Sidley Shale Gas and Hydraulic Fracturing Report

Vol. 4. No. 4

Federal

Environmental Groups Challenge Gunnison Sage Grouse Decision. Two environmental groups filed suit in federal district court claiming the Gunnison sage grouse should have been listed by the U.S. Fish & Wildlife Service (FWS) as “endangered” under the Endangered Species Act, not “threatened.” By listing the species as threatened, FWS designated 1.4 million acres in western Colorado and southeastern Utah as critical habitat, requiring all other federal agencies to consult with FWS before authorizing any activity that could destroy or adversely modify that habitat, including oil and gas drilling. In their complaint, the groups allege FWS ignored evidence of dramatic decreases in the bird’s critical habitat warranting an “endangered” designation that would require even further land use restrictions. The State of Colorado issued a notice of intent to sue as well, arguing that the Gunnison sage grouse should not have been listed at all given extensive state and local conservation efforts.

Forest Service Reconsiders Drilling in the Gunnison National Forest. To settle a lawsuit filed by environmental groups, the U.S. Forest Service has agreed to conduct a further environmental analysis for five natural gas wells that the Forest Service had previously approved for drilling in the Gunnison National Forest. The lawsuit alleged the Forest Service improperly used a categorical exclusion under the National Environmental Policy Act (NEPA) to approve the wells without analyzing the potential environmental impacts of drilling near Little Henderson Creek, which flows to the Gunnison River. The national forest is in Colorado’s North Fork Valley, a primarily agricultural area where drilling opponents have campaigned against oil and gas development on federal lands.

NGO Challenges Pawnee Grasslands Plan. Environmental group WildEarth Guardians filed a formal objection with the U.S. Forest Service challenging the government’s Resource Management Plan for the Pawnee National Grasslands even though it would prohibit oil and gas drilling on federal lands. The objection asserts the Forest Service violated the Minerals Leasing Act by allowing leasing of 100,000 subsurface acres of underlying shale to companies that use directional drilling from private lands outside of the Grasslands’ boundaries. WildEarth Guardians claims that the drilling on private property will degrade air and water quality, noting that the Pawnee National grasslands are in an area that is not in attainment with the national ambient air quality standard for ozone. The Service has defended the plan as striking the right balance – allowing for taxpayer-owned minerals to be developed, while limiting the potential environmental impact of drilling. The Forest Service has 45 days to respond to the objection.

States

New Mexico Hydraulic Fracturing Ban Ruled Unconstitutional. In the first federal court decision to consider the legality of a local ordinance banning the use of hydraulic fracturing, a federal judge invalidated Mora County, New Mexico’s ban on hydraulic fracturing, holding that the ban is preempted by state and federal law. Voters in rural Mora County, approximately 100 miles northeast of Santa Fe, approved the ban in April 2013. Shell Western E&P filed a legal challenge to the ballot measure which, among other things, declared that corporations were stripped of their First Amendment and due process rights. The District Court found that Supreme Court precedent entitled corporations to those rights under the U.S. Constitution and that the ban itself conflicted with state law governing the development of mineral rights. The judge did, however, opine that some aspects of oil and gas operations could be regulated without running afoul of state law, such as related truck traffic, noise and operational effects that could create a nuisance to neighboring properties.

Colorado Proposes New Regulations for Oil and Gas Operations. After a September 2013 flood caused the release of 43,000 gallons of oil from well fields in the South Platte River Basin, the Colorado Oil & Gas Conservation Commission is proposing new regulations in an effort to limit or prevent similar spills. The new regulations would require remote shutoff capabilities for new wells and anchors for oil and gas well equipment located within 100-year floodplains. The rules would also impose new precautionary measures for production pits and containment berms.

Business

Kinder Morgan Acquires New Pipeline Network. Kinder Morgan agreed to purchase Hiland Partners’ 3,500 mile pipeline network, located primarily in the Bakken Shale play, for $3 billion. Hiland’s assets include 1,225 miles of oil gathering pipelines and 1,800 miles of gas gathering pipelines as well as 240 million cubic feet per day of gas processing capacity. For Kinder Morgan, the acquisition would establish not only the company’s first pipeline network in the Bakken, but would include Hiland’s long-term oil transportation contracts with Continental Resources. The deal will close in March 2015.

Novel Well Service Firm Seeks Bankruptcy Protection. GasFrac Energy Services, a Canadian firm with operations in the Eagle Ford Shale, filed for bankruptcy reorganization under Canada’s Companies’ Creditors Arrangement Act. An ancillary filing was made in U.S. Bankruptcy Court in Texas. In 2012, the company gained attention for its waterless hydraulic fracturing technique. GasFrac has utilized a propane gel and liquid petroleum gases, saving the approximately five million gallons per well stimulation. By the spring of 2013 the company had completed its 100th well in Texas. Rising debt and reduced demand for drilling services, however, saw the company unsuccessfully seek a buyer in November 2014.

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Sidley Shale Gas and Hydraulic Fracturing Report

Vol. 4. No. 3

Federal

White House Announced Plan To Reduce Methane Emissions from Oil and Gas Sector. On January 14, 2015 the White House announced broad plans to reduce methane emissions over the next decade by 40 to 45 percent from 2012 levels. While few details were provided, the plan will involve new regulations by a number of federal agencies. The Environmental Protection Agency (EPA) will issue New Source Performance Standards under Section 111 of the Clean Air Act for new and modified wells this summer and will finalize them in 2016. EPA’s regulations may target completion of hydraulically fractured oil wells, pneumatic pumps and methane leaks from well sites and compressor stations. There are no immediate plans to regulate existing wells under Section 111, but EPA will also develop new control technique guidelines for state to reduce emissions of volatile organize compounds (VOCs) in areas designated non-attainment for ozone. The Bureau of Land Management will also issue new methane emission standards for oil and gas wells located on public lands. In addition, the Department of Transportation’s Pipeline and Hazardous Materials Safety Administration will develop new safety standards for natural gas pipelines that are expected to reduce methane emissions from the midstream sector. Finally, the Department of Energy (DOE) will issue energy efficiency standards for natural gas and air compressors. The new regulations will be proposed later this year and are expected to be finalized in 2016.

States

California: Draft Environmental Impact Report Concludes that Hydraulic Fracturing can be Conducted Safely. On January 14, 2015, the California Department of Conservation’s Division of Oil, Gas and Geothermal Resources (DOGGR) issued a draft Environmental Impact Report (EIR) regarding hydraulic fracturing, concluding that hydraulic fracturing can be conducted safely as long as appropriate mitigation measures are used. The EIR evaluated potential impacts on a range of issues including air and water quality, public safety, wildlife habitat, climate change, seismicity, cultural impacts, noise and vibration impacts and visual impacts. The EIR was required by California’s legislature in S.B. 4, which also directed DOGGR to issue rules for hydraulic fracturing which were finalized last year. Environmental groups criticized the timing of the EIR, arguing that it should have been completed before DOGGR’s regulations were issued. Over the past decade, hydraulic fracturing has been used widely in oil production in California. Written comments on the draft EIR must be submitted by March 16, 2015.

North Dakota Proposes Disposal Plan for Radioactive Drilling Waste. The North Dakota Department of Environmental Health (DEH) recently proposed new regulations regarding the disposal of radioactive drilling waste. The proposal would increased the limit on radium-containing drilling waste that can be deposited in “special waste” landfills from 5 picocuries per gram (pCi/g) to 50 pCi/g. Special waste landfills are similar to municipal solid waste landfills, but contain an additional composite liner. Industry representatives supported the proposal, asserting that it would provide clarity for drillers and ensure that radioactive wastes are disposed of properly. The proposed rule may also serve as a precedent for other states that are currently considering new regulations for such waste materials.

Wyoming Considering Expanded Setbacks for Oil and Gas Wells. The Wyoming Oil and Gas Conservation Commission recently announced a new proposal to amend the state’s oil and gas regulations. Under the proposal, setbacks between oil and gas wells and occupied structures including houses, schools and hospitals would be increased from 350 feet to 500 feet. The proposal would also require pre-drilling notice to owners of all occupied structures within 1000 feet of the well site. A public hearing on the proposal has been scheduled for March 9.

Studies

Report by Think Tank Questions Manufacturing Benefits from Shale Development. A recent report by the Information Technology and Innovation Foundation (ITIF) questions whether shale development will have an effect across all manufacturing sectors. The study agrees that shale development and lower gas prices have benefited certain manufacturing sectors such as the petrochemical industry and steel and aluminum sectors that service the drilling industry. However, these researchers claim that other sectors have not experienced similar benefits. Instead, the study asserts that energy prices have little impact on manufacturing when compared to other expenses such as shipping costs. The study concludes that recent gains in other manufacturing sectors are cyclical improvements related to the recovery from the recent recession and are not indicative of longer-term trends for U.S. manufacturing.

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Sidley Shale Gas and Hydraulic Fracturing Report

Vol. 4. No. 2

Federal

Environmental Groups Sue DOI for Documents Related to the Use of Hydraulic Fracturing in the Gulf of Mexico. On January 8, the Center for Biological Diversity filed a lawsuit against the U.S. Department of the Interior’s Bureau of Ocean Energy Management and Bureau of Safety and Environmental Enforcement in the U.S. District Court for the District of Columbia. The lawsuit alleges that DOI failed to comply with its obligations under the Freedom of Information Act to produce reports, permits and other documents relating to Interior’s allowance of the use of hydraulic fracturing and other unconventional development techniques in offshore oil and gas operations in the Gulf of Mexico.

Environmental Groups file suit against U.S. EPA Seeking to Compel EPA to act on NGO Petition to Extend Reporting Requirements to Oil and Gas Sector. A group of environmental NGOs filed suit this past week against the United States Environmental Protection Agency (EPA) seeking an order compelling EPA to act on their petition urging EPA to add the oil and gas industry to the industry sectors that must report toxic chemical releases under the federal Emergency Planning and Community Right-to-Know Act Toxics Release Inventory. The petition cites to prior EPA statements regarding releases from the oil and gas industry and the increase in releases from expanded oil and gas operations with the advent of hydraulic fracturing. The original petition was filed in October 2012 and EPA has not yet made a decision whether the petition should be granted. The plaintiffs seek an order compelling EPA to issue a decision on the petition within 60 days.

DOI Secretary Responds to Growing Number of Local Fracking Bans. Interior Secretary Sally Jewell voiced concern that that state and local efforts to ban hydraulic fracturing are often based on inaccurate information about drilling operations and cause uncertainty for industry groups and drilling operators faced with county and city specific rules. Speaking in response to a number of new bans, including those recently adopted in New York, Pennsylvania, Texas and Colorado, Secretary Jewell said that industry should use more scientific explanations to inform local communities about fracking practices and associated risks.

States

Texas Town Delays Decision on Drilling Ordinance. The Denton, TX City Council voted to continue a moratorium until late March and delay voting on new gas drilling rules that would supplement a ban on hydraulic fracturing passed by voters in November 2014. The Texas Oil and Gas Association and state sued Denton following passage of the voter-approved ban, however the city-enacted moratorium and proposed rules have been progressing separately. The proposed ordinance, which would remain in effect even if the ban is successfully overturned through litigation, will allow companies to drill new wells on existing leases as long as they take steps to protect the surrounding land, including consolidating well locations and complying with setback provisions.

Virginia Weighs New Draft Regulations on Chemical Disclosure and Fracking Operations. A new, draft regulation under consideration by the Virginia Department of Mines, Minerals and Energy (DMME) will require companies that use hydraulic fracturing within the state to disclose all of the chemicals used during drilling both to DMME and the FracFocus website, including those claimed as trade secrets. Sixteen states currently require operators to disclose the chemicals in hydraulic fracturing fluids to FracFocus; Virginia’s current regulations requires only a general description of the fluid. The draft regulations also contain provisions requiring pre-drilling groundwater testing, pressure-testing and local government participation in pre-application discussions with DMME and drilling companies. Once the draft is finalized, there will be an opportunity for public review and comment.

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Sidley Shale Gas and Hydraulic Fracturing Report

Vol. 4. No. 1

Federal

EPA Rulemaking Could Expand Clean Air Act Obligations. The Environmental Protection Agency (EPA) is planning to propose a change to its Prevention of Significant Deterioration (PSD) regulations that would “aggregate” the emissions of oil and gas wells, processing units, and related equipment into a single “major source” even where these individual sources are several miles apart. The revision would overrule a Sixth Circuit decision finding that EPA cannot aggregate geographically distant sources that must be “contiguous or adjacent” under EPA rules and rejected an informal agency interpretation that any two or more points can be aggregated if they are “functionally interrelated.” The D.C. Circuit subsequently held that the decision must apply nationwide. According to EPA, it intends to change its regulations to aggregate geographically distant emission sources in order to resolve confusion for industry and permitting authorities. Environmental groups have argued for the need to aggregate oil and gas facilities to reduce GHG emissions in light of the Supreme Court’s Utility Air Regulatory Group ruling which requires a facility to meet PSD permit thresholds for conventional pollutants as a prerequisite to limiting GHG emissions. According to EPA’s recently issued Unified Agenda, it anticipates issuing the proposed rulemaking in May 2015.

Natural Gas Association Requests Hearing on GHG Reporting Rule. The Interstate Natural Gas Association of America (INGAA) requested a public hearing on EPA’s proposed expansion of GHG reporting requirements. Under the proposal, companies would have to report GHG emissions from hydraulically fractured oil wells and blowdowns of transmission pipelines between compressor stations. In response to INGAA’s request, EPA will be holding a public hearing this week on January 8, 2015. INGAA, and other industry representatives, have raised questions on new definitions that could make entire pipeline and property systems subject to the Subpart W reporting provisions. They are seeking clarification as to where reporting systems begin and end under the definitions. The comment period on the proposed rule closes on February 9, 2015.

States

Colorado Approves Increased Penalties for Permit Violations. On January 5, the Colorado Oil & Gas Conservation Commission approved increased penalties for oil and gas permitting violations. Under the new rules, oil and gas companies could face civil penalties of $15,000 per day for permitting and environmental violations. The Commission removed a $10,000 maximum cap that had been in place for many years, but also lowered the maximum daily fines for the least serious violations, such as late filed paperwork. While the Commission limited the state director’s discretion to waive all penalties in serious cases, fines may still be reduced for operators who self-report a violation and quickly correct it.

California Issues Hydraulic Fracturing Regulations. The California Department of Oil, Gas and Geothermal Resources (DOGGR) released its much anticipated final regulations for hydraulic fracturing and well acidization, allowing DOGGR to issue drilling permits. The rules were required by SB 4, passed by the California legislature in 2013 amid a push by environmental groups to ban hydraulic fracturing within the state. Among the key provisions are those requiring well developers to notify neighboring property owners 30 days before well stimulation, test and analyze groundwater before, during, and after well stimulation, seismic testing during well stimulation, rules for the handling and storage of drilling wastes and produced water, and the reporting of both the types and volumes of chemicals used in hydraulic fracturing fluids. Under the chemical disclosure provisions, while the constituents of fracturing fluids must be reported to DOGGR, information claimed as a trade secret will not be made public. Despite objections by environmental groups, the final rules also provide for “single-project authorization,” which will allow DOGGR to authorize the drilling of multiple wells under a single permit. The regulations take effect July 1, 2015.

Business

Florida Power & Light Cleared for Hydraulic Fracturing Investments. Citing the potential to reduce future energy costs, the Florida Public Service Commission approved a request by Florida Power & Light (FP&L) to invest in an Oklahoma hydraulic fracturing operation. Under the terms of the approval, FP&L can recover the cost of a $191 million joint venture with PetroQuest Energy plus a 10.5 percent return. The Florida Office of Public Counsel opposed the request, arguing that there is no guarantee that the investment will reduce consumers’ energy prices in the future and that the rate base may be left to bear the costs of the investment, but the Public Service Commission found that a utility producing its own fuel supply could be an effective hedge against price volatility. FP&L defended the investment as being less costly than constructing a new supply pipeline from the Gulf Coast and that producing its own natural gas would eliminate markups by other companies throughout the supply chain. The decision could become important as other southeastern utilities have explored the idea of directly investing in the production of shale gas as they transition away from coal due to EPA regulations.

Oil and Gas Price Slides Impacting Shale Operations and Investments. With declining oil and gas prices, shale developers appear to be pulling back on drilling as financing becomes more challenging. Brent International finished the year at just above $55 with West Texas Intermediate closing at $53, about half of their respective 2014 highs of $115 and $105 per barrel, and the lowest since 2009. Natural gas prices are falling as well. NYMEX prices for January delivery was down nearly 30%, when compared to December 2014 trading, to $3.144 per million Btu. Drilling companies and their investors are finding that hedges, locking in a conditional floor for the sale of crude, were not designed with such low prices in mind and are providing minimal protection from price drops. Data compiled by Bloomberg claims that over a dozen private equity firms have lost a combined $11.7 billion in oil and gas company investments since June 2014’s crude oil peak. Many smaller, independent companies are highly leveraged from the past few years of easy credit and may face cash shortages in 2015. These companies are now faced with a combination of cutting capital budgets, reducing operations costs, and selling off assets, and even large independents have announced significant reductions in 2015 capital budgets when compared to 2014. Weekly surveys report reductions in the number of active oil rigs in the U.S., and the Texas Railroad Commission reported a significant decrease in permit applications to drill new wells. The Federal Reserve Bank of Dallas has predicted that drilling slowdowns could cost the industry nearly 250,000 jobs in eight oil producing states by the middle of 2015.

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