Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 3

Federal

FERC Draft EIS Finds Cameron LNG Export Project Will Have Limited Environmental Impact. On January 10, 2014, the Federal Energy Regulatory Commission (FERC) issued a draft Environmental Impact Statement (EIS) for the $6 billion Cameron LNG Export Project in Hackberry, Louisiana. After accounting for proposed mitigation efforts, the EIS found the proposed facility would have limited environmental impact. It found most impacts would be temporary, while identifying some permanent impacts on lands, migratory birds and certain fish species. FERC is accepting comments on the draft EIS until March 3, 2014. If a final EIS and record of decision are issued by the agency approving the project, Cameron will be able to construct the facility, subject to other state and federal permitting requirements.

Industry Trade Associations Challenge BLM’s Deferral of Oil and Gas Lease Sale. The Western Energy Alliance, along with member company Castle Valley Holdings LLC, have appealed the Bureau of Land Management’s (BLM’s) decision to withdraw nearly 100,000 acres of federal land in Utah from a November 2013 lease sale. The appeal, which was filed with the Interior Board of Land Appeals, alleges that BLM based its decision on an untimely protest by the Utah Rock Art Research Association. A number of interest groups submitted comments opposing leases on some of the withdrawn lands. BLM claims that it withdrew this acreage in order to address residual concerns regarding cultural resources and sensitive species.

EPA Letter to NRDC Stresses Agency Actions to Address Hydraulic Fracturing. In a letter to the Natural Resource Defense Council (NRDC), Environmental Protection Agency (EPA) Administrator Gina McCarthy defended the agency’s hydraulic fracturing initiatives. McCarthy stressed EPA’s draft guidance for the use of diesel fuel in hydraulic fracturing under the Safe Drinking Water Act’s Underground Injection Program, the agency’s involvement in BLM’s proposed regulations for hydraulic fracturing on public land, and the agency’s ongoing groundwater study. The letter stated that EPA’s diesel fuel guidance is anticipated to be issued in the next few weeks. McCarthy did not respond to charges concerning EPA’s investigations into alleged impacts from hydraulic fracturing in Pavilion, Wyoming, Dimock, Pennsylvania, and Parker County, Texas.

DOT Meeting Sparks Voluntary Railway Safety Changes for Oil Transport. After meetings last week with the Department of Transportation, oil and rail industry representatives, including the Association of American Railroads and the American Petroleum Institute, agreed to adopt a series of safety measures for transporting crude oil by rail. Specific measures addressed at the meetings include speed reductions on high-risk routes and better information sharing between the railroads and oil industry. The meetings were prompted by a series of train derailments over the past year involving cars transporting crude oil.

States

Texas: Duke University Testing Finds Methane in Wells. Testing data from Duke University researchers found elevated levels of methane in wells near Weatherford, Texas. These tests took place near the location of a Range Resources well that EPA previously claimed had impacted groundwater, but EPA has since dropped its pursuit of those claims. The Duke data contrast with data collected by Range Resources, who submits their operations did not cause or contribute to the presence of what is naturally occurring methane.

Arkansas: UT Study Highlights Promise of Fayetteville Shale. A study conducted by the Bureau of Economic Geology at the University of Texas has found that the Fayetteville Shale will remain one of the most prolific natural gas plays in the United States. The Bureau’s study was part of a four-basin analysis of shale gas plays funded by the Alfred P. Sloan Foundation. The study concludes that the Fayetteville Shale holds 38 trillion cubic feet (tcf) of recoverable gas, of which 18 trillion tcf can be economically recovered at a price of $4 per BTU. According to the Bureau’s projections, natural gas can be economically extracted through 2050.

North Carolina Commission Approves Chemical Disclosure Rule. On January 14, 2014 the North Carolina Mining and Energy Commission approved new disclosure rules for chemicals used in hydraulic fracturing fluids. Under the rules, information subject to a trade secret claim would not be disclosed, subject to review by the Department of Environment and Natural Resources and except if needed to address a medical emergency. The rule, which will not become effective until it is approved by the North Carolina legislature, is one of many regulations that must be issued before the state lifts its moratorium on hydraulic fracturing.

Minnesota Agencies Form Advisory Panel for Silica Mining. Minnesota’s Pollution Control Agency and Department of Natural Resources formed a 15-member advisory panel to aid them in developing new silica mining regulations. The panel includes individual citizens, as well as representatives from local governments and the mining industry. Legislation passed last year directs the agencies to develop the new regulations.

Alaska Takes Equity Stake in LNG Joint Venture. The Alaska Department of Natural Resources has agreed to become an equity partner in a $45 billion liquefied natural gas (LNG) project along with ExxonMobil, ConocoPhillips, BP, and TransCanada. The LNG export project will include an 800 mile pipeline from Alaska’s North Slope to the Kenai Peninsula and is expected to produce 15-18 metric tons of LNG per year. As part of the agreement, the state will supply $5.75 billion toward the costs of the project.

Oklahoma Proposal Seeks Information from Disposal Wells. In response to increased seismic activity, the Oklahoma Corporation Commission has proposed rules that would expand the integrity testing and reporting requirements for Class II well operators who dispose of hydraulic fracturing waste water. The proposal would generate additional data from which seismologists and the Commission itself could determine whether there is a link between earthquakes and the disposal of waste water from hydraulic fracturing.

Texas Legislature Forms Subcommittee to Investigate Increased Seismic Activity. Last week, the Texas legislature formed a Subcommittee on Seismic Activity to investigate the cause of recent earthquakes northwest of Fort Worth. The announcement comes after the Texas Railroad Commission announced plans to hire a seismologist and to work with other state agencies to investigate the same issues. NGOs, including Texas-based Earthworks, have been critical of the state’s response to the earthquakes to date.

International

European Union Issues Guidelines for Hydraulic Fracturing. The European Commission today published non-binding guidelines covering hydraulic fracturing operations in the European Union. The guidelines do not impose requirements, but instead provide principles and best practices that member states are urged to follow. In addition, the EU is asking member states to submit to the EU their plans for shale exploration and development. While the EU had considered a legally binding directive that would have established uniform regulatory requirements across the entire EU, opposition by the United Kingdom, among others, resulted in issuance of the guidelines as an alternative.

European Commission Urged to Assess UK Shale Gas Incentives Under State Aid Rules. The United Kingdom’s tax incentives to promote shale gas development have come under scrutiny by hydraulic fracturing opponents, who assert these incentives violate the EU’s state aid rules. The state aid rules prohibit governments from using selective measures to grant an advantage to a specific company or companies. The legality of the UK’s incentives for oil and gas developers, as well as for local communities supporting development, has been hotly debated within the European Parliament. EU Competition Commissioner Joaquin Almunia has signaled a willingness to investigate whether the incentives comply with state aid rules.

Canada Proposes Upgraded Standard for Crude Oil Rail Cars. In response to recent train derailments involving cars carrying crude oil, including the accident in Lac-Megantic, Quebec, the Canadian government has proposed new standards for rail cars carrying crude oil. The proposed regulations, which would apply to Canadian National Railway and Canadian Pacific Railway, along with regional operators, would align Canadian regulations with proposed regulations in the United States. Among other things, the regulations would require the use of thicker shielding and normalized steel, as well as enhanced recordkeeping by railroads on how they classify dangerous goods and document the sampling methods for crude.

China: Shale Gas Output Surpasses 200 Million Cubic Meters in 2013. China’s Land and Resource Ministry reported that 2013 natural gas output increased to 200 million cubic meters (7.1 billion cubic feet), a 500% increase from 2012. The growth occurred primarily in the Changning-Weiyuan, Fushun-Yongchuan, and Fuling areas. China expects growth to continue and has set an annual target of 6.5 billion cubic meters for 2015.

Business

EIA Projects Record High Natural Gas Output. In its January Short Term Energy Outlook, the U.S. Energy Information Administration (EIA) projects that natural gas production will increase to 72.58 billion feet per day by 2015. This marks the fifth consecutive annual record high for natural gas production. At the same time, net imports of natural gas are projected to fall to the lowest levels in 30 years, with the U.S. becoming a net exporter by 2018. According to the EIA, production increases, particularly in the Marcellus Shale, have resulted in a slight decline in natural gas prices.

Operations Begin for Pennsylvania-to-Texas Ethane Pipeline. A Enterprise Products Partners LP ethane pipeline running from the Marcellus Shale to Gulf Coast petrochemical facilities has commenced construction. The 1,230 mile Appalachia-to Texas Express (ATEX) pipeline, which has a 150,000 barrel per day capacity, will send ethane, a co-product in natural gas production to ethylene facilities in Louisiana and Texas. Increased availability of ethane due to hydraulic fracturing has spurred significant investment in ethane facilities, with eight new facilities planned for the Gulf Coast, along with two in the Northeast.

ACC Projects Growth in Chemical Exports Due to Shale Gas Production. A recent report by the American Chemistry Council (ACC) projects that exports of U.S. chemicals will increase by more than 45% over the next five years. Increased production of shale gas and liquids is cited as a primary reason for the resurgence in the U.S. chemical industry. After being a net importer as recently as 2011, ACC projects that net exports will rise to $30 billion by 2108.

Duke University Study Touts Novel Method for Recycling Waste Water. Researchers at Duke University claim to have developed a novel method for removing radioactive material from hydraulic fracturing flowback in Pennsylvania by combining it with acid mine drainage from nearby coal mining operations. When the two fluids are combined, radioactive metals forms solids and settle out of the fluid. While researchers acknowledge that is a not a complete solution for recycling flowback, they note that it can substantially improve the quality of water recovered from hydraulic fracturing operations.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 2

Federal

SEAB Task Force Evaluates FracFocus. In recent meetings, the Secretary of Energy Advisory Board (SEAB) FracFocus task force has questioned administrators of the FracFocus website and industry representatives regarding the sufficiency of current chemical disclosures. Some task force members were critical of the extent to which operators invoked trade secret protections, and asked whether operators could protect confidential information by listing chemical constituents of hydraulic fracturing fluid without providing a formulaic breakdown. Industry representatives defended current disclosure as more than sufficient to put interested parties on notice, while protecting trade secrets. Some states require well operators to disclose chemical use through FracFocus, and in its 2013 proposed rule, the U.S. Bureau of Land Management has likewise proposed to require use of FracFocus for disclosures for wells on federal land.

House Energy and Commerce Committee to Release LNG Export Report. The House Energy and Commerce Committee is due to release a report on liquefied natural gas (LNG) exports by the end of January. The report is expected to explore U.S. natural gas supplies and the geopolitical implications of exports. The report is also expected to discuss requests to streamline the permitting process for approval of LNG export terminals by representatives from countries seeking to import U.S. natural gas. Currently LNG export facilities must obtain permits from the Department of Energy and complete a Federal Energy Regulatory Committee environmental review. Opponents of streamlined permitting, including the Industrial Energy Consumers of America, question the impact of LNG exports on domestic manufacturing.

Senators Question Continuing Ban on Crude Oil Exports. Several members of Congress, including Sen. Lisa Murkowski (R-AK), Sen. John Hoeven (R-ND), and Sen. Mary Landrieu (D-LA) have recently signaled an interest in reconsidering laws that, with some exceptions, have effectively banned the export of crude oil from the United States for 40 years. In a recent speech, Sen. Murkowski suggested the Administration has sufficient statutory authority to lift the ban on its own, but would be prepared to introduce targeted legislation if necessary. In the House, Energy and Commerce Chairman Fred Upton (R-Mich. 6th Dist.) noted that the export ban was under analysis, but did not take a position. The American Petroleum Institute and many producers have come out strongly in favor of permitting exports.

BLM Urged to Defer Oil and Gas Lease Sales in Colorado. In comments on a Bureau of Land Management (BLM) draft Environmental Assessment, interest groups are urging BLM to defer a planned lease sale for five parcels in the North Park area of Colorado. The groups are asking BLM to finish revisions to the region’s Resource Management Plan (RPM) before making any decisions regarding specific lease sales. The revised RMP, which should be issued this spring, is expected to consider potential impacts on habitat for the greater sage grouse and on fish populations. The parcels are slated to be included in a June 2014 lease sale, and BLM is expected to make a final decision on their inclusion by March 2014.

President Announces Quadrennial Energy Review. On January 9, 2014 President Obama issued a memorandum convening the Quadrennial Energy Review, a four year policy plan included in the President’s June 2013 Climate Action Plan. The initial review will deliver a report by January 31, 2015 that addresses the nation’s infrastructure for transporting and transmitting energy. Subsequent reviews will be completed every four years. The initial review will be conducted by an interagency task force co-chaired by the White House Domestic Policy Council and the Office of Science and Technology Policy. The task force will include representatives from 22 federal entities including, the Departments of Energy, Defense, and State; the Environmental Protection Agency; and the Council on Environmental Quality. The final report is expected to include recommendations for legislative and regulatory action as well as research and development priorities.

EPA Revises General Permit to Require Disclosure for Off-Shore Drilling Using Hydraulic Fracturing. On January 9, 2014, the Environmental Protection Agency (“EPA”) published a revised Clean Water Act general permit for off-shore drilling in California that includes chemical disclosure and spill reporting requirements. Under the new requirements, operators must maintain an inventory of chemicals used for well completion, treatment, and workover fluids, and report the chemical makeup of such fluids that are discharged in their discharge monitoring reports. EPA added the requirements in response to concerns raised by state legislators.

States

California: Budget Proposal Includes New Fees for Oil Development. California Gov. Jerry Brown’s proposed budget includes new fees that would be allocated to address risks related to transportation of crude oil. Concluding that increases in domestic oil production have outstripped current pipeline capacity, Gov. Brown proposed to allocate $6.7 million for oil spill prevention and administration, which would focus on the state’s ability to respond to oil releases. The funding would be obtained by expanding the state’s 6.5 cents per barrel fee currently assessed at marine terminals to all crude oil received by California refineries. Gov. Brown declined to support a severance tax on oil production, explaining the state has enacted a number of recent tax increases.

Colorado: Groups Comment on Colorado’s Air Pollution Proposal. The Colorado Petroleum Association and Colorado Oil and Gas Association have filed comments raising concerns with Colorado’s proposal to limit air emissions from oil and gas development. The trade associations argued the rules are too restrictive and the compliance costs will exceed Colorado’s estimate. In contrast, interest groups, including Earthworks and Wildearth Guardians, argued that the proposed rules to do not go far enough. When it introduced the rules last November, Colorado had been joined by three of the state’s largest oil and gas companies and a national environmental group who together worked with the state on the proposal. The Colorado Air Quality Control Commission will hold a hearing on the proposed rule in February.

Colorado: Interest Groups Seek Ballot Measure to Allow Local Restrictions. In response to lawsuits challenging local moratoria on hydraulic fracturing, the Colorado Community Rights Network has drafted a state-wide ballot measure that would permit local governments to restrict industrial activities, including oil and gas development using hydraulic fracturing. The ballot measure still must obtain more than 86,000 signatures to appear on the 2014 ballot.

Ohio: Proposed Drill Site Regulations Expected. More than fifteen months after Ohio passed a law requiring new regulations for the construction of drill sites, the Ohio Department of Natural Resources (ODNR) is expected to issue a proposed rule. The proposal is anticipated to address, among other things, requirements for freshwater storage and erosion controls. While interest groups have been critical of the delay, ODNR representatives have responded that additional time has been taken to ensure the effectiveness of the proposed rule.

Pennsylvania: GIS Database of Abandoned Wells Under Development. As part of an effort to help developers of new natural gas wells, Pennsylvania is developing a detailed GIS database to map up to 50,000 abandoned wells within the state. Releases can occur if fractures created during well stimulation transect existing wells. The database would work in conjunction with proposed rules that would require drillers to review all wells within 1,000 feet of horizontal and vertical well bores. The Pennsylvania Department of Environmental Protection is currently accepting comments on the proposed rules.

Pennsylvania: Agencies Seek Reconsideration of State Supreme Court Ruling. The Pennsylvania Public Utilities Commission and Department of Environmental Protection have asked the Pennsylvania Supreme Court to reconsider aspects of its ruling in Robinson Township v. Commonwealth of Pennsylvania, a decision in which the Court struck down portions of the state’s revised oil and gas law (known as “Act 13”). Act 13 imposed statewide regulations on oil and gas development, but also preempted local zoning laws and other ordinances that would impact such development. The agencies argued in their motion that the Supreme Court based its decision on an incomplete factual record that should have been more fully developed at the trial court level. Separately, Pennsylvania Gov. Corbett expressed concern that the Court’s decision threatened key environmental provisions in the law and urged developers to continue to abide by Act 13’s setback requirements. Industry trade associations have indicated they would comply with the Governor’s request and, to date, there have been no applications for drilling that would not comply with the now-vacated setback requirements.

Texas: Production in the Permian Basin approaches one million barrels per day. In western Texas, unconventional oil development in the Permian Basin increased by more than 100,000 barrels per day in 2013 and is now approaching one million barrels per day. The Permian Basin is made up of a series of unconventional oil and gas plays that occur at a variety of depths and have proved very susceptible to development using hydraulic fracturing. The Permian Basin now accounts for two-thirds of Texas’ oil and gas production and fifteen percent of the United States’ total production.

Texas: Texas Railroad Commission Responds to Seismic Activity near Injection Wells. In response to a series of tremors in the Dallas-Fort Worth area over the past two months, the Texas Railroad Commission is taking steps to evaluate whether underground injection control wells are contributing to the activity, including adding a seismologist to their staff to help with the evaluation. The U.S. Geologic Survey and Southern Methodist University are also evaluating the recent increase in seismic activity in the area and reportedly will publish their results within the next few months. The Commission has also contacted the Texas Bureau of Economic Geology about the potential for conducting a separate study.

Virginia: State Announces Plan to Consider Disclosure Requirements for Hydraulic Fracturing. The Virginia Department of Mines, Minerals and Energy issued a notice of intended regulatory activity that will consider expanded “disclosure of ingredients used in gas and oil well stimulation and completion” as well as industry best practices for oil and gas development. While Virginia currently requires companies to provide a general description of chemicals used in oil and gas development, chemicals used during well stimulation are currently exempt from disclosure. Instead, Virginia recommends that developers voluntarily submit chemical disclosures through FracFocus. The notice is subject to public comment and a public hearing.

International

Chinese Coal Company Invests in U.S. Shale. China’s largest coal company, China Shenhua Energy Co. announced plans to form a joint venture with Energy Corp. of America to drill 25 natural gas wells in Pennsylvania. China Shenhua intends to use the joint venture to develop expertise in unconventional oil and gas development that it can apply to China’s shale reserves. While China Shenhua is the first Chinese coal company to invest in U.S. shale development, several Chinese oil and gas companies have already made significant investments in United States shale reserves.

Business

Shale Oil and Gas Development Projected to Remain Strong in 2014. Federal government and industry analysts generally project that 2014 will be a strong year for oil and gas development in the U.S. Capital investments by oil and gas developers are expected to increase modestly, maintaining the recent trend of increasing shale oil production. Industry surveys indicate that shale oil operations in the Permian Basin, Eagle Ford, and Niobrara plays are expected to be among the fastest-growing plays in 2014, and investments in oil and gas pipelines and related infrastructure are also expected to grow by as much as 30%. While increased oil supplies and the anticipated end of federal economic stimulus are putting downward pressure on oil prices, analysts are projecting modest price declines. Expected economic growth, both domestically and abroad, and improved efficiency within the industry, are expected to offset declining prices, and a cold winter is also supporting natural gas prices through increased demand.

Peterson Institute Study Evaluates Growth Associated with Shale Development. A recent Peterson Institute for International Economics report concludes the expansion of domestic oil and gas production in the U.S. is providing much-needed economic stimulus and will produce ongoing economic benefits through 2020. The production of shale gas and tight oil could increase GDP growth by an average of 0.2 percent per year through 2020, boosting economic output by a total of 2.1 percent. While substantial, these forecasted benefits are more modest than in other analyses, and the report warns against simply projecting forward the current short-run impact of the boom. Over the past decade, shale oil and gas development have been a significant driver of domestic economic growth by creating demand for labor and materials, reducing energy prices, and shifting the balance of trade. The study predicts that, going forward, some of those benefits may be lost, as increased economic growth will strengthen the dollar, making U.S. products less competitive internationally.

SandRidge Energy Shifts Exclusively to On-Shore Development. SandRidge Energy exited the off-shore oil business, selling its Gulf Coast and Gulf of Mexico assets to Fieldwood Energy LLC for $750 million in cash and the assumption by Fieldwood of an additional $370 million in liabilities. The company intends to focus its resources on the Mississippi Lime and Permian Basin shale formations. SandRidge currently holds the second largest position in the Mississippi Lime formation, with more than 1.9 million net acres. This strategy shift came after shareholder TPG Axon Capital gained four seats on SandRidge’s board.

Australian Firm to Invest in North Slope Shale Development. Australian firm Rampart Energy recently announced plans to conduct 3-D seismic testing on a 120 square mile lease southwest of the Prudhoe Bay oil fields. In 2013, Rampart formed a joint venture with Royale Energy, Inc. that will allow it to obtain an ownership interest by funding exploration. Seismic testing is expected to begin next month, and exploratory wells could be drilled in 2015 if the seismic testing is successful. Rampart is the second firm to engage in shale exploration on the North Slope, following Great Bear Petroleum LLC’s exploratory drilling program in 2012.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 1

Federal

EPA Inspector General: Questions remain in Parker County drilling case. The Environmental Protection Agency (“EPA”) Inspector General released a report stating that EPA was justified in placing restrictions on using drinking water wells in Parker County, Texas but that more information is needed to determine if risks still exist. EPA initially ordered Range Resources to investigate and remediate water contamination in the area but later withdrew its order when Range challenged EPA’s evidence linking the company’s shale drilling operations to the contamination. The EPA Inspector General agrees that the residents’ drinking water does not present a current health risk, but that the Agency should continue long-term testing and do more to share its findings with area residents. The report criticized the Texas Railroad Commission for not ordering Range to remediate residents’ well water, but the Commission has stated that the aquifer had a long history of methane contamination and that evidence showed that Range’s wells were not the source.

USGS to document induced seismicity. The U.S. Geological Survey (“USGS”) is embarking on an “induced seismicity” map to complement its standard earthquake hazard maps. Traditionally, USGS excluded seismicity from industrial activities from its earthquake maps, which are used to project the likelihood and severity of natural earthquakes. These are relied upon in setting building codes, engineering public roadways and bridges, and establishing insurance rates. New attention to seismic activity that some have linked to underground injection wells used to dispose of hydraulic fracturing wastewater, has prompted USGS to create separate maps to help the agency and others study induced seismicity and to have more complete information about seismic activity in the United States.

States

North Dakota to begin oversight of gathering lines. Under new rules, owners of gathering pipelines must now start reporting the locations of those lines to the state. North Dakota estimates that there are 18,000 miles of gathering pipelines in the state, with many more expected to be developed in the near future, but neither the North Dakota Public Service Commission or the U.S. Pipeline and Hazardous Materials Safety Administration had ever compiled a record of their locations. The information will be compiled in a state database, although specific line locations will be protected as confidential business information. Landowners that have an active or abandoned gathering line underneath their property will be notified, however. Abandoned pipelines must be reclaimed, either by the owner or through a $75 million fund if the owner cannot be located.

Court settles disputed Bakken shore zone. The North Dakota Supreme Court ruled against a group of land owners claiming that they owned the “shore zone,” a 25,000 acre area between the high- and low-water marks of the Missouri River that runs through the Bakken Shale play. Instead, the court held that the state owned the shore zone and the accompanying mineral rights. The decision will provide some certainty to drilling companies that have paid over $140 million in disputed royalties into an escrow account. That money will now go to the state. The ruling will not end disputes over all of these mineral rights, as it is still unclear whether the State owns the shore zone on the Fort Berthold Indian Reservation and some private parties may be able to demonstrate that the state previously sold or granted portions of the shore zone to private landowners.

International

Hydraulic fracturing projects excluded from E.U. environmental impact assessments. In a victory for European oil and gas companies seeking to develop shale formations, the European Union’s environmental impact assessment rules will not require assessments before using hydraulic fracturing techniques to complete a well. The European Commission’s revisions, primarily intended to streamline environmental reviews, rejected amendments by the European Parliament that would have made assessments mandatory for all projects using hydraulic fracturing. The European Commission is already scheduled to release new rules governing the environmental integrity of shale gas development in January 2014.

Business

Kinder Morgan buys into tankers. Midstream operator Kinder Morgan acquired shipping companies American Petroleum Tankers and State Class Tankers for $962 million in cash. The companies provide a fleet of five vessels, with four under construction, that haul crude oil, condensate, and chemicals for domestic trade. Each tanker holds approximately 330,000 barrels of cargo. A Kinder Morgan spokesman stated that shale development has increased demand for alternative shipping methods. The deal will close in the first quarter of 2014.

Berkshire Hathaway buys into midstream. Berkshire Hathaway announced that it will acquire Phillips 66’s specialty products subsidiary that creates polymers to improve flow through pipelines. Although the companies did not disclose the price of the sale, Reuters estimated the value of the business at approximately $1.4 billion. The deal is expected to close near the middle of the year. Phillips 66 stated that the sale allows it to focus on its core oil and gas transportation and processing businesses.

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Sidley Shale and Hydraulic Fracturing Report

Volume 2, No. 51

Federal

BLM contemplating royalty reforms. The U.S. Bureau of Land Management (“BLM”) will issue regulations that will give the Secretary of the Interior more flexibility to raise or lower royalty rates for oil and gas production on federal lands. Among the options that would be considered is whether royalty rates should be uniform across all federal lands or whether they should differ by region, state, geologic formation, or resource type or be pegged to commodity prices. The regulation would implement a recommendation by a recent Government Accountability Office (“GAO”) report opining that more flexibility would ensure a fairer return to taxpayers. Although the new regulations would not actually set new rates, the GAO report recommended increasing the current onshore oil and gas royalty from 12% to 18.75%, which would be closer to state onshore and federal off-shore royalty rates. Industry trade associations submit that the current royalty rates do not consider the high costs of federal regulations and lengthy permitting times associated with drilling on public lands.

Bill to speed Bakken permitting passes. Before leaving for recess, the Senate passed S. 244, implementing a streamlined BLM permitting system. The bill’s sponsors, John Hoeven (R-N.D.) and Rep. Kevin Cramer (R-N.D.), argued that current BLM permitting times are too long and discourage drilling on federal lands. As a result, most oil drilling in the Bakken Shale play has been on private land. Many companies, however, are looking to expand drilling on the Fort Berthold Indian Reservation, which falls under BLM’s jurisdiction. The streamlined process will be used at seven BLM offices through 2015. The bill will now head to the President, who is expected to sign it.

OMB considering oil and gas rules for wildlife refuges. The U.S. Fish & Wildlife Service sent draft rules to the White House Office of Management & Budget that would impose controls on oil and gas operations on federal wildlife refuge land. Although oil and gas activities are already subject to Fish & Wildlife regulations, officials stated the rules needed updating. Fish & Wildlife officials did not comment on what would be changed in any proposed regulations. There are approximately 2,000 active oil and gas wells on wildlife refuges, including federal lands in Louisiana, North Dakota, and Texas.

Chesapeake settles Clean Water Act claims. Chesapeake Appalachia agreed to pay a $3.2 million civil penalty and implement $6.5 million worth of stream and wetland projects to resolve allegations that the company violated the Clean Water Act. The suit, brought by the U.S. Department of Justice and West Virginia Department of Environmental Protection, alleged the company improperly placed sand, dirt, and rocks into wetlands and streams to construct well pads, impoundments, and roads at 27 different sites. The company agreed to restore the areas and implement a new Clean Water Act compliance protocol.

States

Pennsylvania Supreme Court strikes down portions of Act 13. The Pennsylvania Supreme Court handed down a long-anticipated decision affirming a lower court ruling striking down a portion of Pennsylvania’s Act 13. In Act 13, the legislature established a statewide regulatory system under which the Pennsylvania Department of Environmental Protection would permit and oversee oil and gas operations, but to provide for a single statewide approach, sought to preempt municipal ordinances and other local laws (including zoning laws) that would impact such operations. A plurality of three justices concluded the Environmental Rights Amendment (ERA) of the Commonwealth’s constitution imposes a duty on the state to administer natural resources for the “public trust” and that the ERA provided citizens with a cause of action to compel the state to honor those obligations. The plurality then found that Act 13 violated the Commonwealth’s duty insofar as it prohibited localities from acting to protect the local environment through zoning and other local regulation of oil and gas operations. (A fourth justice affirmed on other grounds.) The decision also reversed a lower court ruling finding that a Pennsylvania doctor lacked standing to challenge regulations prohibiting physicians from sharing information on trade secret chemicals used in drilling. Environmental groups announced that they would institute a wide push for the implementation of local bans on hydraulic fracturing. Pennsylvania Governor Tom Corbett issued a statement that the decision could discourage continued investment in Marcellus Shale development by allowing a patchwork of different municipal regulations.

Bankruptcy trustee sues to end New York moratorium. The bankruptcy trustee for Norse Energy sued the State of New York claiming that its roughly five year de facto moratorium on hydraulic fracturing is illegal. The trustee is asking the court to order the state to finalize a supplemental generic environmental impact statement, which is still on hold pending a study by the New York State Department of Health. Norse alleges that the lengthy review period violates a statutory requirement to complete the review with “minimal procedural and administrative delay” and that Governor Andrew Cuomo has illegally prevented the New York State Department of Environmental Conservation from carrying out its duties. As a result, the complaint alleges, Norse lost more than $100 million because its 27 pending applications to drill will never be processed until the state completes its review. The company’s New York shale gas assets were put up for auction under the bankruptcy proceedings but received no bidders.

Colorado finalizes new oil spill reporting rules. TheColorado Oil & Gas Conservation Commission (“COGCC”) issued a final rule that shortens the time that operators have to report oil spills from 10 days to within 24 hours. The new rule applies to any release of one or more barrels of wastewater or produced fluids outside of secondary containment areas. Previously, only spills of more than 20 barrels or more had to be reported within 24 hours. Spills must now be reported, not just to COGCC, but to the municipality or county where the well is located and to the surface owner.

Minnesota issues draft frac sand mining guidance. The Minnesota Environmental Quality Board issued draft standards for mining silica sand, an important additive to hydraulic fracturing fluid. The standards are described as a proposed “toolbox” of options for municipal governments to adopt. In Minnesota, municipalities regulate sand mines less than 160 acres and a number have restricted mining due to potential health and environmental concerns. The mining industry has questioned why 165 pages of new standards were necessary for a 70-year old industry, as the standards cover everything from the model year of diesel trucks that should be permitted to operate to mine operating hours to mitigating light pollution. The Environmental Quality Board will take comments on the draft standards until January 13, 2014.

Pennsylvania considering new severance tax on shale gas. A proposed bill would impose a 4.9% tax on gas drilling to replace the existing impact fees. The bill’s proponents argue that a severance tax would bring in more money from Marcellus Shale development. Under the bill, 40% of the tax would go to communities where the drilling occurs with the rest funding a slew of unrelated programs, such as drug rehabilitation and veterans programs. Although previous bills to impose a severance tax failed, proponents assert the new bill has bipartisan support.

Groups announce intent to challenge Maryland LNG export terminal. Several environmental groups held a press conference announcing their intent to file lawsuits to block Dominion Resources’ Cove Point liquefied natural gas (“LNG”) export terminal on the Chesapeake Bay. The U.S. Department of Energy approved the company’s request to convert the import terminal into an export terminal, but Dominion is still waiting on approval from Federal Energy Regulatory Commission (“FERC”). The groups argue hydraulic fracturing, which will be used to extract gas from the Marcellus Shale play, will harm the environment and the LNG export terminal will use large amounts of electricity to cool the gas for shipment. The groups are asking the Maryland state government to help block the project and are also threatening to take action against the project’s investors in the form of lawsuits and public protests.

International

U.K. readies new shale licenses for 2014. The British government stated it intends to promote shale gas development in the UK by issuing new shale drilling licenses early next year for exploring nearly 40,000 square miles of potential drilling sites. The announcement accompanied the release of an environmental assessment finding that drilling could create tens of thousands of jobs and see the UK producing twice the amount of gas it currently consumes each year. It also found that water usage and truck traffic could be managed through proper regulation. The government hopes the new licenses will authorize sufficient exploratory drilling to define better the country’s recoverable shale gas resources. The British Geological Survey estimated the country holds 36.8 trillion cubic meters of gas but much of those data are preliminary. Opponents of hydraulic fracturing have promised a showdown between municipal authorities, which have threatened to ban the practice, and the national government. Energy Minister Michael Fallon stated that municipalities would receive £100,000 pounds for each well drilled within their jurisdictions and 1% of the revenue for each producing well. The UK Department of Energy & Climate Change will take comments on the environmental assessment before issuing new licenses.

Business

Companies pursuing compressed natural gas to reduce Bakken flaring. Natural gas flaring is currently a byproduct of Bakken Shale play oil drilling, although new pipelines and processing plants are being built to establish a long term way to make use of the supply. In the interim, Statoil is seeking ways to convert the waste gas to a form of usable compressed natural gas (“CNG”). To do so, Statoil is teaming with General Electric to pilot a process to compress and store the gas using what GE refers to as “CNG in a box,” a process that would take the waste gas, strip it of natural gas liquids, and use a mobile process to compress it into smaller storage tanks for CNG-fueled cars, trucks, and buses, drilling rigs, and locomotives. Statoil and GE hopes to have eight mobile compressors running by the end of next year. BNSF, the railroad which now ships the majority of Bakken crude, is already testing CNG-fueled locomotives to replace diesel fuel.

Wastewater treatment company to start up process to extract compounds from drilling wastewater. Eureka Resources, a company that treats hydraulic fracturing wastewater, announced that it will attempt to distill valuable resources from the waste. The company’s two Pennsylvania plants, scheduled to start-up next month, will extract salts and methanol from the wastewater. The process could potentially be modified to extract barium, which can be used in rubber and glass products, and radium. If profitable, the process could reduce costs to drillers who would otherwise have to truck wastewater to Ohio for injection into underground wells.

Research

EIA: Gas will become primary electric generating fuel by 2040. The U.S. Energy Information Administration (“EIA”) issued its Annual Energy Outlook. Among its predictions is that natural gas will surpass coal as the country’s predominant fuel for generating electricity by 2040. By that time, the EIA predicts natural gas will fuel 35% of power plants with coal falling to 32%. EIA revised downward its estimate of gas-fired generation over the next few years, stating that higher gas prices has slowed the shift away from coal-fired generation. The Annual Energy Outlook also predicted that there would be ample natural gas for export, which EIA predicts will grow by 3% per year through 2023. Exports of bulk chemicals produced from natural gas liquids are projected to grow by 3.4% through 2025, an increase over EIA’s prior estimate of 1.9% growth last year. EIA’s Outlook assumes that no new regulations will slow natural gas production from hydraulic fracturing and that there will be no changes in how the U.S. Department of Energy processes applications to export liquefied natural gas.

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Sidley Shale and Hydraulic Fracturing Report

Volume 2, No. 50

Federal

SEC files suit alleging oil and gas investment partnership was Ponzi scheme. The U.S. Securities and Exchange Commission (“SEC”) sued Texas-based Vendetta Royalty Partners, Ltd., along with related employees and companies, claiming that Vendetta defrauded 80 investors through a Ponzi scheme. According to the SEC, Vendetta offered investors private placements for partnerships investing in oil and gas royalties, but allegedly transferred the investors’ funds to Vendetta executives and other investors. Vendetta allegedly defrauded investors of $17.9 million since 2011. This is the fourth SEC enforcement action against allegedly fraudulent oil and gas investment companies within the past nine months and the agency issued an investor alert to help protect potential investors.

States

Wyoming proposes ambitious well-plugging plan. Wyoming Governor Matt Mead outlined a proposal to increase efforts of the Wyoming Oil & Gas Conservation Commission (“WOGCC”) to plug abandoned oil and gas wells. Under Gov. Mead’s proposal, WOGCC would hire a contractor to plug close to 300 wells on private and public lands per year at a cost between $7.7 million and $18 million. The funds for the program would come from a conservation tax presently paid by oil and gas operators, but total costs would vary based on whether currently idle wells resume operations or are abandoned in the future. WOGCC could also seek to impose higher bonds on well operators or increases in the conservation tax, if necessary.

Dallas approves tight regulations for urban drilling. Dallas passed a new ordinance for Barnett Shale development within the city limits. The ordinance requires at least a 1,500 foot setback from a long list of protected properties, such as homes, schools, and churches, as well as chemical disclosure, baseline air and water testing, and restrictions on compressor station siting. After five years of debate, some council members lauded the regulations as a compromise. Opponents, however, argue the ordinance’s set back requirements amount to a de facto development ban. Council members opposed to the new ordinance stated the city is depriving itself of revenue from drilling royalties and will have to defend against lawsuits from companies that signed leases with the city and paid $33 million in advance for the right to drill, as well as other mineral rights owners.

Chicago considering ban on older railroad oil tank cars. The City of Chicago is considering a proposal to deem older versions of the commonly used Department of Transportation (“DOT”)-111 oil tank cars a public nuisance, prohibiting them from entering the city’s jurisdiction. The proposal was raised in response to July’s explosion in Lac-Mégantic, Quebec after a train hauling crude oil in DOT-111 cars derailed. The Association of American Railroads stated that, if passed, the ordinance would be overturned by a court as preempted by federal law. The Pipeline and Hazardous Materials Safety Administration is considering new rules that could require existing DOT-111 cars to be replaced or retrofitted.

NGOs oppose LNG fueling stations. Environmental groups such as the Sierra Club, Food & Water Watch, and New Yorkers Against Fracking stated that they collected approximately 50,000 comments opposing a proposed New York rule that would allow liquefied natural gas (“LNG”) storage units to accommodate heavy duty trucks that run on LNG. The NGOs contend the fueling stations should be banned because they would open a new market for natural gas produced through the use of hydraulic fracturing. In response, the New York State Department of Environmental Conservation stated that allowing LNG fueling stations would facilitate the use of trucks with substantially lower air emissions and that the proposed rule had no relation to hydraulic fracturing.

Cold spell sends New England gas prices surging. According to the Energy Information Administration, the recent cold weather saw the price of gas at Boston’s Algonquin Citygate spike from $4.13/ MMBtu to over $20/MMBtu. The gas is used primarily for electricity generation, resulting in wholesale power prices exceeding more than $100 per megawatt hour at the Massachusetts hub and over $350 per megawatt hour in southeastern Massachusetts. Both were well above typical on-peak power prices of $30 to $40 per megawatt hour. Gas and electricity price spikes are now common in New England during wintertime. Each episode rekindles debates over the area’s heavy reliance on natural gas and undersized pipeline infrastructure.

International

Canada to list crude oil as “highly dangerous.” Citing the Lac-Mégantic explosion in July, Canada’s Transport Minister announced that crude oil would be listed as a “highly dangerous” substance, triggering additional regulatory obligations for railroads. Companies will now have to create emergency plans to handle both spills and explosions. The details of an Emergency Response Assistance Plan for crude oil are still being developed by a working group, but the Transport Minister expects the group to issue a draft at the end of January 2014.

Business

QEP strikes $950 million deal in Permian Basin. Denver’s QEP Resources announced that it will acquire 26,500 acres in the Permian Basin from EnerVest for $950 million. For EnerVest, the sale is part of a divestment strategy to finance $1.4 billion in new acquisitions. For QEP, the purchase is part of a strategy to continue to transition from primarily gas holdings to acreage richer in crude oil and natural gas liquids. QEP announced the new acreage will allow it to drill 775 new horizontal wells and over 200 vertical wells – roughly equivalent to ten years of drilling inventory. The deal is expected to close by the end of January.

Canadian LNG terminals facing labor shortages. Analysts at Deloitte Canada raised concerns that a lack of skilled labor could jeopardize nine LNG export terminals planned for western Canada. Existing labor shortages have already increased wages for Canadian oil and gas workers by up to 60% over U.S. wages. Adding several LNG construction projects would push those wages even higher, potentially putting the projects over-budget and behind schedule. Financial advisory firm Grant Thornton estimates that, if only five of the nine projects are built, developers would still require over 21,000 workers. Most of those workers must be lured away from other oil and gas projects with higher wages and better amenities. A series of Australian LNG projects under construction have suffered from labor shortages, putting many of the projects significantly over-budget and behind schedule. Woodside Petroleum cited increasing labor costs in cancelling its $50 billion Western Australia LNG terminal.

Marathon Oil paring assets to focus on shale. Marathon Oil announced that it was selling off its North Sea assets in order to devote more resources to North American shale development. The company will plow $3.6 billion into more drilling in the Eagle Ford, Bakken, and Woodford shale plays over the next few years. Nearly 60% of the company’s capital, investment, and exploration budget will be devoted to liquids-rich shale acreage. By contrast, less than $2 billion will be devoted towards conventional oil and gas assets. Marathon’s announcement is similar to those of competitors Apache and Occidental Petroleum which also shed international and conventional assets in favor of greater shale development.

Research

Monterey Shale jobs projections are allegedly unreliable. Next Generation, an environmental group created by billionaire Tom Steyer to oppose the Keystone XL pipeline, has critiqued a University of Southern California study that projected development of California’s Monterey Shale could lead to 2.8 million new jobs by 2020. Next Generation claims that USC used an unreliable methodology. Similarly, the Post Carbon Institute has recently released a report claiming that estimates of the Monterey Shale’s technically recoverable oil are misleading and that there is relatively little oil to be recovered. These reports are expected to be part of the ongoing debate over natural resource development in California, as the State develops new regulations to govern the use of hydraulic fracturing and horizontal drilling techniques.

Master limited partnerships lead to IPO boom. Research firm SNL Energy issued an analysis showing that 2013 initial public offerings for the midstream market raised approximately $6 billion, up from $1.7 billion in 2012. Master limited partnerships (“MLPs”) for projects related to shale gas have become the preferred method to raise capital for pipeline and other midstream projects due to tax advantages and cash payouts to investors. According to SNL Energy’s report, six of the eight MLPs that went public outperformed expectations. SNL Energy also predicts that other energy companies outside of the midstream market, such as AES Corp. and NextEra Energy, may spin off MPLs to raise capital in 2014.

Barclays forecasts E&P budgets will grow in 2014. Investment bank Barclays issued its annual global exploration and production (“E&P”) spending forecast and predicts that it will be a big year for well service companies. Based on surveys of oil and gas executives, the company predicts that E&P will grow by about 6% over 2013 spending to reach approximately $723 billion. Exploration and production at North American shale plays are predicted to grow by 7.5% next year with more than $156 billion in new U.S. investments. Although spending in the Middle East and Latin America is still higher, both major international oil companies and independent companies are cutting back on foreign E&P to focus on North American projects.

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Sidley Shale and Hydraulic Fracturing Report

Volume 2, No. 49

Federal

EPA to examine methane study. Environmental Protection Agency (“EPA”) Administrator McCarthy has said the Agency will review the approach taken by researchers at Harvard University who found higher rates of methane emissions from oil and gas operations than previous EPA estimates. EPA and the Emissions Database for Global Atmospheric Research (a joint project of the European Commission’s JRC Joint Research Centre and the Netherlands Environmental Assessment Agency) have used a “bottom-up” approach, estimating methane emissions using emissions factors, such as the amount of methane typically released per unit of natural gas sold, for example. The Harvard researchers used a “top-down” approach, measuring what is present in the atmosphere and then using meteorological data and statistical analysis to trace it back to regional sources. Environmental groups have urged EPA and the U.S. Department of Interior to reduce methane emissions from the oil and gas industry, citing the new report.

SEC reviewing claims of tight oil reserves. The Securities and Exchange Commission (“SEC”) is challenging claims by a number of oil and gas companies regarding the scope of their tight oil reserves. The SEC has asserted the companies have included less valuable natural gas liquids (“NGLs”), such as ethane and propane, in estimates of proven crude oil reserves. In response, 14 companies have agreed to separate estimates of crude oil and NGL reserves, although several noted that because their NGL reserves were insignificant, including NGLs and crude oil in a single estimate had no material impact on reserve valuations. How companies report condensate, a lighter type of crude oil commonly produced by Eagle Ford and Utica shale wells, may also come under scrutiny because generally it sells for less than heavier crude oil and is more difficult to market.

Labor Department reviews pay in Texas. The U.S. Department of Labor is reporting that it recovered $6.1 million in additional wages for oil and gas workers in Texas since 2012. The Department of Labor’s Wage and Hour Division stated that complex arrangements among well companies, service companies, contractors and subcontractors increases the likelihood that employees are misclassified as independent contractors. The Department has also said that it intends to maintain its effort in Texas, as well as a similar program in the Marcellus Shale.

USGS investigating Texas seismic activity. The U.S. Geological Survey is setting up seismic recorders in Azle, Texas, a suburb of Fort Worth, to investigate recent seismic activity there. The town has experienced 19 tremors over the past month, with the largest having a magnitude of 3.6 on the Richter Scale. Azle’s mayor is seeking an investigation by the Texas Railroad Commission to determine if underground injection wells that dispose of hydraulic fracturing wastewater are a contributing cause, and the USGS recorders will help the town determine the epicenter.

Industry, Senator spar over crude exports. Senator Ed Markey (D-Mass.) has urged U.S. Trade Representative Michael Froman not to support easing export restrictions on U.S. crude oil. The Energy Policy and Conservation Act of 1975, passed shortly after the Middle East oil embargo, largely prohibits U.S. crude oil exports. Hydraulic fracturing, however, created a surge in crude production that is surpassing U.S. refining capacity, in part because many refineries are designed to refine imported heavy and sour crudes. Some believe the crude oil export ban violates World Trade Organization (“WTO”) rules, exposing the U.S. to WTO action by other member nations. Sen. Markey, however, believes the export ban is consistent with WTO rules and that oil exports would be contrary to longstanding U.S. law and practice.

States

Trade group challenges two Colorado ordinances. The Colorado Oil & Gas Association (“COGA”) filed two lawsuits challenging a Fort Collins ordinance extending a five-year moratorium on hydraulic fracturing and an ordinance banning the practice in Lafayette, Colorado. Both ordinances were passed as ballot initiatives in early November. COGA argues the ordinances are preempted by state law, which assigns exclusive authority over oil and gas regulation to the Colorado Oil & Gas Conservation Commission (“COGCC”). COGCC has intervened in ongoing litigation challenging the city of Longmont’s moratorium on hydraulic fracturing but Governor John Hickenlooper said that the state had no plans to intervene in the Fort Collins and Lafayette cases. The cities of Boulder and Broomfield also passed moratoria on hydraulic fracturing within city limits, but no suits have yet been filed challenging those.

Gas driller threatens suit to compel completion of New York study. The trustee for Norse Energy Corporation USA, an oil and gas drilling company that converted its bankruptcy filing to a Chapter 7 liquidation earlier this year, announced plans to seek a court order compelling the New York State Department of Environmental Conservation (“DEC”) to complete its Supplemental Generic Environmental Impact Statement (“SGEIS”) for hydraulic fracturing. DEC has said it is waiting for the Commissioner of the New York State Department of Health to complete an evaluation of the potential health impacts of hydraulic fracturing before finishing the SGEIS, but Norse claims that delegating authority to the Department of Health was illegal and the protracted review process has exceeded relevant deadlines. Norse claims it was forced to declare bankruptcy while 27 drilling applications filed with the state were suspended until the various reviews were completed.

Massachusetts considering hydraulic fracturing moratorium. A bill imposing a ten-year moratorium on hydraulic fracturing passed out of the Massachusetts Joint Committee on Environment and Natural Resources and will next be considered by the House Ways and Means Committee. The bill would also prohibit hydraulic fracturing wastewater from being treated, stored, or disposed of within the state. Massachusetts has little to no known potential for shale development so the bill is viewed as a largely symbolic gesture. If the bill ultimately passes, Massachusetts would become the second state to ban the practice. Vermont, also lacking any notable shale reserves, banned hydraulic fracturing in 2012.

New North Dakota website will provide public information on spills. Responding to criticism for withholding information about a recent pipeline rupture, the North Dakota Department of Health announced it will soon launch a website allowing the public to monitor oil and hazardous waste spills. The website will include updates and information on historic spills going back to 1975. Although spill records are public information, groups complained that there was no practical way to access them. The Department of Health plans to update the website twice per week.

Texas oil production up by one-third. The Texas Railroad Commission’s preliminary estimates of oil production showed that the state produced 1.8 million barrels of oil per day in September 2013, compared to 1.34 million barrels per day in September of last year. Most of the growth was attributed to hydraulic fracturing in the Permian Basin. While drilling permit applications were down slightly, well completions were 75% higher than last year – 21,432 in 2013 versus 12,188 through October 2012. Although the numbers indicate that drilling efficiencies are improving, Texas was still home to nearly half of the drill rigs being used in the United States.

International

Brazil sells first shale gas development rights. Brazil’s National Oil Agency (“ANP”) sold 72 of 240 lease blocks to foreign and domestic oil and gas companies, including blocks for shale gas development. The state-owned oil company, Petrobras, won most of the leases along with four foreign companies, GDF Suez, Petrominerales, Trayectoria Oil & Gas, and Geopark. ANP estimates that leases in five basins could hold up to 515 trillion cubic feet of coalbed methane and shale gas. Environmental groups, scientific associations and water service companies protested the sale, claiming hydraulic fracturing could impact the Guarani Aquifer, one of the largest groundwater reservoirs in the world. ANP plans to issue regulations for shale gas development in early 2014.

CNOOC seeking LNG export approval in British Columbia. China’s state-owned off-shore oil company CNOOC Ltd. applied to Canada’s National Energy Board to export LNG from its British Columbia-based Aurora LNG project. The company’s recently acquired subsidiary, Nexen Energy, would own and operate the plant. It is seeking approval to ship 1.7 billion cubic feet per day to Asia.

Business

Shell abandons Louisiana gas-to-liquids project. Despite incentives offered by the Louisiana state government, Shell cancelled its plans to construct a $12.5 billion gas-to-liquids plant that would have processed natural gas into diesel fuel. The company cited a need for stricter capital discipline, referring to recent concerns that the company was spending too much on capital intensive projects, including its Australian LNG export terminal.

Research

Pennsylvania Supreme Court declines to hear drilling obligation case. A petition by Marcellus Shale mineral rights owners claiming that they could terminate their lease with Kriebel Resource Company because it failed to develop fully the shale gas resources under the lease was denied by the Pennsylvania Supreme Court. The decision effectively upholds a Pennsylvania Superior Court ruling that Kriebel Resources did not have a duty to drill more than a few shallow wells under its agreement with Terry and Carol Caldwell. It noted that there was no Pennsylvania law imposing a requirement beyond that provided by contract and that a duty to more fully develop the gas resources should not be implied against Kriebel Resources.

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Hydraulic Fracturing and Shale Gas Report

Volume 2, No. 48

Federal

National Park Service withdraws comments critical of hydraulic fracturing. National Park Service (“NPS”) Director Jonathan Jarvis announced that the agency is withdrawing comments it submitted on the U.S. Bureau of Land Management’s proposed regulations governing hydraulic fracturing. The comments were controversial for relying on a New York Times op-ed by Cornell University Professor and hydraulic fracturing critic Anthony Ingraffea claiming that shale gas is a greater threat to the Earth’s climate than coal because of fugitive methane emissions. Professor Ingraffea’s claims have been criticized by both other academics and the U.S. Department of Energy. According to Jarvis, the unsigned comments were submitted without any management review or approval, called their submission “inappropriate,” and stated that relying on opinion pieces in the popular press in forming its scientific views was contrary to NPS’ scientific integrity policy.

States

Texas Supreme Court to hear wastewater trespass case. Next month, the Texas Supreme Court will hear arguments on whether a property owner should be able to recover damages for fluids entering the deep subsurface under the owner’s property. A rice farm, FPL Farming, claimed that when Environmental Processing Systems (“EPS”) injected hydraulic fracturing wastewater underground, wastewater migrated under FPL’s property. A jury ruled that there was no trespass, but the appeals court reversed, finding fluid migration far below the surface could be a trespass. It also found EPS had the burden to show FPL had consented to the migration. The Texas Oil & Gas Association, among other industry groups, filed amicus curiae briefs arguing that the lower court’s ruling marks an unprecedented expansion of the rights protected by trespass and significantly threatens oil and gas production in the state.

International

Poland will issue shale gas regulations by the end of the year. Maciej Graboswki, Poland’s new Minister of the Environment, announced his ministry will issue regulations governing shale gas by the end of this year. Those regulations would require parliamentary approval. Poland’s Prime Minister, Donald Tusk, is pushing for a quick passage in order to provide regulatory certainty for foreign gas companies interested in developing shale gas in Poland. Industry representatives, however, reportedly have raised concerns that drafts of the regulations provide for the creation of a state-owned gas company that would own a stake in any operation and that the provisions for converting exploration licenses and production licenses are too vague.

Business

Tribes will build gas plant to cut flaring. North Dakota’s Mandan, Hidatsa, and Akira Nations announced plans to invest up to $300 million to build a gas processing plant on the Fort Berthold Indian Reservation. According to the tribes, approximately 55% of all gas produced from nearby oil wells is burned off at flares, because there is currently no natural gas infrastructure to take and process the gas. The proposed plant would fill that gap, with an eye towards significantly reducing waste gas flaring from oil wells.

Research

Hydraulic fracturing opponents assert shale development brought fewer jobs than claimed. The Fiscal Policy Institute of New York, a coalition of groups opposed to shale development and the use of hydraulic fracturing, has prepared a report claiming that industry analyses have inflated the number of jobs created by drilling in the Marcellus and Utica shale plays. Including related jobs, such as engineering and trucking, the Institute asserts shale development has only created 52,000 jobs in Pennsylvania, West Virginia, and Ohio. The Institute’s report also criticizes the Pennsylvania Department of Labor and Industry’s September 2013 analysis that found shale development supported 200,000 jobs in that state alone.

Study: EPA should not have changed methane emission estimates. A study by Harvard University researchers, published in the Proceedings of the National Academy of Sciences, argues that EPA was wrong to lower its estimate of methane emissions from natural gas production by 20% earlier this year. Instead, the study claims that EPA was underestimating emissions by as much as 50% overall and up to 270% from oil and gas wells in Texas and Oklahoma. The researchers relied on atmospheric methane observations from aircraft and towers instead of estimates of individual well emissions, as EPA uses.

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