Sidley Shale Gas and Hydraulic Fracturing Report

Volume 3, No. 51

Federal

EPA issues clarifying rules for air emissions from oil and gas sector. On December 19, 2014, EPA issued a series of regulations to clarify and revise portions of the new source performance standards that will take effect on January 1, 2015. Among the amendments are clarifications on how gases and liquids should be handled during the well completion process as well as changes to the requirements for storage vessels. The changes were made, in part, in response to requests from the oil and gas industry to ensure that EPA’s regulations were consistent with current industry practices. EPA also used the rulemaking to remove the affirmative defense for malfunction from the new source performance standards as part of a broader agency initiative to remove the affirmative defense from all Clean Air Act regulations.

States

New York: State announces plan to ban hydraulic fracturing. After more than six years of debate, New York announced plans to ban hydraulic fracturing. The ban would officially keep 12 million resource-rich acres in the Marcellus Shale from being developed – and cost New York untold billions in economic benefits. In Pennsylvania, energy companies have generated $2.1 billion in state and local taxes and thousands of high paying jobs. In a long-awaited report, the state Department of Health (DOH) recommended the ban, finding there are scientific uncertainties about the risk of adverse health effects from hydraulic fracturing and the effectiveness of mitigation measures in reducing or preventing the potential environmental impacts which could produce those effects. In response the state Department of Environmental Conservation (DEC) announced that it would issue a final Supplemental Generic Environmental Impact Statement (SGEIS) and related documents to officially ban hydraulic fracturing early next year. New York has been operating under a de facto ban since DEC began an SGEIS to evaluate hydraulic fracturing in 2008. State officials tried to downplay the economic impact of the ban, claiming that less than half of the Marcellus Shale would be available for development under any circumstances due to other state and local restrictions.

North Dakota: New regulations and low oil prices slow oil production. Oil production in North Dakota showed a slight month-over-month decline in October in response to a combination of low oil prices and increased regulatory requirements. The 4,000 barrel a day reduction is small in comparison to the daily production of more than 1 million barrels per day, but also reflects a shift from virtually continuous growth over the past half-decade. The reduction in oil prices has coincided with new regulations that limit the amount of natural gas that can be flared at oil wells. Thus far, the regulations have produced a 22% reduction in flared natural gas. Even at today’s prices, significant portions of the Bakken shale can be developed economically, and state regulators project that growth will continue as oil prices rebound.

Colorado: State to sue the Department of Interior over Gunnison sage grouse listing. On December 12, 2014, the state of Colorado submitted to the U.S. Department of the Interior (DOI) a 60-day notice of intent to sue regarding DOI’s decision to list the Gunnison sage grouse as threatened under the Endangered Species Act (ESA). The notice letter is a necessary prerequisite to bringing suit to challenge the listing decision. In the letter, Colorado argues that DOI failed to analyze the required factors under the ESA and did not rely on the best available science. In particular, the notice alleges that DOI failed to account for conservation efforts that state and local governments, as well as private individuals, have taken to protect the Gunnison sage grouse and its habitat. In light of those voluntary initiatives, Colorado argues that additional federal protection is not necessary.

New York: Inspection of crude-by-rail uncovers defects in tank cars and infrastructure. A recent joint inspection conducted by state and federal workers in New York identified defects in a number of tank cars and in track infrastructure. New York has become a rail hub for shale oil from the Bakken formation, as well as from other sources. The inspections, which took place at rail yards in Buffalo, Albany and Chatauqua County, were part of a broader inspection initiative that has been ongoing for most of the year. Thus far, New York has inspected 7,368 rail cars and 2,659 miles of track, identifying 840 defects. In the most recent inspection, the inspectors classified eight defects as requiring immediate action; the remaining defects must be corrected within 30 days.

Studies

Study finds variations in methane leaks across shale plays. In a recent study presented at an American Geophysical Union, researchers reported lower than expected methane leaks at oil and gas wells in Wyoming. The research, which was conducted in collaboration with the Clean Air Task Force, was intended to compare methane leaks from the Wyoming oil and gas fields to similar fields in Utah and Colorado. Despite the similarities in location, reservoir depth, gathering techniques and other features, the Wyoming fields showed methane leakage rates 0.4 percent or less, which is an order of magnitude lower than methane leakage rates previously reported for Utah and Colorado. The report did not offer an explanation for the variations in methane leaks.

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Sidley Shale Gas and Hydraulic Fracturing Report

Volume 3, No. 50

Federal

Anticipated endangered species listing limits auction of oil and gas leases – but budget rider that restricts listing adds confusion to process. The anticipated endangered species listing of the wide ranging sage grouse halted a Bureau of Land Management auction of ninety-seven oil and gas leases. Bidding did not begin due to concerns that the bird will soon be included on the endangered species list, as Interior’s Fish and Wildlife Service (FWS) is under court order to make a decision on listing by September 30, 2015. However, a rider to the $1 trillion budget bill recently passed by the Congress, which President Obama is expected to sign, provides that FWS cannot “write or issue” listing rules for four grouse species during FY 2015. The rider only lasts for the coming fiscal year as it is part of an underlying appropriations bill, but given the makeup of the incoming Congress, permanent or further temporary restrictions on any listing may be forthcoming. How this will all shake out will have significant impact on oil and gas operations on land that share the bird’s habitat in many parts of the western United States.

States

Texas regulator exploring urban oil and gas inspections. The Texas Railroad Commission (TRC) announced that the agency will consider increasing inspections of wells in suburban and urban areas. The announcement follows a vote to ban fracking in the Dallas suburb of Denton in November, amid claims that current state regulations are not sufficiently addressing the alleged impact of drilling operations on densely-populated areas of the state. Ban supporters argued that drillers failed to comply with local regulations regarding setbacks and well spacing, while state officials urged voters not to set a precedent for banning oil and gas development in the state. In addition to the drilling boom, a surge in population is contributing to increased complaints in urban areas. To help meet its regulatory responsibilities, TRC is seeking additional resources to handle the growth in oil and gas development. In August, TRC requested a large budget increase that would add additional well inspectors and pipeline inspectors. Press reports indicate that industry representatives generally supported increased urban inspections, believing it will help demonstrate that most drilling companies are already in compliance with all applicable state and local regulations.

Business

NGO and green investor review finds drillers should provide more complete information to investors on potential risks of hydraulic fracturing. On December 11, a coalition of green investment firms and advocacy groups released a report analyzing disclosure rates for water and waste management, emissions and other environmental impacts from oil and gas operations between August 2013 and September 2014. The review, authored by Boston Common Asset Management LLC, Green Century Capital Management Inc. and As You Sow Foundation, found that while some companies have increased disclosures, industry-wide reporting should be expanded. The review assessed five areas of environmental, social and governance-related risks: (1) toxic chemicals; (2) water and waste management; (3) air emissions; (4) community impacts; and (5) management accountability. According to the report, the analysis relied on publicly available information that companies disclose on their websites or in financial statements or other reports linked from their websites.

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Sidley Shale Gas and Hydraulic Fracturing Report

Volume 3, No. 49

Federal
<lt;BR>NGO Sues to Block Offshore Hydraulic Fracturing Permits.
The Environmental Defense Center filed suit in federal court alleging the Bureau of Safety and Environmental Enforcement (BSEE) issued 51 permits authorizing hydraulic fracturing and well acidizing off the coast of California without complying with the National Environmental Policy Act (NEPA). According to the suit, BSEE should have conducted an environmental impact statement under NEPA to review the potential risks of offshore hydraulic fracturing, including how this offshore development would potentially impact endangered species, such as certain whale species and the southern sea otter.

Forest Service Finalizes Plan for Oil and Gas Leasing in Pawnee National Grasslands. The Forest Service issued the final Environmental Impact Statement for issuing oil and gas leases for the Pawnee National Grasslands in eastern Colorado. The Forest Service leases will allow companies to access portions of the Niobrara Shale Play by horizontally drilling under the federal lands, not by placing well pads on top of the 193,000 acre reserve. While industry generally supports this compromise approach, environmental groups vowed to file formal protests against the leases, claiming that industrial activity will diminish the area’s use for birding and threaten other wildlife.

States

Members of Ohio NGO Files Proposed Class Action Claiming State Oil and Gas Act Violates Rights to Local Self Governance. Members of a group known as Mothers Against Drilling in Our Neighborhoods (MADION), an environmental group that helped organize Broadview Heights, Ohio’s charter amendment banning hydraulic fracturing, filed a class action lawsuit against Governor John Kasich and two oil companies claiming that the Ohio Oil and Gas Act violates residents’ right to “self governance.” Bass Energy Company and Ohio Valley Energy, both named as defendants, have a pending lawsuit challenging Broadview Heights’ ban. The companies argue that the Ohio Oil and Gas Act preempts Broadview Heights’ “community bill of rights” charter amendment prohibiting hydraulic fracturing. MADION’s suit, however, contends that state preemption of local laws unconstitutionally violates the right of town residents to make their own laws. The Community Environmental Legal Defense Fund, which worked with Broadview Heights to enact its ban – and with many other municipalities to pass similar charter amendments – asserts that similar class action suits would be filed throughout the country.

Business

OPEC Holds Steady, Potentially Impacting U.S. Shale Development. The Organization of the Petroleum Exporting Countries (OPEC) announced that it would not cut production in light of falling oil prices, sending oil prices down further. With Brent Crude prices reaching below $70 per barrel, and West Texas Intermediate down to $66 per barrel, the trade press is reporting that North American oil and gas companies are re-evaluating their strategies in those shale plays that have higher development costs. Some analysts are predicting a material drop in exploration and production expenditures, with independent producers potentially being hardest hit due to higher leverage and an inability to reduce production without financial difficulties. A Barclay’s research report estimated that, with OPEC inaction, U.S. oil production could drop by as much as 1 million barrels per day to keep prices from declining further.

Weatherford to sell fluids unit to Lubrizol. Oilfield services company, Weatherford International, announced that it will sell off its chemistry and drilling fluids business to Lubrizol for $825 million. The business focuses on creating the fluids required to drill and stimulate oil and gas wells. Weatherford noted that the sale is part of a continuing strategy to pay down debt. For Ohio-based specialty chemical company Lubrizol, which was purchased by Berkshire Hathaway in 2011, the acquisition gains it entry into the highly competitive oil and gas services business. The companies are expected to complete the sale before the end of 2014.

Research

Utah Universities: Oil and Gas Revenue Could Support Land Takeover. Economists at the University of Utah, Utah State University, and Weber State University released a study of the costs and benefits of the state’s attempt to takeover federal lands. According to the study, Utah could recoup management costs, or even turn a profit, from oil and gas drilling revenues. Utah’s legislature passed a bill in 2012 demanding that the federal government relinquish 31.2 million acres of land to the state, alleging that Utah is entitled to these lands under the 1894 Enabling Act and that they are poorly managed by the federal government.

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Sidley Shale Gas and Hydraulic Fracturing Report

Federal

EPA publishes final amendments to Subpart W regulations and issues proposal to further expand the reporting requirements. The Environmental Protection Agency (EPA) has published final amendments to its Subpart W rules governing reporting of GHG emissions from oil and natural gas production, and natural gas transmission, distribution and storage. Among other changes, EPA is phasing out an alternative calculation method known as best available monitoring methods, thereby requiring operators to install new monitoring equipment during the next year in order to comply with Subpart W. The final Subpart W rule will also require operators to report emissions in metric tons of each GHG separately, including methane, as well a facility’s total GHG emissions in tons of carbon dioxide equivalents. EPA also proposed further amendments to Subpart W that would require reporting of GHG emissions from additional gathering and boosting systems, completions and workovers of oil wells using hydraulic fracturing, and blowdowns (the release of gas from transmission pipelines for the purpose of reducing system pressure or complete depressurization) of natural gas transmission pipelines.

EPA seeks an extension of judicial stay in challenge to hazardous air pollution regulations for oil and gas sector. EPA is asking the D.C. Circuit to extend until January 30, 2015 a stay in a challenge to EPA’s national emission standards for hazardous air pollutants (NESHAP) for the oil and gas sector. EPA previously agreed to reconsider certain aspects of the rule, but is requesting more time to define the scope of a revised rule and how that might affect current litigation. Last month, EPA announced in its 2014 unified agenda of pending regulations that it plans to propose a reconsideration rule by May 2015 and to finalize the rule by May 2016.

States

Illinois: Court denies preliminary injunction in challenge to state hydraulic fracturing regulations. An Illinois Circuit Court judge denied the plaintiffs’ motion for a preliminary injunction to halt implementation of Illinois’ hydraulic fracturing regulations, holding the plaintiffs had failed to prove they would suffer irreparable harm from the regulations. The plaintiffs, who include a number of landowners in southern Illinois and the advocacy group Southern Illinoisans Against Fracturing Our Environment, allege the Illinois Department of Natural Resources (IDNR) failed to follow proper procedures when it proposed and accepted comment on draft hydraulic fracturing regulations and, by doing so, deprived them of an opportunity to participate in the rulemaking process. IDNR disputes the allegation, contending the agency satisfied the requirements of the Illinois Administrative Procedure Act. In the absence of a preliminary injunction, IDNR says it will begin processing applications for hydraulic fracturing permits.

Colorado: Colorado Oil and Gas Association challenges the City of Broomfield’s hydraulic fracturing ban. On November 24, 2014, the Colorado Oil and Gas Association (COGA) filed suit in state court challenging the 5-year ban on hydraulic fracturing recently approved by the City of Broomfield, Colorado. COGA contends that the ban is preempted by Colorado’s oil and gas laws. The practical effect of the ban is limited to date, as Broomfield has reached a separate agreement with Sovereign Operating Co.—the only company with active plans to develop wells in Broomfield—that will allow some hydraulic fracturing activities to continue. Similar local bans on hydraulic fracturing in Lafayette, Fort Collins and Longmont have recently been struck down by Colorado courts on preemption grounds.

Maryland agencies conclude that hydraulic fracturing can be conducted safely. A recent draft report published by the Maryland Department of the Environment and Department of Natural Resources concludes that the potential risks from hydraulic fracturing can be managed by a combination of best practices and agency enforcement. The report recommends new regulations, new legislation to expand enforcement authority, a severance tax to support state actions related to shale development, new monitoring programs and comprehensive region-wide gas development plans. A final report, along with proposed hydraulic fracturing regulations, is expected to be released after the Maryland Marcellus shale Advisory Commission reviews and comments on the draft report. There is a de facto moratorium on hydraulic fracturing in Maryland, pending finalization of the report.