Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 28

Federal

DOT considering stabilizers for rail shipments of tight oil. Officials from the U.S. Department of Transportation are meeting with energy companies to consider the use of fuel stabilizers in shipments of tight oil by rail. The agency has been evaluating a range of safety measures and other steps in response to fires from derailed trains carrying crude oil from shale plays. A spokesman from American Fuel & Petrochemical Manufacturers, an industry trade association, stated that requiring stabilizers would reduce the volume of tight oil that could be shipped in each tanker car, making transport by rail more expensive. Government officials believe that lighter, sweeter oil is more combustible, but energy companies have disputed that claim, stating that analyses of the crude shows little difference from other forms of crude oil.

States

Ohio’s Utica Shale play surging. The Ohio Department of Natural Resources (Ohio DNR) reports that gas production from the state’s Utica Shale play doubled in 2013 over 2012 numbers, with oil production rising by 62%. The Department announced that it issued approximately 350 drilling permits in 2014, compared to 85 in 2012, and it anticipates issuing about 800 next year. Drilling opponents have objected to the rapid growth in drilling, citing two recent incidents involving oil and gas wells in eastern Ohio. In response, Ohio DNR has hired more inspectors – the agency more than doubled the number of well inspections in 2013 – and is considering additional regulations regarding disposal of hydraulic fracturing wastes.

Pennsylvania legislature passes new oil and gas provisions. As part of a state budget measure, the Pennsylvania legislature passed new provisions to allow natural gas drilling on state lands and require separate regulation for conventional and unconventional oil and gas operations. The bill will go to Governor Tom Corbett, who is expected to sign the bill. Opponents of the bill have threatened litigation, claiming the oil and gas provisions violate the Pennsylvania Constitution’s single-subject requirement. Previously, bills that sought to establish separate regulatory schemes for conventional and unconventional drilling failed to get legislative support. The Pennsylvania Independent Oil & Gas Association, which actively supported these provisions, has argued that new regulations aimed at hydraulic fracturing should not be applied to conventional oil and gas operators and unnecessarily increase production costs. Leasing the mineral rights on public lands could bring in $95 million in additional state revenue.

International

EU pressing for crude oil exports. A confidential document leaked to the public shows that European Union trade representatives are urging the United States to lift its longstanding restrictions on the export of crude oil. Prepared for the Transatlantic Trade and Investment Partnership negotiations, the document explained the EU’s concerns over its dependence on foreign oil supplies. These concerns were exacerbated when Russia recently shut off supplies of oil and gas to Ukraine. Subject to certain exceptions, the U.S. largely banned crude oil exports in 1975, citing domestic energy security concerns after the oil embargo of 1973 caused crude prices to quadruple. The leaked document, however, criticizes the U.S. policy as “resource nationalism” and urges a “legally binding commitment” to end the export ban. Energy companies and some members of Congress have generally supported lifting export restrictions, and recently the Commerce Department authorized limited exports of certain liquids associated with light crudes. Environmental groups have criticized the EU’s position, claiming, among other things, exports would incentivize more hydraulic fracturing in the U.S.

Greenpeace protests Romanian shale project. Activists from Greenpeace chained themselves to the gates of a shale gas exploration well site in Pungesti, Romania, blocking access and demanding that the government ban the use of hydraulic fracturing. The exploratory site, owned by Chevron, has faced years of delays due to protests even though Chevron will not use hydraulic fracturing during its five-year exploratory program. The U.S. Energy Information Administration estimates that Romania could hold as much as 51 trillion cubic feet of gas, which would be enough to meet the country’s demand for natural gas for roughly 100 years.

Litigation

Chesapeake’s win in shareholder suit affirmed but will head to trial on collusion charges. The U.S. Court of Appeals for the Tenth Circuit affirmed a district court ruling in a shareholder suit against Chesapeake Energy. Plaintiffs claimed that financial arrangements with co-founder and former CEO Aubrey McClendon that allowed McClendon to buy a stake in every well the company drilled, and finance his stake through the same banks that loaned funds to Chesapeake, created a conflict of interest leading the company to over-borrow to the detriment of shareholders. The Tenth Circuit affirmed the district court’s ruling that there was inadequate evidence to show the company acted recklessly or had intended to defraud shareholders. In Michigan, however, a trial court judge declined to dismiss criminal charges that Chesapeake colluded with Encana to drive down prices to lease land in the Antrim shale field. Two related antitrust charges were dismissed. Encana previously pled no contest to a misdemeanor and paid a $5 million fine.

Business

Permian Basin outgrows pipelines, turns to rails. As oil production in the Permian Basin continues to increase – up 79% since December 2009 – drilling companies are increasingly looking to ship crude by rail due to constraints on pipeline capacity. With the temporary closure of a Phillips 66 refinery in Borger, Texas, production now exceeds takeaway capacity by approximately 300,000 barrels per day. Producers are trying to make up the difference by shipping the crude out by rail to avoid steeper discounts in oil prices. West Texas Sour crude has already fallen by $11.50 per barrel when compared to West Texas Intermediate. Resorting to the rails, however, is expected to be a temporary measure. The Phillips 66 refinery is expected to return to service within a month and new pipeline projects by Occidental, Plains All America and others are expected to add another 700,000 barrels per day in takeaway capacity by 2015.

API introduces guidelines for community relations. Industry group American Petroleum Institute has published community engagement guidelines to serve as best practices for companies working in shale plays. The guidelines will help companies address community concerns responsibly and enhance the long-term benefits of development to local communities. The guidelines call for drillers to communicate with local residents and municipalities regarding environmental, health and safety practices throughout the drilling and production process. The guidelines provide a framework for addressing issues that arise during active shale development, such as from increased truck traffic and resulting impacts on local roads, as well as to better ensure residents that wells are safe even after the drilling rigs are gone. The guidelines have taken on more importance with the growing movement for local governments to exert more power over limiting, or even outright banning, hydraulic fracturing.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 27

States

Colorado: Supreme Court allows ballot initiatives to proceed. The Colorado Supreme Court rejected challenges to state-wide ballot measures that would seek to amend the state constitution to allow local governments to ban or restrict hydraulic fracturing. The measures also would seek to block regulatory taking lawsuits by owners of mineral rights if local municipalities were to enact drilling bans. Industry groups had challenged the initiatives, arguing that they were misleading and improperly addressed multiple subjects in a single initiative, in violation of Colorado law, but the court rejected their arguments and allowed the measures to move forward. The ruling clears a path for these initiatives to appear on the ballot in November, but only if supporters collect 86,000 signatures.

International

German energy and environmental ministers seek ban on shale oil and gas drilling. Germany’s departments of energy and environment proposed regulations this week that would ban drilling for shale oil and gas over the next seven years, citing concerns that drilling could damage water supplies and the environment. The proposed legislation would curtail Chancellor Angela Merkel’s original plans to end the country’s de facto moratorium by introducing legislation to regulate hydraulic fracturing this fall. Instead, the proposal upholds bans on the use of hydraulic fracturing, but would allow conventional drilling and drilling for exploration. Shale oil and gas development is a hotly debated topic in Germany; many Germans oppose the use of hydraulic fracturing, but are also concerned about Germany’s continued dependence on imported natural gas. Experts estimate that Germany sits on approximate 81 trillion cubic feet of shale gas.

Litigation

Federal court dismisses drilling disclosure case. The U.S. District Court for the Middle District of Pennsylvania dismissed a doctor’s complaint for lack of standing, finding that he had not suffered any injury from a state rule limiting doctors’ access to drilling operations’ chemical lists. Pennsylvania’s 2012 oil and gas law allows doctors, and other health professionals, to obtain a list of hydraulic fracturing chemicals used during drilling operations as long as they sign a confidentiality agreement. The complaint alleged that the law hinders doctors’ medical practices by preventing professionals from consulting with one another. The district court decision deviates from a similar lawsuit pending in state court that found a doctor did have standing to challenge the law. The state case is currently being reconsidered by a lower court.

Research

Report links Oklahoma earthquakes to wastewater injection wells. Researchers from the University of Colorado and Cornell University recently concluded that four high-rate disposal wells in Oklahoma City likely induced a group of earthquakes known as the Jones swarm, accounting for 20% of the seismic activity in the central and eastern United States between 2008 and 2013. According to the report, seismicity can be induced up to 19 miles away from a disposal well. The researchers, who reviewed 89 of the over 4,500 wastewater injection wells in Oklahoma, believe the vast majority of wells in Oklahoma are operating without effect. Oil and gas industry representatives responded to the report with skepticism, noting this report is just one part of continuing research into the increase of seismic activity in Oklahoma. Government regulators and researchers have likewise been looking into the issue, but to date have not recommended any regulatory changes.

Business

Black Hills sand may be suitable for Bakken shale drilling. In spite of an earlier state report that could not locate suitable sand in South Dakota to be used for hydraulic fracturing in North Dakota’s Bakken shale, South Dakota Proppants (“SDP”) recently located sand that has the properties necessary for drilling operations. SDP plans to build South Dakota’s first frac sand mine near Hill City. The proposed mine could employ up to 300 workers and make $65 million a year in revenue. Before proceeding, SDP will need to obtain permission from the Board of Minerals and Environment and secure water permits through the Water Management Board, processes that could take up to two years to complete.

Companies market new biocides for use in hydraulic fracturing operations. Two companies, Integrated Environmental Technologies (“IET”) and Universal Bacteria Specialist (“UBS”), have begun to develop environmental friendly biocides to use during hydraulic fracturing operations. Biocides, compounds used to kill organisms and bacteria that interfere with oil and gas extraction, are regularly used but often made with harsh chemical materials. IET’s product, Excelite, is made with hypochlorous acid, a nontoxic compound first discovered inside humans. UBS’s biocide, Envirolyte, converts water and sodium chloride into biodegradable materials that can be used in hydraulic fracturing fluid. More eco-friendly biocides will likely be developed by competitors as the market for these products is expected to grow along with the increased production of shale oil and gas.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 26

Federal

Commerce allows export of ultralight condensate. In a move that takes a step toward easing the restrictions on U.S. crude oil exports that have been in place since the 1970s, the Commerce Department granted permits to two Texas companies to export an ultralight, processed oil condensate. A Commerce spokesman claimed this does not signal a policy change on crude oil exports in general, because Commerce has reclassified the ultralight condensate as a processed product and allowed the companies to export it under the current rules. The oil industry and some members of Congress, including Sen. Lisa Murkowksi (R-Alaska), the lead Republican on the Senate Energy and Natural Resources Committee, have urged the Obama Administration to use existing authorities to allow crude oil exports.

House approves bill to expand oil and gas drilling. On June 26, the U.S. House of Representatives passed the “Lowering Gasoline Prices to Fuel an America that Works Act of 2014,” H.R. 4899, by a vote of 229-185. The measure, which combines multiple proposals that have previously been approved by the House, would direct the Department of the Interior to open additional land and water to energy exploration, expedite drilling applications and limit legal challenges.

Bicameral committee considers economic potential and risks of natural gas exports. On Tuesday, June 24, the Joint Economic Committee heard testimony on the potential economic impact and environmental risks that could come with natural gas exportation. Proponents have strongly argued for expansion of natural gas exports because increased domestic production due to hydraulic fracturing and horizontal drilling has created a surplus in some regions that could benefit the U.S. economy if exported. The U.S. Energy Information Administration reports that natural gas production increased 27% between 2007 and 2013 and that domestic crude oil production will increase to 9.6 million barrels/day by 2020. The growth in production is also linked to job creation; an industry research firm predicts 3.3 million jobs will be connected to unconventional oil and gas extraction by 2020, up from 2.1 million in 2012.

States

New York: Appellate court upholds local fracking bans. In a long awaited ruling, the New York Court of Appeals upheld bans on the use of hydraulic fracturing in the towns of Dryden and Middlefield. In a 5-2 decision, the court held that the state’s Oil, Gas and Solution Mining Law (OGSML) does not preempt the municipalities’ home rule authority to regulate land use. New York currently has approximately 170 bans and moratoriums on hydraulic fracturing, so the decision is expected to impact cases across the state. The court interpreted the OGSML’s preemption clause narrowly, holding that local governments cannot regulate how oil and gas development occurs, but are free to regulate where oil and gas development can occur. The court took no position on the propriety of hydraulic fracturing within the state, asserting that such policy decisions should be left to the legislature and executive.

Colorado: City rejects two-year fracking ban. Voters in Loveland, CO narrowly defeated a hydraulic fracturing moratorium on June 25. The measure would have banned hydraulic fracturing and the storage and disposal of hydraulic fracturing waste products within the city limits for two years. Loveland is the sixth city in Colorado to vote on a hydraulic fracturing moratorium but is the first to vote against the restrictions.

Ohio: Department of Natural Resources settles suit over hydraulic fracturing waste injection well records. The Ohio Department of Natural Resources (ODNR) settled a lawsuit with the Athens County Fracking Action Network (AFCAN) arising out of a dispute over the production of records concerning approval of a well used to inject hydraulic fracturing waste for disposal. AFCAN had sought the records as part of a challenge to the approval of the well. AFCAN lost its original challenge to the well permit, but announced it plans to file a motion for reconsideration now that the records have been released. This is ODNR’s third settlement of NGO suits seeking production of records – it agreed to pay fines and turned over similar records to the Sierra Club in 2012 and earlier in 2014.

Pennsylvania considers new natural gas tax. As part of discussions to resolve its $1 billion budget deficit, Pennsylvania may implement a severance tax on the extraction of natural gas. The state previously decided against a severance tax in 2012 in favor of a locally-directed, per-well impact fee (based primarily on the age of the well), but Governor Tom Corbett indicated this week that the state may be reconsidering the tax. Currently, Pennsylvania has the lowest effective tax rate on natural gas production when compared with other high production states. Other states are similarly using severance taxes to increase revenue; earlier this year, Oklahoma passed legislation to raise taxes on production from new wells and Ohio is currently considering proposals to increase its taxes on extraction.

Wyoming to test groundwater in Pavillion oil and gas field. In a further response to a 2011 U.S. Environmental Protection Agency (EPA) draft research report, the Wyoming Department of Environmental Quality (WDEQ) will begin testing groundwater in the oil and gas field near Pavillion. The WDEQ will also test the integrity of oil and gas wells near fourteen private drinking water wells and examine the status of legacy pits in the area. In its 2011 draft, EPA had concluded that groundwater contamination in the area was likely associated with natural gas production, but after EPA’s data and draft conclusions were challenged, the agency initiated a peer review process. After taking one set of public comments, EPA ultimately discontinued its work, announcing it would not finalize its peer review of the draft report, but would support State of Wyoming investigations. WDEQ expects to issue a report with its analyses by the end of 2014.

Studies

Flowback liquid may mobilize compounds in soils. A study conducted by researchers at Cornell University and published in the American Chemical Society’s Environmental Science & Technology journal concludes that flowback fluid from hydraulic fracturing of a well could potentially mobilize tiny particles, or colloids, in soils that may cause heavy metals and other compounds to leach out of the soil and into the flowback fluids. To date, the researchers have analyzed the effect of flowback fluid from a Marcellus Shale well on a column of sand with known deposited colloids, but the researchers reportedly next plan to evaluate the fluid’s impact on colloid movement in natural soil.

Business

Lighter shale oil extracted from certain shale plays presents refining challenge. Industry experts report that high gas levels in oil from the Texas Eagle Ford Shale and Permian Basin and the Colorado Niobrara Shale are creating challenges for refineries designed for and accustomed to handling heavier crude. Until the past few years, most oil refined in the United States was heavier crude. Now the federal government’s Energy Information Agency has estimated that light and ultralight oil accounts for over 95% of oil growth production since 2011. In response, refiners are investing hundreds of millions to upgrade and add special equipment to handle the ultralight shale oil.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 25

Federal

FERC approves Cameron LNG project. The Federal Energy Regulatory Commission (FERC) approved the final environmental impact statement (EIS) for Sempra’s Cameron LNG export terminal. The EIS found the $10 billion Texas terminal would have “less-than-significant” environmental impacts, once mitigation measures specified in the final report are implemented. NGOs participating in the proceedings had argued the EIS should analyze the environmental impacts associated with hydraulic fracturing operations that may supply a portion of the gas that would be exported, asserting that authorizing LNG exports would lead to an increase in hydraulic fracturing, which, they claim, will lead to air and water pollution. FERC, however, reasoned these potential upstream impacts are beyond the scope required by the National Environmental Policy Act. The NGOs may ask FERC for a rehearing, before challenging the approval in court. This is only FERC’s second LNG export terminal approved. FERC approved the Cheniere Energy Sabine Pass export terminal in 2012, after similarly declining to review the potential environmental impacts of hydraulic fracturing.

NGOs sue seeking more protections for species located in western states. Several NGOs filed suit against the U.S. Fish & Wildlife Service claiming the Service’s listing of the lesser prairie chicken as a “threatened” species under the Endangered Species Act (ESA) will not provide the protections required to reverse the bird’s population decline. The suit claim that populations in the five states that make up the bulk of the prairie chicken’s habitat – Colorado, Kansas, New Mexico, Oklahoma and Texas – declined by 50% between 2012 and 2013. Governors from the five states oppose the “threatened” listing, and have argued that voluntary programs developed by those states would allow the bird to recover without harming agriculture and energy development. Oil and gas development will be limited in large areas across the five states that are expected to be determined to be part of the prairie chicken’s habitat. Similar ESA determinations due later this year and during 2015 regarding the Greater sage grouse and Gunnison sage grouse could impose similar restrictions on drilling.

Stakeholders near deal for drilling in Roan Plateau. Drilling the shale formation under Colorado’s Roan Plateau has been stalled since 2007, when the U.S. Bureau of Land Management (BLM) leased 55,000 acres to companies with plans to drill thousands of natural gas development wells. As a result of a 2012 suit by NGOs, the court ordered a remand of the leases back to BLM, citing potential harms to mule deer, elk and cutthroat trout as well as air quality concerns. Under a proposed settlement, NGOs, BLM, industry attorneys and Colorado politicians have agreed to terms where BLM would buy back some of the leases and includes conditions for BLM’s planned revisions to the area’s regional management plan. Congressman Scott Tipton (R- CO), who was involved in the negotiations, wrote to Secretary of Interior Sally Jewel reporting that the proposed deal would allow drilling to proceed in an environmentally protective way. The Department of Interior must still approve the proposal.

FRA: Information on crude oil trains is not confidential. The Federal Railroad Administration (FRA) issued a statement that information provided to states regarding trains hauling crude oil, such as their routes and volumes of oil, should not be kept confidential for security reasons. Last month, Transportation Secretary Anthony Foxx ordered that such information be provided to state agencies for trains hauling one million gallons of crude oil or more to better prepare for an emergency response to accidents. Some railroads asked states to sign agreements restricting public access to that information, citing security concerns. After the announcement, Montana and Washington state officials agreed to make information on train routes and crude oil volumes public, citing state open records laws. At least one railroad has threatened to sue in order to block the release of those data, citing the potential for criminal misuse of the information.

States

California revises proposed hydraulic fracturing regulations. The California Department of Conservation’s Division of Oil, Gas, & Geothermal Resources (DOGGR), issued new proposed regulations for hydraulic fracturing. Highlights include the need for more detailed information about sites and water used for stimulation to be included in permit applications and requirements for drillers to notify nearby residents so that they may request that the company test their groundwater and measure seismic activity during and after stimulation. Any seismic activity of magnitude 2.0 or greater must be reported to the state.

North Dakota hits 1 million barrels of oil per day. The North Dakota Department of Mineral Resources announced that the state’s oil production, largely centered in the Bakken shale play, reached just over 1 million barrels per day in April 2014, second only to Texas. Only four other states (Alaska, California, Louisiana and Texas) have produced 1 million barrels of oil per day, however, each of them have a long history of conventional oil production. In 1999, before the widespread use of hydraulic fracturing and horizontal drilling, North Dakota did not have a single drilling rig. Today, North Dakota produces more than 12% of the country’s oil, mostly from shale. The Department of Mineral Resources projects that North Dakota output will peak at between 1.5 and 1.7 million barrels per day by 2017.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 24

Federal

EIA projects U.S. natural gas output will set record in 2014. A recent report by the U.S. Energy Information Administration (EIA) projects that U.S. natural gas output will set a new record in 2014, reaching 73 billion cubic feet (Bcf) per day. Additional growth is expected to be supported by new pipeline infrastructure in the Marcellus Shale which is providing market access to previously stranded gas. The EIA projects that domestic demand for electricity and industrial, commercial, and residential consumption will increase to 66.36 Bcf per day.

Notwithstanding record production, EIA reports natural gas storage is below average. Despite record natural gas production, the harsh winter has depleted natural gas storage reserves significantly. EIA reports that natural gas storage injections are over 40% (922 Bcf ) below the 5-year average of 2302 Bcf, and 748 Bcf below last year’s levels. While storage levels have been increasing with increased production, storage rates could decline, depending on the demand for electricity for air conditioning this summer. Unless storage levels approach the long-term average by the end of the injection season in October, there could be increased pressure on electricity prices next winter.

USFWS faces legal challenges over Endangered Species Act listing decision. Industry trade associations and local governments have filed suit against the U.S. Fish and Wildlife Service (USFWS) challenging the decision to list the lesser prairie chicken as threatened under the Endangered Species Act. The listing has the potential to adversely affect oil and gas development in several western states. The plaintiffs allege USFWS failed to account for the conservation plan implemented by the Western Association of Fish and Wildlife Agencies (WAFWA) under which 160 companies have enrolled 9 million acres and committed more than $43 million to conserve lesser prairie chicken habitat. Reportedly, a number of environmental groups also intend to challenge USFWS’ decision, alleging the agency included too many exceptions that will harm the lesser prairie chicken and should have listed the lesser prairie chicken as endangered.

EPA extends deadline to comment on hydraulic fracturing ANPR. On June 12, the Environmental Protection Agency (EPA) announced that it would extend the deadline for public comment on its advanced notice of proposed rulemaking (ANPR) regarding disclosure of chemicals used in hydraulic fracturing fluids by 30 days until September 18. EPA is using the ANPR to solicit information regarding the potential need for broader public disclosure of chemicals used in hydraulic fracturing beyond what is already required by state governments. EPA issued the ANPR in response to a petition by environmental groups seeking a federal rule mandating public disclosure of the chemicals used in fracturing fluids without trade secret protections.

States

North Dakota: Producers seek solutions to reduce flaring. In response to new regulations limiting natural gas flaring, oil producers in the Bakken Shale in North Dakota are seeking alternative options for using the natural gas produced alongside the oil being extracted in the Bakken. Beginning June 1, 2014 drilling applications must include a “Gas Capture Plan,” and after one year of production, producers must pay royalties and taxes on flared gas. While pipelines and other infrastructure will be critical to reducing flaring, the ever-changing array of production wells will likely limit access to pipeline infrastructure for many wells. Producers are currently exploring alternatives such as conversion to compressed natural gas (CNG) that can be used as a fuel at other drilling sites. Statoil SA has already implemented a pilot CNG program. If producers are unable to develop alternative strategies to capture and use natural gas, more draconian measures may be necessary to limit flaring, including reducing oil production.

Colorado: Environmental group sues state, oil industry for opposing local moratorium on hydraulic fracturing. The Community Environmental Legal Defense Fund (CELDF), a key sponsor of local ordinances banning hydraulic fracturing, has sued the state of Colorado and the Colorado Oil and Gas Association (COGA) in response to their lawsuits challenging the local ban on hydraulic fracturing passed last year by the city of Lafayette. The lawsuit alleges that state’s enforcement of oil and gas regulations, as well as COGA’s opposition to the local moratorium infringe on the community’s right to self governance. The lawsuit was filed on behalf of two Lafayette residents, but the complaint seeks class action certification.

International

China: FTSI and Sinopec announce joint venture to develop shale resources in Sichuan basin. FTS International (FTSI) announced a joint venture with Chinese energy company Sinopec to develop shale resources in the Sichuan basin in China. The joint venture will be called SinoFTS. FTSI was a pioneer in the U.S. hydraulic fracturing industry and remains among the largest suppliers of well completion services in the United States. SinoFTS will service wells for Sinopec and other oil and gas companies in China. While SinoFTS will initially concentrate on the shale-rich Sichuan basin, eventually it may seek to expand to other development opportunities in China. China’s shale gas reserves are the largest in the world – nearly double those of the United States. However, the depth and geologic complexity of the shale formation in the Sichuan basin make development of the reserves more challenging than the more productive U.S. shale plays.

Markets

American Energy Partners spends $4.25 billion in Permian, Marcellus and Utica formations. American Energy Partners LP recently announced plans to invest $4.25 billion in key shale plays. The investments include a lease of 63,000 net acres in Texas’ Permian Basin, where Enduring Resources LLC is currently producing 16,000 barrels of oil equivalent per day. A 27,000 acre leasehold in the Utica shale in Ohio is expected to produce 40 million cubic feet of natural gas equivalent per day, while a 48,000 acre leasehold in the Marcellus shale in West Virginia is expected to produce 135 million cubic feet of natural gas equivalent per day. Over the past nine months, American Energy has raised $10 billion for strategic investment in five key shale plays.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 23

Federal

EPA seeks comment on air permitting for oil and gas production facilities on tribal lands. The oil and gas industry is growing rapidly in many tribal areas, particularly in the North Dakota Bakken Shale play. In an advanced notice of proposed rulemaking, the U.S. Environmental Protection Agency (EPA) is seeking public comment on options to streamline air quality permitting for new and modified oil and gas production facilities on tribal lands. Specifically, in response to concerns about permitting delays, the agency is considering three options for facilities to demonstrate compliance with the Clean Air Act’s minor new source review requirements, including a simpler general permit, a “permit by rule” that would not require a formal application and a directly applicable Federal Implementation Plan. The notice follows a 2011 EPA final rule setting requirements for new minor sources on tribal lands that allowed tribes flexibility to issue permits. The June 6 notice triggered a forty-five day public comment period.

NGO and local government challenge planned oil and gas lease sale on federal land. The Center for Biological Diversity (CBD) and Nevada’s Lander County filed separate administrative challenges this week protesting a planned oil and gas lease sale by the Bureau of Land Management (BLM). The sale would open nearly 300 square miles of public land to oil and gas development using hydraulic fracturing. CBD seeks cancellation of the sale in favor of alternative energy sources that CBD asserts are more protective of water supplies and wildlife. Lander County filed a challenge on behalf of local farmers and ranchers concerned that hydraulic fracturing may divert water away from their operations. BLM is reviewing the challenges and reported that a final decision on the sale may not be reached until closer to the sale date of July 17, 2014.

States

New York: Court of Appeals hears landmark cases on local bans. The New York State Court of Appeals recently heard two cases regarding a local government’s ability to ban hydraulic fracturing through the use of zoning and land use laws. The main issue in both cases is whether the state’s Oil, Gas and Solution Mining Law (OGSML) preempts local regulation that may impact oil and gas development. Developers argued the legislature expressly preempted zoning regulations that ban all drilling operations, while the municipal governments argued the OGSML only preempted local regulation of the oil and gas industry but did not prevent local governments from enacting zoning and land use regulations. The New York Supreme Court Appellate Division upheld the local bans in the two cases in 2013. The Court of Appeals is expected to rule by July 4.

North Carolina: Governor signs hydraulic fracturing bill. North Carolina Governor Pat McCrory signed a bill that will allow for hydraulic fracturing in the state. Under the bill, drilling permits could be issued by early 2015, lifting a moratorium that has been in place since 2012. The North Carolina Mining and Energy Commission still must finalize regulations and the legislature retains the ability to block those rules. The bill includes additional protections for landowners, addresses the relationship between local zoning and state law, and provides for a severance tax. The law also provides for further study of “forced pooling” of gas from beneath neighboring properties, as well as making it a misdemeanor to improperly disclose confidential chemicals used in hydraulic fracturing fluids.

Virginia: Advisory panel reviews state hydraulic fracturing regulations. An advisory panel of the Virginia Department of Mines, Minerals and Energy held its inaugural meeting in Richmond to discuss hydraulic fracturing developments in Virginia. The nine-member panel, comprised of state, local and industry representatives, was created in response to increased interest in natural gas drilling near Fredericksburg, in the Taylorsville Basin and along the Chesapeake Bay. The panel discussed what companies should be required to disclose when proposing to use hydraulic fracturing. Panel members will also discuss best industry practices and whether additional requirements are necessary for drilling in different parts of the state.

International

Germany: Government considering hydraulic fracturing guidelines. German Chancellor Merkel’s administration is considering guidelines to allow energy companies to extract oil and natural gas through hydraulic fracturing in Germany. The government is responding to concerns that Germany is too dependent on foreign gas—nearly ninety percent of Germany’s gas is imported, while Germany has an estimated 2.3 trillion cubic meters of shale gas that could supply domestic consumption. The recoverability of Germany’s shale gas resources has not been studied extensively, and thus it could take up to a decade before Germany has a significant oil and gas production industry. Germany also faces strong opposition to hydraulic fracturing. Last year, an attempt to pass a law failed when opponents raised the threat of potential drinking water contamination. The guidelines under consideration would require independent environmental audits and ban drilling on areas requiring water protection. The guidelines are expected to be developed before the summer recess and sent to Parliament for a vote by the end of 2014.

Litigation

Michigan AG accuses Chesapeake of fraudulent leasing practices. Michigan Attorney General Bill Schuette is pursuing nine felony charges against Chesapeake Energy Corporation (Chesapeake) alleging the company leased property in Michigan’s Antrim Shale formation under false pretenses. The complaint alleges Chesapeake misled property owners by representing that holding mortgages was not an obstacle to signing a lease allowing the company to drill for gas and then used the mortgages as a reason to cancel the lease. The complaint further alleges Chesapeake entered over 700 leases but honored fewer than 30 in the state. These charges come amidst a separate misdemeanor antitrust suit in which Michigan claims Chesapeake conspired with rival Encana Corporation to rig leasing bids in order to avoid driving up prices. Chesapeake plans to contest all allegations.

Studies

West Virginia University faculty to study shale gas development. Six professors at West Virginia University received $10,000 grants to study a range of shale gas development issues including particle emissions, prediction of fracture patterns, Chinese and Argentine shale gas development and the use of natural gas as a raw material. The group of professors received the first research grants from the Shale Gas Network, a research network funded by the National Research Center for Coal and Energy and the university’s research office established to promote collaboration and research in shale gas issues. Results from the faculty research are expected to be presented at the final 2014 meeting of the Shale Gas Network later this year.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 22

Federal

Energy Department proposes new process for LNG export approval. The U.S. Department of Energy (“DOE”) has proposed to revise its procedures and only consider applications to export liquefied natural gas (“LNG”) to non-free trade countries after the Federal Energy Regulatory Commission (“FERC”) completes all environmental reviews for LNG terminals. If finalized, this change would end DOE’s practice of issuing conditional approvals, as DOE’s Office of Fossil Energy would wait until FERC’s environmental review is finished before deciding whether a proposed project is in the public interest. According to DOE, the change would ensure that the department only reviews projects that have commercially advanced to a significant degree and provide more information upon which DOE can make an informed decision. Unveiled on Capitol Hill, the proposal drew decidedly mixed reactions, with Senate Energy & Natural Resources Committee Chair Mary Landrieu praising the move and House Energy & Commerce Chair Fred Upton arguing that it will increase delays and uncertainty in the “public interest” approval process. The revised procedures are subject to a 45-day public review and comment period.

EAB denies appeal of wastewater injection well. The Environmental Protection Agency’s Environmental Appeals Board (“EAB”) rejected challenges to an injection control permit authorizing Seneca Resources to inject hydraulic fracturing wastewater underground for disposal. The EAB found the petitions for review, filed by the Highland Township (Pennsylvania) Municipal Authority and a local resident raised only generalized fears of water contamination, earthquakes and adverse health impacts which were insufficient to support an appeal. The EAB also found Highland Township’s petition was submitted after the appeal deadline.

States

California: Bill to impose hydraulic fracturing ban dies. California Senate Bill 1132, which would have banned all well stimulation techniques in the state, including hydraulic fracturing and acid stimulation, failed to win a procedural vote in the Senate. Needing 21 votes to pass on to the California Assembly, the bill failed on a 16-16 vote. The bill’s sponsor, Sen. Holly Mitchell, promised to introduce a similar bill in the future. California passed S.B. 4 in 2013, allowing for hydraulic fracturing in California once the Division of Oil, Gas, and Geothermal Resources publishes regulations.

North Carolina: Hydraulic fracturing bill passed. The North Carolina legislature passed the Energy Modernization Act, a bill that would allow for hydraulic fracturing in the state. Governor Pat McCrory is expected to sign the bill. Under the bill, drilling permits could be issued by early 2015, lifting a moratorium that has been in place since 2012. The North Carolina Mining and Energy Commission still must finalize regulations and the legislature retains the ability to block those rules, although that appears unlikely. The bill includes additional protections for landowners, addresses the relationship between local zoning and state law and provides for a severance tax. Among other fiercely debated provisions, the law provides for further study of “forced pooling” of gas from beneath neighboring properties, as well as making it a misdemeanor to improperly disclose confidential chemicals used in hydraulic fracturing fluids. The U.S. Geological Survey has estimated that the Deep River Formation in central North Carolina could contain up to 1.7 trillion cubic feet of gas.

North Dakota: Royalty controversy may go to state commission. A federal court dismissed lawsuits by North Dakota mineral rights owners against 14 oil and gas companies, finding the court had no jurisdiction to hear the cases as the plaintiffs must first exhaust state administrative remedies. The plaintiffs allege that flaring in the Bakken Shale play wastes valuable gas and deprives mineral rights owners of the valuable royalties for that gas. The plaintiffs reportedly will now proceed before the North Dakota Industrial Commission, seeking back royalties and other relief. The Commission has authority over oil and gas drilling in the state, including authority to issue regulations for flaring.

Pennsylvania: Governor lifts moratorium on leasing state lands for shale development. Pennsylvania Governor Tom Corbett signed an executive order rescinding a moratorium that had banned the leasing of state lands for gas drilling since 2010. Under Gov. Corbett’s order, state forests and parks may be leased to gas companies, so long as drilling involves no surface disruptions within the state lands. A spokesman for the governor stated that royalties from the leases will be dedicated to acquiring new state lands.

International

U.K. establishes community payment obligation on shale developers. The United Kingdom’s Department for Energy and Climate Change reached an agreement with potential shale developers that would provide a “community payment” of £20,000 per well. The Department stated that it would prefer the £20,000 payment be made to a “relevant community body” rather than the landowners themselves as it believed the money would be put to better use and ease notification requirements for shale developers. Under the proposal, no compensation would be paid for wells drilled deeper than 300 feet as the government determined that landowners have no interest in the subsurface. The proposed plan is subject to a 12-week public consultation period.

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