summary judgment where a Texas trial court ruled that plaintiffs failed to provide evidence that could show that their alleged personal injuries could have been caused by hydraulic fracturing. The plaintiffs had alleged that the companies’ hydraulic fracturing activities caused them to suffer a range of personal injuries, as well as created sinkholes on their property that damaged their home. The court found that the plaintiffs lacked evidence linking hydraulic fracturing to their alleged ailments.

Business

As wells age, companies look to “refracking” to maximize production. Owners of wells that were first developed using hydraulic fracturing in the mid-2000s have seen production drop off, and companies are now hoping to use “refracking” as a method to boost output from those wells. Encana announced that it has successfully refracked wells in the Haynesville Shale play for an estimated $1 million per well, while others have begun a similar process in the Bakken Shale play. The process involves a new injection of hydraulic fracturing fluid with diverting agents to block older, lower-pressure fissures to increase the overall well pressure. The process, however, is still new and placement of the diverting agents can be imprecise.

Research

Billions of cubic feet of gas flared in Eagle Ford. A review of records by the San Antonio Express-News estimated that in the course of extracting oil from shale in the Eagle Ford play, developers have flared nearly 39 billion cubic feet of gas between 2009 and 2012. According to the report, the gas flared could have supplied fuel for cooking and heating to every home in San Antonio and resulted in air pollution that exceeds that of the six oil refineries in Corpus Christi. The newspaper cited the lack of gas pipelines and the low cost of gas in the area. The issue of gas flaring has been prominent in the oil-rich Bakken Shale formation, leading to lawsuits by mineral rights owners, claiming that developers are flaring gas on which they should be paying royalties, as well as state regulations seeking to reduce flaring.

Environmental and industry groups work to develop methane monitors. The Environmental Defense Fund (“EDF”), an environmental group with a history of working cooperatively with the industry, announced that seven oil and gas companies have agreed to work with EDF to develop better methane monitors. There is considerable debate about the amount of fugitive methane emissions from oil and gas operations. Some claim that there are significant fugitive methane emissions from gas wells and related pipelines, making their lifecycle greenhouse gas emissions higher than coal. Others dispute those contentions and have challenged the data on which they are based. Better methane monitors may not only help resolve this debate, but could allow industry to address or otherwise capture fugitive methane emissions. The working group announced that it has narrowed their study to five different technologies that will be lab-tested with the more promising technologies moving on to field testing.

University of Texas to study Mexico’s Eagle Ford shale potential. The Eagle Ford shale, a boon for south Texas, extends across the border with Mexico. Researchers at the University of Texas at San Antonio, who previously studied the economic development potential of the Eagle Ford shale on the U.S. side, will begin studying Mexico’s portion of the shale formation. Known as the Boquillas, the Eagle Ford shale formation extends through the Burgos Basin south of the Rio Grande and to the City of Monterrey. The study comes shortly after Mexico announced that it will open shale development to foreign investors. As a result, Mexico’s state-owned oil company and several private companies are now investigating whether the country’s shale formations have significant potential for development.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 33

Federal

USFWS seeks information related to potential Endangered Species Act listing for greater sage grouse. On August 11, the United States Fish and Wildlife Service (USFWS) announced a formal status review that will seek information related to a possible Endangered Species Act (ESA) listing for the greater sage grouse. The Agency is seeking information from state and federal agencies, tribes, industry representatives and environmental groups. Listing the bird could materially impact oil and gas development across the west, including in Montana, Wyoming and elsewhere. States have sought to avert a listing, in part, by developing conservation plans to protect the species. An industry representative stated that, as part of oil and gas development projects, companies have committed to 773 conservation measures that will protect more than 68,000 square miles of habitat for the greater sage grouse. The USFWS is under a court order to make a final ESA listing decision by September 30, 2015.

NGO claims operators use “diesel fuel” in hydraulic fracturing wells without requisite permit. The Environmental Integrity Project (EIP) asserted that more than 350 wells have used “diesel fuel” as an ingredient in hydraulic fracturing fluids since 2010 without obtaining a permit under the federal Safe Drinking Water Act (SDWA). By federal law, injecting hydraulic fracturing fluids does not require an SDWA permit, unless the fluid contains “diesel fuels.” The SDWA and implementing regulations do not define “diesel fuel,” but EPA issued interpretive guidance on the term that it finalized earlier this year. EIP also claims that chemical disclosure reports submitted to FracFocus were revised in a number of cases to remove references to diesel fuel. Hydraulic fracturing operators took issue with the report, noting that EIP used an unduly broad definition of diesel fuel and that revisions to the FracFocus reports were made in response to revised data provided by suppliers. FracFocus also defended its reporting program, which continues to perform its intended function of providing data to citizens regarding the chemicals used in injection fluids at a specific well site.

States

New Jersey Governor vetoes ban on disposal of hydraulic fracturing waste. On August 8, 2014 Gov. Christie vetoed a bill that would have prohibited the treatment of disposal of hydraulic fracturing waste in new Jersey. The bill, S. 1041, had broad bipartisan support and was similar to another bill that Gov. Christie vetoed in 2012. In each case, Gov. Christie asserted that the bill would violate the dormant Commerce Clause of the United States Constitution. Hydraulic fracturing does not currently occur in New Jersey and, as a result, only out-of-state hydraulic fracturing operators would be affected by such a ban. The legislature has not yet determined whether it will seek to override Gov. Christie’s veto.

North Dakota considering regulations to require reduced volatility of Bakken crude oil before transport. The North Dakota Industrial Commission has announced plans to consider regulations to reduce the volatility of Bakken crude oil. While studies of Bakken crude oil have reached different conclusions regarding its volatility compared to other crudes, a study conducted for the Industrial Commission has recommended steps to reduce the volatility of Bakken crude oil before it is transported. The process would involve heating the crude oil to reduce flammable gases and then letting it stand in tanks before shipment. The Industrial Commission intends to hold a hearing on this issue in September.

Texas Railroad Commission proposes seismicity regulations. On August 12, the Texas Railroad Commission released proposed rules to regulate the seismicity allegedly associated with the underground disposal of hydraulic fracturing waste water. The Commission declined to recognize a causal link between wastewater disposal and seismic activity, but proposed to require that permit applicants must evaluate the area’s seismic history as part of the permitting process. In addition, the Commission would be given authority to shut down an injection well that is linked to seismic activity. In response to previous calls to shut down injection wells located near seismic activity, the Commission had previously stated it lacked the authority to do so. The proposal will be published later this month and will then be subject to a 30-day comment period.

Virginia announces special permit review process for hydraulic fracturing in Coastal Plain. On August 13, Virginia Gov. McAuliffe announced a special review process for hydraulic fracturing permit applications in the Coastal Plain. Under the revised permitting process, the Department of Mines, Minerals and Energy (DMME) and the Department of Environmental Quality (DEQ) will have joint review authority over permitting decisions. Before any permits are issued, however, the two agencies must complete a review of the potential cumulative impacts of hydraulic fracturing in the Coastal Plain. In addition to its standard role in reviewing DMME environmental assessments, DEQ may also conduct its own independent environmental assessments—an action that could effectively freeze the DMME permitting process.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 32

Federal

Second Circuit asks NY court to analyze state moratorium’s impact on oil and gas leases. On July 31, the Second Circuit Court of Appeals asked the New York State Court of Appeals to determine whether the state’s fracking moratorium constitutes a force majeure for purposes of oil and gas lease contracts. If it does, it may operate to extend the terms of several dozen leases that energy companies executed with Marcellus Shale landowners. The Second Circuit said it needs the state court’s input because the case involves significant and novel state issues that will have a significant impact of the state’s economy and environment.

States

California hydraulic fracturing study and regulations delayed six months. In 2013, Senate Bill 4 passed in California, establishing the state’s first regulations specific to the use hydraulic fracturing, including additional permit requirements, neighbor notification, pressure-testing and water quality standards. The bill additionally requires the state to perform an independent, peer-reviewed study to evaluate the health and environmental risks associated with well operations. The California Council on Science and Technology and the Lawrence Berkeley National Laboratory are currently conducting the study but the majority of their report will be delayed from its original January deadline to July 2015. In June, state legislators also approved a delay for the corresponding regulations as well. The effective date for the regulations will not be July 1, 2015, but the Department of Conservation is expected to finalize them by the end of the year.

Colorado Oil and Gas Commission withdraws from lawsuit over local regulation. The Colorado Oil and Gas Conservation Commission agreed to dismiss a lawsuit against Longmont that addressed whether the city had the authority to implement local oil and gas regulations. The decision to drop the lawsuit was part of a compromise arranged for by Governor John Hickenlooper and U.S. Representative Jared Polis (D-Colo.) to avoid the placement of two anti-fracking and two pro-industry measures on the November ballot. The anti-fracking measures would have established substantial additional well setbacks, provided substantial authority to local governments to restrict hydraulic fracturing, and instituted an environmental bill of rights. The industry initiatives would have required economic analyses for ballot measures and barred cities that ban hydraulic fracturing from receiving state oil and gas tax revenues. All four initiatives have been shelved to allow a task force to consider options and make recommendations to the state legislature.

Colorado court strikes down local fracking ban. On August 7, the Colorado District Court of Larimer County struck down Fort Collins’ five-year fracking moratorium, holding that the Colorado Oil and Gas Conservation Act pre-empted the local ban. Voters approved the local ordinance banning hydraulic fracturing in November 2013. Despite the narrow scope of the ordinance, the court found it effectively eliminated all oil and gas development due to the prevalence of hydraulic fracturing in Colorado wells. The Fort Collins decision was the second decision in a month to overturn a local ordinance—a court overturned Longmont’s ban (in a case separate from the lawsuit involving Longmont’s regulations, discussed above) two weeks earlier. Lafayette, Boulder and Broomfield counties continue to have voter-passed bans in effect.

NGOs and property owners challenge PA natural gas drilling permits. A coalition of environmental groups and property owners are appealing the Pennsylvania Department of Environmental Protection’s (DEP) decision to grant XTO Energy Inc. permits for natural gas drilling in Western Pennsylvania. The coalition is concerned that the permitted complex will impact the Shannon Run and Mulligan Run watersheds and argues that the watersheds could be protected by moving the well pad to an alternate location at the site. The coalition also alleges that the permits violate state law that prohibits unconventional gas well sites within 1,000 feet of existing water supplies and that DEP’s permitting process did not properly account for water contamination risks. The case will be heard by the Environmental Hearing Board.

Litigation

Ohio man fined and sentenced to prison after illegally dumping wastewater from gas drilling operations. Benedict Lupo, the owner of Hardrock Excavating LLC in Youngstown, OH, was sentenced to more than two years in prison and fined $25,000 after directing employees to dump storage tanks containing wastewater flowback from hydraulic fracturing into a storm drain that leads to the Mahoning River. The Department of Justice reported that Lupo instructed employees to dump the wastewater on more than thirty occasions between November 2012 and January 2013, in violation of the Clean Water Act. The dumped waste contained hazardous pollutants such as benzene and toluene and contributed to an aquatic dead zone in a nearby creek.

Studies

Report concludes more research necessary on effects of hydraulic fracturing. The Frontier in Ecology and the Environment recently published a report that concluded there are gaps in knowledge and quantifiable research surrounding the environmental and health impacts associated with the rapid development of hydraulic fracturing. The report observes that the use of hydraulic fracturing has surged by over 700 percent since 2007 and advocates that additional research is necessary to understand the potential impacts. Supporters of hydraulic fracturing have noted that the technique has been safely used on literally millions of wells over the course of many decades without any demonstrable impact.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 31

Federal
<br&ggt;Eighth LNG export terminal gains approval.
The Department of Energy (“DOE”) authorized LNG Development Company LLC to export up to 1.25 billion cubic feet of gas per day to countries without a free-trade agreement from a planned LNG export terminal in Oregon. The approval, valid for 20 years, is the eighth LNG export license granted by the Department. DOE considered the company’s application under what may be considered the “old rules.” The Department is taking comments on a new process that will give priority to applications for projects that have already completed an environmental review under the National Environmental Policy Act, instead of on the existing first-come, first-served basis, as projects that have completed that review are deemed to be more likely to be constructed. The recently approved LNG Oregon project is expected to cost $12 billion and begin exporting gas in 2017, relying primarily on gas transported from Western Canada.

States

Industry group challenges Compton moratorium. Western States Petroleum Association filed suit in Los Angeles Superior Court arguing that the City of Compton’s moratorium on hydraulic fracturing is preempted by existing Department of Conservation’s Division of Oil, Gas, and Geothermal Resources (“DOGGR”) rules for hydraulic fracturing. Compton claims that DOGGR’s rules are not adequate to protect health, safety and the environment, although the division is currently drafting new regulations.

New York mineral rights owners appeal dismissal of delay suit. Several landowners have appealed a trial court decision rejecting their request to compel Governor Andrew Cuomo to issue regulations that would allow for hydraulic fracturing in New York. The suit charged the delays in determining whether to allow hydraulic fracturing was a regulatory taking of their property interests, but the trial court found the landowners lacked standing to sue. A de facto moratorium has been in place in New York since 2008, when the state began work on a Supplemental Generic Environmental Impact Statement (“SGEIS”) for hydraulic fracturing. Although the New York Department of Environmental Conservation claimed that it would conclude the SGEIS in 2009, the Department has still not issued a final SGEIS. Presently, DEC’s work is on hold as it awaits the completion of a separate New York State Department of Health review of hydraulic fracturing that has been ongoing for two years.

International

U.K. opens shale development licenses for bidding. The U.K.’s Department of Energy and Climate Change is putting up licenses for bids that will allow energy companies to begin exploratory shale drilling. Prime Minister David Cameron said his government is “going all out for shale” in an effort to boost Britain’s energy self-sufficiency. Shale exploration in the U.K. has been subject to a moratorium for the past three years, after drilling by Cuadrilla Resources in northern England allegedly contributed to small scale tremors. The licenses are the first step in the exploration process but do not give outright permission to drill. Oil and gas exploration companies must also obtain planning permission, environmental permits and health and safety approvals before they can receive final go-ahead to drill, a process that means it will be several years before new drilling actually commences. The British Geological Survey has estimated that Britain has substantial shale gas reserves of approximately 1,300 trillion cubic feet, but landowners have little incentive under current law to allow exploration as they are not guaranteed a share of the resources recovered.

European Commission: Poland’s drilling rules violate EU directive. According to the European Commission, Poland violated the European Union’s Environmental Impact Directive by issuing regulations that allow for shale drilling at depths up to 5,000 meters without completing an environmental impact assessment. Recent revisions to Poland’s regulations would exempt most drilling projects from environmental impact assessments, except for those within 500 meters of sensitive areas. The European Commission is threatening legal action in the European Court of Justice, if Poland does not commit to revising its regulations. Poland is seeking to develop shale gas, in part, in an effort to reduce the amount of natural gas it imports from Russia.

Markets

Hess to spinoff Bakken midstream assets. Hess Corporation announced that it would spinoff its Bakken shale midstream assets into a master limited partnership (“MLP”). The new MLP would take interests in Hess’ Bakken crude railway loading terminal, natural gas processing and storage facilities, and pipelines. Industry analysts had been expecting the move for months as the MLP provides significant tax advantages to investors. The MLP’s initial public offering will likely take place in the first quarter of 2015.

Research

Texas: No evidence of Barnett shale cancer cluster. The Texas Department of State Health Services (“DSHS”) re-affirmed its prior 2010 study in failing to find a cluster of blood, brain, breast or lymphatic cancers in Flower Mound, Texas, located in the Barnett Shale. The study was undertaken in response to a March 2014 paper by University of Texas law professor Rachel Rawlins that criticized DSHS’s 2010 survey for using a 99% confidence interval in linking drilling activities to cancer diagnoses, claiming that the standard was too high. The new DSHS study used the 95% confidence interval suggested by Rawlins but reached the same results. Both DSHS studies found slightly higher incidences of breast cancer in Flower Mound but did not conclude that they resulted from shale drilling.

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