Sidley Shale Gas and Hydraulic Fracturing Report

Volume 3, No. 43

Federal

NGOs seek rulemaking to reduce hydraulic fracturing emissions. Over 100 environmental groups signed a petition to the Environmental Protection Agency (“EPA”) and Department of the Interior seeking a rulemaking that would address emissions of air pollutants from hydraulic fracturing operations. According to the groups, hydraulic fracturing emits methane, a greenhouse gas, as well as volatile organic compounds and other hazardous air pollutants that the petition alleges are threatening the health of those living near drilling operations. The petition states that EPA has the power to regulate these emissions under the Clean Air Act, and Interior could regulate emissions on public lands, but did not suggest any specific methods, emission limitations or control technologies.

Railroads protest STB disclosure requirements. Several railroads criticized a U.S. Surface Transportation Board (“STB”) decision requiring the companies to publicly disclose weekly updates on delays, including several categories of data such as the number of trains delayed by more than six hours, and system-wide train speeds. The STB ordered the weekly updates after an April hearing where North Dakota farmers complained that crude oil shipments were receiving priority over agricultural shipments, delaying the delivery of grain commodities for weeks. The first round of disclosures showed more grain cars sitting idle for at least 48 hours more than oil tankers. Spokesmen for the railroads, however, said that the weekly disclosures imposed significant burdens on the companies without doing anything to improve service. They also noted that cars may frequently be idled for several days but still reach their destinations on time.

States

New York requests that North Dakota reduce crude volatility. The Commissioners of New York’s State Department of Environmental Conservation and Department of Transportation issued a letter to North Dakota requesting that the state require companies to remove volatile gases from Bakken crude oil before being loaded into rail tankers for shipments. The Commissioners claim the regulations are necessary to protect residents living near railroad tracks, citing last year’s explosion and fire in Quebec. New York has seen an increase in crude oil rail traffic as Bakken crude is shipped to refineries in Canada and the Mid-Atlantic. The request came after a New York investigation into the safety of crude oil shipments recommended the removal of dissolved gases in light crude. In response, a spokesman for the North Dakota Petroleum Council stated that oil companies have already invested between $2.5 and $5 billion on facilities to condition the oil for shipment and that the oil meets all regulatory requirements. The Council also noted that the Pipeline and Hazardous Materials Safety Administration has declined to require the kinds of measures sought by New York.

New York decision may come in late 2014. New York Governor Andrew Cuomo stated during a gubernatorial debate that he could make a decision on whether to lift the state’s moratorium on hydraulic fracturing by the end of the year. His statement gave no indication of what that decision would be, as Governor Cuomo stated that he was still waiting on an opinion from the Departments of Health and Environmental Conservation. Those departments are scheduled to complete their review and issue a report on the potential impacts of using hydraulic fracturing to produce oil and gas from shale resources by the end of 2014. Governor Cuomo’s opponent in the upcoming election, Westchester County Executive Rob Astorino, has promised to end the moratorium within 90 days of taking office.

Business

Tesoro Logistics buys into natural gas market. Tesoro Logistics, a master limited partnership with crude oil and refined product assets, announced that it will buy QEP Resources’ natural gas business for $2.5 billion. The QEP Resources acquisition will be Tesoro Logistics’ first foray into natural gas since it was spun off from Tesoro Corporation in 2011. The deal will add 2,000 miles of natural gas pipeline with 2.9 million cubic feet of natural gas throughput capacity per day, as well natural gas gathering and processing assets held by QEP Field Services and QEP Midstream Partners.

Shell Midstream issues initial public offering. Shell Midstream Partners, a master limited partnership, launched its IPO, offering 37.5 million shares on the New York Stock exchange. The shares, estimated to sell for between $19 and $21 per share, represent just over 27% of the company with Royal Dutch Shell subsidiaries owning the remainder. The company’s assets include two crude and two refined products pipelines in the Gulf Coast.

Weatherford announces further divestitures to cut costs. Oil field service company, Weatherford International, announced that it will likely divest two more non-core business units before the end of the year. The company is in the midst of shedding non-core businesses to pay down over $7 billion in debt. Weatherford previously sold off its land drilling and work-over operations in Venezuela and Russia to Rosneft, as well as its pipelines and specialty services business to Baker Hughes earlier this year. The sales come on top of cutting nearly 9,300 jobs over the past two years and closing 64 worldwide offices. At the end of the turnaround, planned for the end of 2015, Weatherford will focus on four core areas: formation evaluation, well construction, well completion and production.

Studies

Researchers claim to track fracturing fluids in the environment. A group of U.S. and French scientists believe they found a way to track hydraulic fracturing fluid that remains underground using two chemical tracers. After well stimulation, only about 40% of the fracturing fluid returns to the surface. The fate of the remaining fluid is not well known. Researchers, however, published the results of a field study in Environmental Science & Technology showing that the fluids can be tracked through boron and lithium released from shale formations during fracturing. The researchers claim that the tracers could be used to determine whether sources of drinking water been influenced by fracturing fluid.

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Sidley Shale Gas and Hydraulic Fracturing Report

Volume 3, No. 42

States

North Dakota: Companies announce plan for $4 billion petrochemical plant. On October 13 Badlands NGL, Tecnicas Reuindas, and Vinmar Projects announced plans to construct a $4 billion petrochemical plant that will convert ethane from oil and gas wells into polyethylene, a key feedstock for the plastics industry. The project, which is the largest private investment in North Dakota’s history will produce 3.3 billion pounds of polyethylene per year and employ 500 people. Gov. Dalrymple praised the project as an important investment that will help the State meet its goal to reduce flaring at oil and gas wells.

Illinois: Landowners sue DNR over failure to issue hydraulic fracturing regulations. On October 15 a group of landowners sued the Illinois Department of Natural Resources (DNR) over its failure to issue final regulations for hydraulic fracturing in Illinois. Illinois passed a law to allow hydraulic fracturing in 2013, but has not yet issued implementing regulations. The suit alleged that, by failing to allow hydraulic fracturing, the state violated the Constitution by taking their mineral rights without compensation. The suit was filed one day after the Illinois Joint Committee on Administrative Rules delayed a vote to approve the regulations. While hydraulic fracturing operations could potentially be permitted beginning on Nov. 15, regardless of whether regulations are in place, the Illinois DNR has stated that, until regulations are finalized, it will not issue permits without a court order.

International

The Netherlands delays decision on allowing hydraulic fracturing until 2016. The Dutch government recently announced that, in response to public comments on a draft policy, it would delay until 2016 a decision on whether to allow hydraulic fracturing. The government granted two shale gas exploration licenses in 2011, but has since been operating under a de facto moratorium until completing an assessment and policy document. That moratorium will now last until at least 2016. According to the U.S. Energy Information Agency, the Netherlands has 735 billion cubic meters of shale gas resources.

Studies

Aspen Institute study concludes that lifting oil export ban will benefit domestic manufacturing. A recent report issued by the Aspen Institute concluded that eliminating the current ban on crude oil exports will benefit the manufacturing sector through increased oil production. According to the report, increased oil production will increase demand for pipes, machinery and other durable goods needed for drilling and transporting oil. Overall, the report concluded that the manufacturing sector would grow by an average of 37,000 jobs per year if the ban were lifted. Others, however, have argued that allowing the export of U.S. crude oil will reduce global prices and limit the incentive for U.S. companies to increase production.

IEA Report: Declining oil prices may affect production, viability of shale companies. In its monthly Oil Market Report, the International Energy Agency (IEA) projected that a prolonged downturn in oil prices could affect both production and the viability of some companies involved in shale oil development. Noting that production continues to outstrip demand, the IEA cut its forecast for 2014 demand growth to 700,000 barrels per day (a 200,000 barrels per day reduction). The IEA also noted that a long-term drop in crude prices could induce a wave of mergers and acquisitions within the industry, with high debt levels or operating in high-cost fields serving as primary targets. Highlighting the variation in drilling costs, even in highly productive fields, an IEA representative noted that even in the Bakken shale, break even production prices vary from as low as $40 per barrel in core areas to more than $85 per barrel in others.

Study highlights employment benefits of drilling in Marcellus shale. A recent study conducted by researchers at the University of Illinois, Urbana-Champagne found that natural gas development in the Marcellus shale has generated more than 45,000 construction jobs since 2008. The study, which was commissioned by the Oil and Natural Gas Industry Labor-Management Committee, evaluated total hours worked in 13 trades associated with natural gas development in Pennsylvania, Ohio, Maryland and West Virginia. The 31 percent growth in labor hours for oil and gas and related industries differed markedly from the 54 percent decline in labor hours in other sectors, demonstrating the positive impact that hydraulic fracturing has had on local economies in the Marcellus shale.

Researchers’ model predicts increased reliance on natural gas will not reduce climate change. In an article published in Nature, researchers concluded that increased consumption of natural gas will have little effect on climate change because gas will replace zero- and low-emission energy sources rather than other fossil fuels. In the study, five research teams from the United States, Australia, Austria, Germany and Italy developed “integrated assessment models” to assess the impact of increased natural gas consumption. The article reported the models showed that by replacing renewable fuels, causing releases of methane emissions through leaks and other sources, and increasing overall energy use due to lower prices, natural gas would leave greenhouse gas emissions little changed from business as usual projections. At the same time, the article acknowledges that natural gas development provides measurable benefits including economic growth, reduced local air pollution and increase in energy security.

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Sidley Shale Gas and Hydraulic Fracturing Report

Volume 3, No. 41

Federal

NGOs and Unions ask EPA to issue national methane emission standards. In an October 10 letter to President Obama, the BlueGreen Alliance (a partnership of unions and environmental groups) urged the Environmental Protection Agency (“EPA”) to set national standards for methane emissions from the oil and gas sector. The group asserts that existing technology could eliminate nearly half of all methane emissions in the industry within five years. EPA Administrator Gina McCarthy has stated that the EPA is in the process of formulating a plan and will issue a national strategy later this fall, including possibly proposed regulations. According to EPA data, methane emissions are on the decline, with the largest reductions coming from wells using hydraulic fracturing techniques, where emissions have decreased nearly 73 percent since 2011.

Energy Secretary reports administration reconsidering crude oil ban. Energy Secretary Ernest Moniz told the Council on Foreign Relations that the Obama administration is evaluating the country’s 40-year-old ban on crude oil exports. The Energy Policy and Conservation Act of 1975 banned most crude oil exports, but allows the Commerce Department to approve exceptions. Industry representatives, including Exxon Mobil Corporation, Shell and the American Petroleum Institute, have called for the Administration to lift the ban; and recently, there has been interest from members of both houses of Congress. Since 2011, domestic oil production has jumped to nearly 8.5 million barrels a day, up from 5.4 million. Still, Secretary Moniz emphasized that the country remains a large oil importer and did not provide a time frame for any decisions regarding the ban.

States

California issues revised hydraulic fracturing rules. On October 9, the California Department of Conservation’s Division of Oil, Gas and Geothermal Resources released revised proposed regulations that, if implemented, will govern hydraulic fracturing and well stimulation operations in California. The proposed regulations are the third version to come out since the state legislature passed S.B. 4, a law that requires the state to draft new regulations to govern use the of hydraulic fracturing. The first two drafts each received around 100,000 comments, prompting the agency to issue a third proposal. Changes in this draft include raising the seismic activity reporting threshold, changing the application process for drilling permits and water use permits, and altering deadlines for neighbors to request water quality testing. The rules are scheduled to take effect on July 1, 2015, but must be approved by January 2015. The revised rules are now open for public comment.

Litigation

Colorado court finds hydraulic fracturing ban is not retroactive. A Colorado trial court recently determined that a voter-approved city ban on fracking did not apply retroactively to operations that were covered by an agreement executed before the voters approved the ban. The court found the company’s contractual rights in a memorandum of understanding it formed with the city had vested before passage of the ban and that Colorado’s Constitution prohibits ex post facto laws. Industry officials applauded the decision for recognizing that agreements reached between a city and an operator before the ban remain binding.

Michigan tribal court dismisses attempt to block use of water for hydraulic fracturing. The Little Traverse Bay Bands of Odawa Indians tribal court recently dismissed a lawsuit filed by political candidates Phil Bellfy (D) and Tim LaCroix (D) that alleged freshwater withdrawal permits for Michigan developers using hydraulic fracturing violated tribal law protecting the Great Lakes. The court dismissed the case based on a lack of subject matter jurisdiction, finding state and tribal laws do not allow for individual people to bring suit against the state for environmental violations. Bellfy and LaCroix plan to appeal the decision on the basis that the tribal constitution allows individual members to bring suit.

Studies

Satellites identify methane leaks in New Mexico. According to an article published on October 9 in the Geophysical Research Letters, New Mexico’s San Juan Basin was responsible for approximately 590,000 metric tons of methane emissions every year between 2003 and 2009. That is equivalent to 10% of all the methane emissions from the natural gas sector in the country. Notably, high emissions were recorded in 2003, before hydraulic fracturing was used in the area. The authors have theorized that that the higher emissions are due to greater use of coalbed methane extraction, but further study is required.

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Sidley Shale Gas and Hydraulic Fracturing Report

Volume 3, No. 40

Federal

EPA reports that methane emissions from oil and gas dropped in 2013. The Environmental Protection Agency (“EPA”) released the results from its 2013 Greenhouse Gas Reporting Program, showing that oil and gas operations reduced their share of the country’s methane emissions. Landfills and wastewater treatment plants took the top two spots with the oil and gas sector in third, contributing 33% of methane emissions. This is a 73% decrease compared to methane emissions from oil and gas operations in 2011. Overall, total greenhouse gas emissions from the oil and gas industry, including the production, transmission, processing and distribution sectors, were down 1% in 2013 when compared with the prior year.

DOT rejects requests to keep route information confidential. The Department of Transportation (“DOT”) rejected requests by railroad trade associations to rescind an emergency order issued in May 2014 requiring railroads hauling one million gallons or more of Bakken crude oil to disclose shipping information to states. DOT ordered railroads to produce information on the route trains take, their cargo, and the frequency of shipments to states through which they would ship crude oil so that first responders could be better prepared. Railroads had argued that state open records laws make this information available to the public, posing security risks and exposing confidential business information. DOT, however, rejected these contentions, arguing the railroads had not documented any actual harm resulting from the public release of this information.

FERC approves Cove Point LNG terminal. Cove Point, the East Coast’s first planned liquefied natural gas (LNG) export terminal, won Federal Energy Regulatory Commission (“FERC”) approval. The approval, which included an extensive environmental review, drew protests from environmental groups. The groups have threatened litigation, claiming FERC should have conducted a full Environmental Impact Statement under the National Environmental Policy Act (“NEPA”) and examined the environmental impacts of the hydraulic fracturing used to supply some of the gas that would be exported. Dominion Resources, the project’s developer, is still waiting for final approval from the Department of Energy (“DOE”) on its application to export over five million tons of LNG to countries without a free trade agreement. DOE previously provided conditional approval to supply LNG to customers and Japan and India, beginning in 2017.

States

New York: Bill would prohibit disposal of out-of-state hydraulic fracturing wastes. NGOs are backing a New York State Senate bill that would prohibit the disposal of out-of-state hydraulic fracturing wastes, such as drill cuttings, at New York landfills. The bill’s proponent, Sen. Ted O’Brien, cited the presence of naturally occurring radioactive materials in the wastes as the reason to ban their disposal. Another bill would prohibit New York municipal waste treatment facilities from treating wastewater from out-of-state drilling operations unless it meets a set of new treatment standards.

Texas: Comments filed on proposed rules on seismic activity. Texas has proposed rules that would require operators seeking underground injection permits to dispose of wastes to consult first with U.S. Geological Survey (“USGS”) records to determine if the area where injection is proposed could present a seismic threat before receiving a permit. Although some commenters found the proposals to be a good step forward, the reliance on USGS records was criticized, as even the USGS believes the agency has too few stations in Texas to provide adequate warning. EPA Region 6 and academics from Southern Methodist University (“SMU”) made similar comments. Industry groups joined EPA and the SMU researchers in asking the Texas Railroad Commission to reconsider how its proposal would require permit applicants to conduct seismic surveys, citing several factors that they claim were not considered. The proposal was sparked, in part, by a series of small earthquakes near Azle, Texas, a town in the Barnett Shale formation, that some have linked to three underground injection wells.

West Virginia plan to drill under Ohio River attracts controversy. Environmental groups are protesting a plan for West Virginia to allow companies to drill for shale gas underneath the Ohio River. Governor Earl Ray Tomblin cited a $100 million budget shortfall as the reason for fielding four bids from companies to secure the drilling rights to a 14-mile area along the river. The environmental groups claimed that hydraulic fracturing near the river would adversely impact the Ohio River, which is used as a source of drinking water.

Business

Baker Hughes begins disclosure of chemicals. Starting on October 1, 2014, Baker Hughes announced that it began fully disclosing all of the chemicals used in its hydraulic fracturing fluids. The company first announced in April 2014 that it can provide the disclosures without comprising trade secret protections. Now, after each hydraulic fracturing job performed for a client, it will disclose a list of chemicals and their maximum concentrations. Environmental groups and a Department of Energy advisory panel have advocated for the disclosure of chemicals used in hydraulic fracturing fluids without trade secret protections.

Encana deal makes it a player in the Permian. Canada’s Encana Corporation announced that it was buying Athlon Energy, Inc., a Fort Worth independent oil and gas company, in a deal valued at approximately $7 billion. Athlon’s assets are concentrated in the Permian Basin, one of the United States’ largest on-shore oil fields. Through the deal, Encana will acquire 140,000 acres in the Permian Basin for exploration, estimated to hold as much as three billion barrels of oil-equivalent hydrocarbons.

Wyoming may see next manufacturing boom. J.R. Simplot announced plans to construct a $300 million ammonia fertilizer plant in Rock Springs, Wyoming, citing the availability of cheap natural gas. The Wyoming Business Council stated that it is in discussions with other companies, which it declined to name, to locate in Wyoming for similar reasons. The Council is pitching new development near the Jonah natural gas field, which has become significantly more productive with the use of hydraulic fracturing, and is hoping to mimic the boom in petrochemical manufacturing currently enjoyed in the Gulf Coast region.

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