This Week in Hydraulic Fracturing

Volume 2, No. 33

Federal

BLM sage grouse plan could disrupt oil and gas development. The Bureau of Land Management (“BLM”) released a draft environmental impact statement and resource management plan amendment that will implement protections for the sage grouse on 1.6 million acres of BLM and U.S. Forest Service lands in Colorado. The plan includes land use restrictions and “management options” for a 910,000 acre “Area of Critical Environmental Concern,” which could significantly curtail oil and gas development in Colorado’s Niobrara Shale play. Nearly half of the sage grouse’s habitat lies in federal lands in Colorado. The plan’s goal is to preserve sage grouse habitat before the species is listed as threatened or endangered, which would restrict land use even further. BLM will take public comment on the proposal until November 14, 2013 and thus a final plan will not be released until 2014.

EIA: Energy production on federal lands drops again. A new U.S. Energy Information Administration report shows that fossil fuel production on federal lands dropped in fiscal year 2012 by 3.7%, the second annual reduction in a row and the lowest level in the past ten years. Much of the decline was attributed to coal mining, however, oil and gas production dropped as well. Traditionally, approximately 1/3 of U.S. energy production has come from federal lands. That proportion has dropped to 28% as hydraulic fracturing has largely developed on private or state-owned land.

States

New Pennsylvania regulations to cut air emissions from shale operations. The Pennsylvania Department of Environmental Protection (“PADEP”) eliminated its longstanding exemption from air permitting regulations for shale gas drillers. Companies will now have to provide an air quality plan for PADEP’s approval or win an exemption by demonstrating that they will use methods to reduce air emissions below federal standards. The exemptions require companies to, at a minimum, implement a leak detection and repair program for the entire well site, reduce volatile organic compound and hazardous air pollutant emissions below federal levels, reduce nitrogen oxide levels to 100 pounds per hour/ 1,000 pounds per day/ 6.6 tons per year, and only flare gas on an emergency basis.

California Coastal Commission to investigate offshore hydraulic fracturing. In light of recent reports that oil companies have used hydraulic fracturing to stimulate aging oil wells off the coast of California, the California Coastal Commission has announced an investigation into the practice. Several state legislators have expressed concern that offshore hydraulic fracturing has been permitted with minimal environmental review. A spokesman for the Commission stated that it was not previously aware of the practice because the offshore rigs are regulated by the U.S. Bureau of Safety and Environmental Enforcement (“BSEE”). The Coastal Commission will examine how often the practice has occurred and if the Commission has any power to regulate offshore hydraulic fracturing. No California agencies have regulations specific to offshore hydraulic fracturing. Environmental groups are demanding a moratorium on the practice, both onshore and offshore. BSEE stated that it never informed the Commission of approvals to use hydraulic fracturing because they were “minor revisions” to permits that did not require public notice and were subject to a categorical exclusion under the National Environmental Policy Act.

Ballot initiative would impose moratorium on hydraulic fracturing. Broomfield, Colorado, a northern Denver suburb, will put the question of whether to impose a moratorium on hydraulic fracturing to voters in November. A group called Our Broomfield, a subsidiary of a national movement to implement local bans and moratoria on hydraulic fracturing, obtained the signatures required to put the proposal on the ballot.

Franklin County, Kentucky imposes pipeline moratorium. Franklin County imposed a one year emergency moratorium on roadway crossings for pipelines carrying hazardous materials, reportedly in order to study potential risks. The move was aimed at blocking construction of the Bluegrass Pipeline that would ship natural gas liquids from the Marcellus Shale play to Gulf coast plants. The pipeline is being developed by Williams Cos. and Boardwalk Pipeline Partners. The companies have not indicated yet if they will challenge the moratorium in court.

<lt;STRONG>Business

Railroad to experiment with LNG fuel. BNSF Railway, the country’s largest railroad operator, will implement a pilot program to run trains on liquefied natural gas (“LNG”) instead of diesel. The railroad, which consumes about 1.4 billion gallons of diesel per year, believes that it could realize significant cost savings by converting to LNG. Even if the pilot program works, converting fleet operations to LNG would depend on an economic analysis of future LNG prices and obtaining government approval from several federal agencies.

Antero Resources developing water pipeline. Antero Resources, one of the largest drillers in the Marcellus Shale play, is planning an 80-mile, $500 million pipeline that will ship water from the Ohio River to well sites in West Virginia and Ohio. The company stated that the project will ensure consistent water supplies while cutting costs from trucking water to each site. Other companies have constructed water pipelines to supply drill sites, but Antero’s planned pipeline is by far the largest and most ambitious water pipeline project to date.

New recycling method could ease drilling waste burden. Scott Environmental Services announced that it is introducing a new waste treatment process that compacts solid drilling wastes, primarily mud and cuttings, for reuse as well pads, compressor pads, and road beds. The company asserts that its compaction method is in-line with the Environmental Protection Agency (“EPA”) practices for solidifying, stabilizing, and burying waste in cleaning up contaminating sites. The process can reduce the costs of current waste disposal, which requires the wastes to be treated to remove metals before being shipped to a solid waste landfill. To date, Scott received approvals to sell its services in seven states with active shale development operations. The company plans to launch a pilot project in Texas within the next few months.

Research

Marcellus gas production up despite low prices. Energy market analyst Bentek released a report showing that natural gas production in Pennsylvania and West Virginia is up by 50% compared to July 2012, with much of the new production coming since April 2013. That is the time that new pipelines and processing plants came on-line with an eye towards shipping the gas to east coast metropolitan areas. The analysts stated they were surprised and assumed that producers would wait until additional infrastructure arrives in 2014. The report predicts that the Marcellus Shale play will produce approximately 3.2 trillion cubic feet of gas in 2013 and is starting to displace the Gulf of Mexico as the primary supplier of natural gas to the Northeast United States.

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This Week in Hydraulic Fracturing

Volume 2, No. 32, August 5, 2013 to August 11, 2013

Federal

Hydraulic fracturing off California coast. Companies operating off the coast of California have used hydraulic fracturing in off-shore wells in an effort to stimulate older wells with declining production. A moratorium prohibits new oil leases off the California coast, but existing oil platforms may operate, and the use of hydraulic fracturing was authorized by U.S. Environmental Protection Agency (“EPA”) and the Bureau of Safety and Environmental Enforcement as exempt from new permitting. In response to questions regarding this practice, EPA has said it will reconsider whether off-shore hydraulic fracturing should require a separate permit and more environmental review. Critics argue chemicals used in hydraulic fracturing fluids are toxic to aquatic life and are calling for a moratorium on the practice until potential effects can be studied. A group of California state legislators demanded a federal investigation, complaining that they were unaware of off-shore hydraulic fracturing. Hydraulic fracturing has been used successfully in off-shore oil wells in the North Sea and Gulf of Mexico, but the companies operating in the Pacific Ocean have reported mixed results.

Third LNG export terminal approved. Lake Charles Exports LLC, a joint venture between BG Group and Southern Union Company, received approval from the U.S. Department of Energy (“DOE”) to export two billion cubic feet of liquefied natural gas (“LNG”) per day to countries without a free trade agreement. The license is contingent on the Federal Energy Regulatory Comission (“FERC”) approving the company’s pending application to construct the facility. This is the third DOE non-free-trade export license approved overall and the second in three months. DOE’s Office of Fossil Energy faces a large backlog of export applications but this approval provides some reason for optimism for critics who have complained that DOE’s delays in considering applications are hurting the country’s economy. Sen. Ron Wyden (D-Or.), Chair of the Senate Energy and Natural Resources Committee, who has opposed unlimited LNG exports, issued a statement that DOE should make it more difficult for each succeeding export application to be approved. Manufacturers that use natural gas complain that the cumulative effects of LNG exports will drive up natural gas prices and harm their businesses.

BLM will re-evaluate Colorado oil and gas projects. As part of a settlement agreement, the U.S. Bureau of Land Management (“BLM”) agreed to re-examine potential air quality impacts from 34 oil and gas drilling projects covering 1,300 wells on federal lands in Colorado. Four environmental groups filed suit in June 2011 alleging that BLM ignored potential air pollution concerns in its environmental review. As part of a settlement agreement, BLM will re-open its 2006 Roan Plateau environmental impact statement to include the oil and gas projects which the environmental groups claimed were outside of the Roan Plateau area. BLM will also establish an online tracking system for federal drilling permits issued from its Colorado River Valley field office.

Labor Department’s Marcellus Shale initiative continues. The U.S. Department of Labor (“DOL”) will continue its Marcellus Shale Initiative for a second year. DOL has been investigating claims that companies are improperly labeling employees as independent contractors to avoid paying overtime and paying day rates without recording the number of hours employees work in a day or week. The largest fine to date was levied against Groundwater and Environmental Services, Inc., an environmental consulting company that collected water samples at well sites, for improperly exempting 69 employees from Fair Labor Standards Act requirements. DOL has been conducting compliance audits, and if violations are identified, companies can be required to pay back wages. DOL has also agreed to furnish relevant information to the IRS, which can lead to Social Security and Medicare tax issues as well.

Interior Secretary tours Bakken Shale play. Interior Department Secretary, Sally Jewell, is touring the Bakken Shale play, accompanied by North Dakota’s two Senators, John Hoeven (R) and Heidi Heitkamp (D), as well as Lieutenant Governor Drew Wright (R). Secretary Jewell stated her visit will focus on job creation, concerns about gas flaring, and technologies to mitigate greenhouse gas emissions. Sen. Hoeven stated that the tour will demonstrate that state regulation of hydraulic fracturing is robust, that additional federal regulations of the practice are unnecessary, and that the Keystone XL pipeline and other infrastructure is vital to improving safety and reducing truck traffic in the area.

States

Pennsylvania DEP eliminates emission plan exemption for shale gas wells. In a new guidance document, the Pennsylvania Department of Environmental Protection (“PDEP”) is now requiring shale gas well operators to either file air quality plans for each well site or demonstrate that well controls are more stringent than the recently updated federal New Source Performance Standards. Pennsylvania requires operators to implement a leak detection and repair program for the well pad and related facilities and only permit flaring on an emergency basis. Federal standards require wells to use reduced emission completions (or “green completions”) by January 2015. PDEP had previously exempted all unconventional oil and gas wells in the state from the obligation to file air quality plans for individual well sites.

Environmental group settles wastewater suit against PDEP. Clean Water Action settled its challenge to a PDEP operating permit issued to Appalachian Water Services for a new wastewater treatment facility designed to treat wastewater from hydraulic fracturing operations. The suit alleged that the operating permit failed to protect water quality in the Monongahela River by not imposing more stringent total dissolved solids (“TDS”) limits. Under a consent decree, Appalachian may not discharge to the River until it installs additional equipment to reduce TDS. The revised operating permit will also require the plant to shut down immediately if it violates the new limits.

PDEP shuts down wastewater treatment plant. PDEP revoked the discharge permit for Aquatic Synthesis Unlimited which treated hydraulic fracturing wastewater. The company will also forfeit its $1 million bond after operational problems led to a series of spills. The plant was previously sanctioned by PDEP for beginning construction of the site in December 2011 without required permits. The plant was envisioned as a “drive through” treatment plant, where trucks could dispose of wastewater and pick up clean recycled water at another end of the plant. A lack of financial capability led to an inability to recycle all of the wastewater being delivered, and the plant began shipping the wastewater to other disposal sites without a permit. As the company’s finances deteriorated, it laid off staff, resulting in a series of overflows and spills from pits and storage tanks. PDEP is now moving to remediate the site.

Suit alleges hydraulic fracturing caused earthquakes. Texas landowners filed a class action suit in state court alleging that hydraulic fracturing by EOG Resources, Shell, Sunoco, and Enterprise Products Partners caused earthquakes that damaged homes. Plaintiffs’ complaint alleges that homes in Alvarado, Texas, near the Barnett Shale play, have suffered cracked foundations. They claim that a person can feel tremors on the surface with each hydraulic fracturing job. Plaintiffs also allege that the companies are responsible for tremors caused by the underground injection of hydraulic fracturing wastewater, although no owner or operator of a disposal well was named in the suit. The complaint alleges claims for nuisance, negligence, and strict liability and seeks compensatory and punitive damages.

Business

S&P: NGL prices will cause midstream companies to struggle. Credit rating agency Standard & Poor (“S&P’s”) issued a report opining that midstream companies handling significant volumes of natural gas liquids (“NGLs”) will see weak financial results through 2013 and beyond. NGL prices are low and expected to weaken from low domestic demand, making NGLs a weaker commodity than natural gas, which is selling at low but relatively stable prices. S&P recently downgraded ONEOK Partners and DCP Midstream from “stable” to “negative” ratings due to their NGL business.

MarkWest, Kinder Morgan announce Utica Shale joint venture. MarkWest Utica EMG and Kinder Morgan Energy Partners announced they will jointly construct two new infrastructure projects to capitalize on production of natural gas liquids in the Utica Shale play. The first is a cryogenic processing facility capable of handling 400 million cubic feet of gas and liquids per day. The companies expect the plant to come on-line in late 2014 with a second plant as an option thereafter if there is customer interest. The second project is a 200,000 barrel per day NGL pipeline running from Ohio to Texas. The 1,100 mile pipeline is expected to start up in late 2015.

BHP Billiton continues to buy up U.S. shale assets. The CEO of Australian company BHP Billiton Ltd, the world’s largest mining company, recently announced that the company will continue to commit billions of dollars to U.S. shale assets. CEO Andrew Mackenzie announced his intention to make the company a leader in U.S. shale development. The company has backed this up with $20 billion in North American shale acquisitions in 2011 and an additional $4 billion in 2013.

Research

NOAA study: methane emissions form Utah oil and gas operations. The National Oceanic and Atmospheric Administration (“NOAA”) published a study in the journal Geophysical Research Letters finding that drill sites in Utah’s Uintah Basin were emitting fugitive methane, on average, equivalent to 9% of the gas they produced. This rate is higher than other studies which place fugitive methane emissions at around 2%. The study’s main author stated that, at a 9% emission rate, natural gas would have no advantage over coal in reducing greenhouse gas emissions. An industry representative stated that oil and gas companies have every incentive to capture all of the gas they produce and that additional controls can be implemented to reduce fugitive emissions.

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This Week in Hydraulic Fracturing

Volume 2, No. 31

Federal

BLM to study hydraulic fracturing on public lands in California. The Bureau of Land Management (“BLM”) announced it will prepare an environmental impact statement (“EIS”) to study the potential impacts of hydraulic fracturing in central California’s Monterey Shale formation. Based on the findings, BLM could amend the area’s resource management plan for oil and gas development on federal lands. With the state, BLM will concurrently review scientific literature regarding potential seismic impacts from drilling. The seismicity study will be led by the California Council on Science and Technology and will undergo peer review before publication and incorporation into the EIS. The studies were announced in response to a court ruling finding BLM violated the National Environmental Policy Act (“NEPA”) by issuing leases for hydraulic fracturing without adequately considering its potential environmental impacts.

BLM plan to allow oil and gas exploration in Montana struck down. The Ninth Circuit remanded a 2008 U.S. BLM plan to allow oil and gas exploration in an area of Montana designated as a national monument in 2001. The Montana Wilderness Association argued BLM’s plan violated the Federal Land Policy and Management Act, NEPA, and the National Historic Preservation Act (“NHPA”) when it allowed for exploration activities in the Upper Missouri River Breaks National Monument. The court found BLM violated the NHPA when it failed to consider the effect of increased traffic on historic areas, such as survey stations established by explorer Meriwether Lewis.

House Committee votes to block BLM hydraulic fracturing rules. The House Natural Resources Committee voted to advance a bill that would block BLM from finalizing its proposed regulation of hydraulic fracturing on federal land. Instead, state regulations would govern drilling activities. The bill’s proponents criticized the proposed BLM rule as duplicative and unnecessary. Although the bill may pass the House, it is not expected to pass the Senate.

Senators seek clarification on DOE power to revoke LNG export permits. Senate Energy and Natural Resources Committee Chairman Ron Wyden (D-Or.) and ranking member Lisa Murkowski (R-Alaska) wrote U.S. Department of Energy (“DOE”) Secretary Ernest Moniz asking whether DOE was empowered to revoke previously approved permits to export liquefied natural gas (“LNG”) to non-free trade countries. Sen. Wyden has asserted that exports could be restricted if domestic gas prices reach levels that weaken U.S. manufacturing and power sectors. DOE likewise has stated it could revoke or modify permits under “appropriate circumstances,” but the Senators are asking DOE to define the “appropriate circumstances” standard as well as whether DOE would consider the cumulative impact of natural gas exports and whether LNG exporters would receive a hearing before their permits were cancelled or modified.

House members seek answers on EPA water investigations. Members of the U.S. House of Representatives wrote EPA Administrator Gina McCarthy asking why the agency began investigations into claims of drinking water impacts from hydraulic fracturing in Pennsylvania, Texas, and Wyoming. After several years of investigation, EPA declined to take action in each case, engendering criticism from both hydraulic fracturing proponents and environmental groups. The representatives asked how often EPA has used its emergency powers under the Safe Drinking Water Act to investigate such claims and how it determines that “appropriate State and local authorities have not acted.”

States

Halek Operating ND fined $1.5 million. The North Dakota Industrial Commission fined Halek Operating ND LLC $1.5 million, the maximum possible, for the illegal disposal of wastewater in underground injection wells. The Commission is also pursuing criminal charges against Nathan Garber, the president of Executive Drilling, which bought the wastewater disposal site from Halek and allegedly continued the illegal disposal practices. According to the Commission, Garber instructed workers to mislead state inspectors regarding the company’s disposal practices. The wastewater was from hydraulic fracturing operations in the Bakken shale play.

Pennsylvania to monitor air quality in Marcellus Shale play. The Pennsylvania Department of Environmental Protection (“PDEP”) will be monitoring air quality at wells and compressor stations in southwestern Pennsylvania. Although PDEP recently imposed more stringent air emission standards for compressors, and prior PDEP studies showed that the area met federal ambient air quality standards, residents and activists have raised concerned about potential health impacts to residents living near gas well sites. A report on the findings will be issued in early 2014.

Colorado County blocks natural gas liquids pipeline. The Adams County Colorado Commission rejected a proposed route for the Front Range pipeline, a 435 mile pipeline that would carry natural gas liquids from Northern Colorado to Texas. The project is a joint venture of Anadarko Petroleum, Enterprise Products Partners, and DCP Midstream Partners. The Commission stated the pipeline would interfere with the county’s economic development plans. A project spokesman stated that it would continue to work with the county on a more acceptable route but that it was also considering its legal options.

Business

Platts creates new oil pricing index. Platts, the commodities pricing company, has created a new Light Houston Sweet daily assessment price. Previously, “the price of crude oil” has always referenced the West Texas Intermediate (“WTI”) index price at the New York Mercantile Exchange. For WTI, the benchmark price settlement point is in Cushing, Oklahoma, where terminals collect crude oil from Midwest production wells and imported oil from Houston before shipping to coastal refineries. Hydraulic fracturing, however, has led to pipelines and railway lines that allow crude oil to bypass Cushing and to go directly to refineries. The Light Houston Sweet price will be based on spot prices at three Houston crude oil terminals which Platts hopes will make for pricing that is more relevant for regional traders.

Pioneer Resources bets big on Spraberry/Wolfcamp field. Independent exploration and production company Pioneer Natural Resources Company is planning to spend $1.6 billion, half of its capital budget, on developing the Spraberry/Wolfcamp field. Many companies have been deterred from developing the field due to difficult geology, but Pioneer believes the field holds 50 billion barrels of recoverable oil and gas, second only to Saudi Arabia’s Ghawar oil field. Their research shows that shale strata in the field are several thousand feet thick, as opposed to a few hundred feet thick in most other plays. Pioneer plans on using a “stacked lateral” drilling method where horizontal wells are drilled below each other. This would allow the company to drill 30 to 40 wells from a single well pad.

Reinsurance industry seeking more data on risks. It has been reported that the reinsurance industry wants more information on the potential hazards of hydraulic fracturing in U.S. shale plays before determining whether to provide insurance policies and at what cost. Among other things, reinsurers are seeking a clearer set of best operating practices from oil and gas companies and are struggling with conflicting claims about risks from hydraulic fracturing. Among these best practices could be criteria for pre-drilling evaluations that identify abandoned wells, potential seismicity, shallow gas zones, and risks to aquifers; baseline sampling of nearby water wells; the disclosure of hydraulic fracturing fluid chemicals; and the use of a “closed loop” system for wastewater. Companies now largely cover shale play development with self insurance and surety bonds. Satisfying reinsurers, however, may become more important.

Oil company sues well field service companies for price fixing. Citing a U.S. Department of Justice investigation into the possibility of anticompetitive practices, Cherry Canyon Resources LP filed a class action suit in federal court alleging that Halliburton, Schlumberger, and Baker Hughes conspired to raise prices and squeeze out smaller competitors. According to the suit, the hydraulic fracturing boom attracted many new well service companies, leading the defendants to restrict the price of services in order to increase prices and the companies’ market share. Halliburton, Schlumberger, and Baker Hughes are the three largest publicly traded well service companies in the country, accounting for about 60% of U.S. marketshare. The suit asserts that it is filed on behalf of all companies that contracted with the defendants for well field services since May 29, 2011 and is seeking treble damages.

Encana moves into Michigan. Encana Corporation is planning to drill up to 500 wells in the Antrim and Collingwood shale plays, situated in the northern tier of Michigan’s Lower Peninsula. The company believes that both plays are rich in natural gas. Opposition groups are forming to block the project, claiming shale development will contaminate drinking water and cause earthquakes. Encana has been exploring the Antrim and Collingwood plays since 2009. Governor Rick Snyder is encouraging shale production, stating that it will bring jobs to Michigan.

Hess sells off energy marketing division. London-based Centrica PLC purchased Hess Corporation’s natural gas and electricity delivery unit for $1.03 billion. The unit, based in Woodbridge, New Jersey, provides gas and electricity to 23,000 area customers and will be run by Centrica’s U.S. subsidiary Direct Energy Business. The sale is part of Hess’ strategy to divest its downstream assets to focus on exploration and production. Hess has already sold off $4.5 billion in assets this year. Centrica, however, is looking to dramatically increase its North American presence within the next five years. The company is reportedly interested in acquiring pipeline and storage capacity from other U.S. companies.

M&A activity in energy sector down. Deloitte issued a report finding that mergers and acquisitions in the energy sector have fallen over last year. In the last half of 2012, there were 109 U.S. mergers and acquisitions worth $84.4 billion. The first half of 2013 saw 76 deals worth $34.5 billion. The report suggested several possibilities for the decline, including low natural gas and natural gas liquids prices, slowing economic growth in Asia, the potential for changes to energy tax policies, and a general industry transition from acquiring new assets to developing those assets. Further, “distress sales” of assets by companies struggling with debt have largely leveled off but may pick up in the future if independent exploration and production companies cannot weather a prolonged period of significant debts and low gas prices. The report did note that investment in master limited partnerships in the pipeline and midstream asset sector was doing very well, up to $25.1 billion in the first half of 2013 versus $18.7 billion in the second half of 2012.

Chemical tankers booming as chemical exports to Asia surge. The influx of low cost natural gas from hydraulic fracturing is leading to record U.S. chemical exports, especially to Asia where China is the largest importer of chemicals. The specialized tankers used to ship the chemicals are also setting records. Freight rates are at a five-year high and set for a 12% increase next year, according Norwegian investment bank RS Platou Markets AS. Norwegian tanker owner Stolt-Nielson is one of the biggest beneficiaries with Platou estimating shares to rise 24% over the next year with fleet use expected to approach 90%. Utilization may increase further in 2015 when several new U.S. chemical plants and unit expansions are expected to come on-line. Utilization on a ton-mile basis is further increased because shipping chemicals from the U.S. to Asia is a much longer trip than shipping from the Persian Gulf. Shippers are ordering new tankers, although they may not arrive in time to prevent shortages and higher shipping rates.

Research

Study of wells near Barnett Shale. A new study by a University of Texas-Arlington researcher, published in Environmental Science & Technology, found that wells closer to Barnett Shale drilling operations were more likely to have elevated levels of arsenic, strontium, and barium, although the study could not conclude that drilling caused contamination as other wells near the drilling did not have elevated contaminant levels and the researcher acknowledged there are other potential causes. The study examined 91 drinking water wells within 3 miles of a natural gas well and compared those to other wells, both within and outside the Barnett Shale, where there was no drilling. Nearly all of the wells contained some level of strontium and barium; 29 had arsenic concentrations above regulatory levels and two had selenium concentrations above regulatory levels. Comparisons to baseline data taken between 1989 and 1999 showed that water quality in many of the wells has declined.

Study of North Dakota flaring. Activist investor group Ceres issued a report finding that Bakken Shale oil drillers doubled the amount of natural gas flared since 2011. Ceres estimated that 266 million cubic feet of gas per day, with a current market value of nearly $1 billion, was burned off instead of being captured and sold. With the price of crude oil nearly 30 times higher than natural gas, there is little economic incentive to construct natural gas pipelines to the area and hence the infrastructure to sell the gas does not currently exist. Ceres urged that new regulations be adopted, while a spokesman from the North Dakota Department of Mineral Resources stated that new tax incentives to build pipelines should reduce flaring in the future.

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This Week in Hydraulic Fracturing

Volume 2, No. 30

Federal

XTO settles alleged Clean Water Act violations. XTO, Exxon Mobil’s shale development subsidiary, settled the Environmental Protection Agency (“EPA”) claims of Clean Water Act violations related to discharges of wastewater into a tributary of the Susquehanna River in Pennsylvania. Under the consent decree, XTO will pay a $100,000 civil penalty and spend approximately $20 million on wastewater management improvements at its operations in Pennsylvania and West Virginia such as increased wastewater recycling, storage tank alarms, secondary containment, and other new equipment and operating practices.

Study: BLM underestimated costs of proposed rulemaking. A study prepared by John Dunham & Associates for the Western Energy Alliance estimates that the U.S. Bureau of Land Management’s (“BLM”) revised proposed regulations governing the use of hydraulic fracturing to develop federal oil and gas resources would impose $346 million per year in additional costs on about 3,400 wells. This is more than 15 times higher than BLM’s own estimate of the proposed rule’s cost, although less than the cost of BLM’s May 2012 original proposal. Even as revised, industry members have continued to express concerns about the proposal, including that BLM lacks the budget and staff to implement the proposed requirements, and has urged that regulation of onshore oil and gas development should remain state matters. The proposed rule states that BLM would defer to states that have regulations at least as stringent as these proposed federal rules, but includes no mechanism for making that determination. Bills have been introduced in the House of Representatives that would block the proposed rule from becoming law and shift regulatory responsibility to the state where the federal land or subsurface rights are located.

House hearing focuses on EPA hydraulic fracturing study. EPA’s hydraulic fracturing study was the focus of a Capital Hill hearing. Several members of the House Science, Space, and Technology Committee urged that EPA’s study focus on probable impacts, not “possible impacts,” fearing that the agency will rely on largely hypothetical scenarios to justify federal regulation. The EPA study was ordered by Congress in 2010 and will be the product of 18 separate agency research projects, including examinations on injection fluid chemicals, well construction standards, and impacts on water quality. EPA’s witness, Fred Hauchman, the director of the Office of Science Policy, stated that the study will not include a quantitative risk assessment but would still be valuable given the lack of research on potential impacts on sources of drinking water. He assured that industry, state regulators, and NGOs would all be able to provide input on the peer-reviewed study and he was confident that the study would produce “a useful report.”

EPA: injection wells should stop operating if they induce seismic activity. According to an EPA draft report, the agency could force waste disposal injection wells to shut down if they are found to cause seismic activity. The draft includes a “decision model” that also outlines a handful of less drastic options that operators could implement, such as reducing the injection volume. Some have attributed small seimic activity to injection wells located in Ohio, Oklahoma, and Arkansas, three states which are now doing substantial business in disposing of hydraulic fracturing wastewater. Although regulation of these wells is typically delegated to states, and the draft was characterized as guidance for state agencies, EPA’s draft report states that it still has the authority to step in and shut down the wells if they are believed to be responsible for inducing seismic events. State agencies in Arkansas, Ohio, and Texas have already shut down wells on these grounds. Development of the draft, however, stalled. Originally intended for peer-review before being released, EPA appears to have abandoned the project without explanation.

GAO to examine impact of shale development on transportation infrastructure. Senator Jay Rockefeller (D-WV), Chair of the Senate Commerce Committee, requested the Government Accountability Office (“GAO”) to review the potential impacts of shale development on the country’s transportation infrastructure. Citing recent railroad accidents involving tanker cars of crude oil, Sen. Rockefeller asked GAO to examine safety concerns along key transportation routes as well as the impacts of shale gas development in rural areas of West Virginia. High volumes of heavy truck traffic carrying equipment and supplies in connection with shale development have been a source of concern in some areas. The report is to provide recommendations regarding federal rail, pipeline, and highway transportation policies.

U.S. Dep’t of Justice investigating well service companies. Attorneys from the U.S. Department of Justice’s antitrust division issued a civil investigative demand to well service companies Halliburton and Baker Hughes. Representatives from the Department of Justice and the companies declined to provide details other than to say that the government requested two years’ worth of documents and information regarding allegedly anticompetitive practices related to oil and gas wellfield services.

States

North Carolina shale development bill fails. Backers of hydraulic fracturing in the North Carolina legislature failed to push through a bill allowing the practice within the state. This was the third failed attempt in 2013; however, Governor Pat McCrory and Senate leaders expressed optimism that the bill will either be raised again in a special session or in next year’s short session, beginning in May 2014. The bill would have lifted the existing moratorium, allowing the state to start issuing permits for hydraulic fracturing by mid-2015. The bill was supported by the North Carolina Department of Environment and Natural Resources, which would issue those permits. The regulatory package also would have established a severance tax on oil and gas production and several other provisions, such as the protection of proprietary information used in hydraulic fracturing fluids. By a narrow margin, however, the House rejected the package, with opponents asserting environmental concerns and claiming it was too late in the session to consider the bill.

Kansas proposes chemical disclosure rules. The Kansas Corporation Commission’s Oil and Gas Conservation Division proposed new rules that would require oil and natural gas companies to disclose the identity of non-proprietary chemicals used in hydraulic fracturing fluids. The Kansas Corporation Commission has permitted hydraulic fracturing since 1947 but does not have specific regulations governing the practice. The Commission will hold a hearing on the proposed rules on August 10, 2013.

Loveland, Colorado gets hydraulic fracturing moratorium on ballot. An environmental group succeeded in gathering enough signatures to put the question of whether the town of Loveland, Colorado should temporarily block hydraulic fracturing on a ballot. Petitions for the referendum, proposing a two-year moratorium, garnered 3,700 signatures. The initative was coordinated by a local environmental group called Protect Our Loveland.

North Dakota studying radioactive materials in drilling wastes. The North Dakota Department of Health is reviewing data on radioactive materials in wastewater from hydraulically fractured oil wells in the state’s Bakken Shale play. Naturally occurring radioactive materials can flow back up with wastewater. The state currently prohibits the disposal of materials registering at more than 5 picocuries. This requires drillers to ship wastes out of state, sometimes as far away as Texas. Depending on the results of the study, which may be completed by the end of the year, North Dakota may permit in-state disposal with additional regulatory safeguards.

International

British tax changes for shale gas takes shape. The U.K. previously announced that it would be reducing its taxes on natural gas exploration in order to encourage shale development. The substance of the tax changes began to take shape after the U.K. Treasury issued a consultation report. On-shore gas producers are currently subject to at least two taxes: the Ring Fence Corporation Tax and a Supplementary Charge, adding 32% to the company’s adjusted ring-fence profits. Wells that received development consent before March 1993 are subject to an additional Petroleum Revenue Tax. Together, they currently impose a 62% marginal tax rate on new wells and an 81% rate on the profits from older wells. The U.K. Treasury recommended that these rates be reduced through a “pad allowance” that exempts a portion of production from the Supplementary Charge based on the capital expenditures incurred for each well pad, with the first year allowing a 100% capital cost exemption. The recommendation also included other various offsets and allowance carryovers. According to the recommendation, this would off-set the high costs of developing the U.K.’s geologically challenging shale formation.

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This Week in Hydraulic Fracturing

Volume 2, No. 29

Federal

XTO settles alleged Clean Water Act violations. XTO, Exxon Mobil’s shale development subsidiary, settled the Environmental Protection Agency (“EPA”) claims of Clean Water Act violations related to discharges of wastewater into a tributary of the Susquehanna River in Pennsylvania. Under the consent decree, XTO will pay a $100,000 civil penalty and spend approximately $20 million on wastewater management improvements at its operations in Pennsylvania and West Virginia such as increased wastewater recycling, storage tank alarms, secondary containment, and other new equipment and operating practices.

U.S. Fish & Wildlife postpones sage grouse decision. The U.S. Fish & Wildlife Service (“FWS”) has delayed until March 2014 its decision whether to list the Gunnison sage grouse as an endangered species. Listing the bird as endangered would restrict businesses, ranching, and residential development in Colorado and Utah. In a proposed rulemaking, FWS has stated that residential and infrastructure development is destroying the bird’s habitat and outlined plans to designate 1.7 million acres as critical sage grouse habitat. Environmental groups blame shale development for degrading the bird’s habitat. In delaying its decision, FWS cited “substantial disagreement” regarding population data, residential growth projections, the success of existing conservation measures, and other relevant considerations.

NGOs may challenge BLM oil and gas leases. Several environmental groups have filed a protest claiming the U.S. Bureau of Land Management (“BLM”) recent oil and gas lease sales in New Mexico’s Otero County were performed under a deficient resource management plan. BLM has acknowledged that the White Sands plan, prepared in 1986 before the common use of horizontal drilling with hydraulic fracturing, is “insufficient for the management of the resource.” A challenge to BLM’s previous attempt to update the plan was sustained by the Tenth Circuit; however BLM said that it carefully examined the parcels in this sale to make sure there would be no significant impacts to wildlife or drinking water resources.

States

Hess, Newfields cancel leases in Northeast Pennsylvania. A joint venture between Hess Corp. and Newfield Exploration Company cancelled leases on parcels within the jurisdiction of the Delaware River Basin Commission. The companies stated there were business reasons for the cancelation, although the Commission’s continuing moratorium on the use of hydraulic fracturing while it considers draft regulations governing development in the area presumably contributed to the action. The Northern Wayne Property Owners Alliance had negotiated a master lease on behalf of approximately 1,300 landowners who had received approximately $150 million in front payments. The cancelation cost the landowners approximately $187 million in anticipated future royalty payments.

Oregon moves to challenge FERC’s LNG terminal siting authority. The Oregon Department of Energy and other state agencies moved to intervene in proceedings regarding Oregon LNG’s application to build a $6.3 billion LNG export terminal on the Columbia River in Warrenton, Oregon. Oregon opposes FERC’s use of its conditional order authority to make siting determinations, arguing the orders are contrary to state law, as well as the Clean Air Act and Clean Water Act. Oregon previously petitioned for review of a 2009 FERC conditional order authorizing a different LNG terminal. The Ninth Circuit found the applicant’s bankruptcy mooted the challenge and declined to reach the merits.

NGOs prepare to sue Pennsylvania treatment company. Clean Water Action issued a notice of intent to sue Waste Treatment Corporation for alleged violations of the Clean Water Act, Endangered Species Act, and Pennsylvania’s Clean Streams. The group claims sampling of the Allegheny River by Pennsylvania DEP proves unlawful discharges of drilling wastewater, as shown by allegedly elevated levels of salts, metals, and naturally occurring radioactive materials. The company denied the allegations and stated it was operating in compliance with its permit.

Research

DOE study finds no evidence that fracturing fluid impacts aquifers. Researchers that recently concluded a year long study by the U.S. Department of Energy (“DOE”) have preliminarily determined that there is no evidence that chemicals in hydraulic fracturing fluid migrated into aquifers. Instead, the chemicals stayed trapped in the well bore 8,000 feet below ground. DOE researchers tagged fracturing fluid chemicals with a marker before injection at a western Pennsylvania drill site. After a year, the chemicals had not been detected at a monitoring zone 5,000 below ground, or about a mile beneath shallow aquifers used for drinking water supplies. The results will be officially published within a few months.

International

Chevron signs on to develop Argentina shale play. Chevron has agreed to a joint venture with Argentina’s state-owned oil company Yacimientos Petroliferos Fiscales (“YPF”) to develop the country’s Vaca Muerta shale formation. Under the agreement, Chevron will spend $1.24 billion to drill approximately 100 wells with each company receiving 50% of the proceeds. This is Argentina’s first deal with a foreign company since the government took over YPF from Spain’s Repsol S.A. last year. Repsol is suing Argentina for $10.5 billion and has promised to sue any companies that do business with YPF, including Chevron. The U.S. Energy Information Administration estimates that Argentina has the third largest shale gas reserves in the world.

U.K. considering incentives for shale development. To incentivize development, the U.K. government is considering reducing the tax on income from shale gas, as well as a plan to offer municipalities £100,000 per well site plus up to 1% of production revenues. Environmental groups criticized the plan, arguing that hydraulic fracturing carries environmental risks and should not be encouraged. The British Geological Survey has estimated the U.K. may have 1,300 trillion cubic feet of shale gas, with most of it concentrated in Lancashire’s Bowland Basin. Although some in industry have estimated that only 10% of the reserves are technically and economically recoverable, that would still boost energy security in a country that consumes approximately three trillion cubic feet of gas per year.

Hollande: no hydraulic fracturing in France. In a television interview, French President François Hollande declared that there will never be hydraulic fracturing in France so long as he is president and that debate over its future is over. France banned hydraulic fracturing in 2011, but there has been a recent industry push to allow for development bolstered by a parliamentary commission recommending a reassessment of the policy. The push had gained enough momentum that commentators speculated that former Environmental Minister Delphine Batho was fired for her criticisms of hydraulic fracturing. President Hollande denied the speculation, appointing Phillippe Martin as the new Environmental Minister who is equally as critical of hydraulic fracturing as his predecessor.

OECD begins examination of fracturing fluid chemicals. The Organization for Economic Cooperation and Development (“OECD”), an influential international economic organization, approved a study of data availability regarding potential hazards of chemicals commonly used in hydraulic fracturing fluids. OECD will also survey member countries, including the United States, to determine how they assess fracturing fluid chemicals. Future projects may include developing methodologies for estimating environmental exposure to the chemicals.

Business

Developers exploring Devonian shale. A number of companies—Consol Energy, Rex Energy, and Range Resources—are now exploring the Upper Devonian shale and sandstone layer lying a few hundred feet above the Marcellus Shale play. Consol recently drilled a 12,490 foot exploration well into the Upper Devonian in Western Pennsylvania, an area where the Marcellus shale, Utica Shale, and Upper Devonian are stacked on top of each other. Although the exploratory well produced about a third of the gas found in a typical Marcellus well, the companies stated that the Upper Devonian is seen as a potential long-term shale play.

Natural gas liquids supply pushing down prices. Natural gas liquids (“NGLs”), such as propane, butane, and ethane, have become as abundant as methane, but customer demand has not yet absorbed the new supply. Wells Fargo Securities estimates NGL production will jump to 950 million barrels per day, compared to 210 million barrels per day in 2012. NGLs are used to manufacture plastics and specialty chemicals and companies are building plants or export terminals to take advantage of the supply. These new demand sources, however, will not begin operating until at least 2016. Until then, abundant supply has pushed down ethane prices from $15.88 per MMBtu in 2011 to $9.50 per MMBtu in March 2013.

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