This Week in Hydraulic Fracturing

Volume 2, No. 38

Federal

Environmental groups move to block Utah oil and gas leasing, sue over air quality. Several environmental groups filed an administrative protest with the U.S. Bureau of Land Management (“BLM”) to block the Bureau’s proposal to lease blocks within Utah’s 2,000 square mile San Rafael Swell for oil and gas development. They argued that BLM failed to sufficiently consider the environmental consequences of oil and gas leasing. The lease auction is currently set for November 2013. Separately, environmental groups filed suit against Environmental Protection Agency (“EPA”), claiming that it must classify Utah’s Uinta Basin as a non-attainment area for ozone. They argue that oil and gas development is responsible for the area exceeding the national ambient air quality standard for ozone of 0.075 parts per million.

Japan has been seeking more U.S. LNG exports. U.S. Department of Energy (“DOE”) documents show that Japan has been lobbying for more U.S. liquefied natural gas (“LNG”) exports since March 2011, fearing that blackouts could cripple the world’s third-largest economy. The country recently took its last operating nuclear plant off-line for repairs, and government officials stated Japan only has a two to three week supply of LNG with most of its exports coming from an unstable Middle East. Japanese officials warned that supply disruptions could send approximately 1/3 of the country into darkness. The danger of a blackout is becoming acute as Japan faces increasing power demands during winter.

New projects press for preferred LNG export approval. EOS LNG and Barca LNG filed petitions for approval to export LNG to non-free trade countries from floating liquefaction facilities that would be constructed offshore of Brownsville, Texas. The project owners, which include African-Americans and disabled veterans, are urging DOE’s Office of Fossil Energy to consider the project applications before nearly two dozen others that have waited longer, some for two years. Los Angeles businessman, Andrew Kunian, who owns a 49% stake in each project, stated that the federal government must give preference to minority and veteran owned businesses. Recent comments by Senator Ron Wyden, Chairman of the Senate Committee on Energy and Natural Resources, that LNG exports are reaching a maximum limit may spur applicants to pursue novel strategies to gain accelerated consideration of their applications.

States

Texas re-investigating Weatherford homes for possible well contamination.&llt;/STRONG> Although EPA dropped its controversial enforcement action against Range Resources, the Texas Railroad Commission is now conducting a new investigation into well contamination at the same residences near Weatherford, Texas. Homeowners stated the methane in their well water has gotten worse since the initial investigation three years ago even though the Commission attributed the methane to natural sources. Range, which continues to monitor the area, stated that some of the residents’ wells were drilled through a shallow gas-producing formation unrelated to the company’s oil and gas development. Range has since sold the two wells that were the source of the controversy to Legend Natural Gas.

State, industry survey Colorado flood aftermath. Now that floodwaters have receded in Colorado, the oil and gas industry and the Colorado Oil & Gas Conservation Commission (“COGCC”) are scrambling to examine potential damage to wells and compressors that were either submerged or cut off by washed out roads. A spokeswoman from the Colorado Oil & Gas Association informed COGCC that all wells and compressors were shut off before the flood and that a “majority of operators” reported no significant impacts from the flooding. COGCC is currently investigating ten oil releases from the Denver-Julesburg Basin, including the Wattenberg Field, which is the site of extensive oil drilling. COGCC only characterized two releases as “notable,” releases of a combined 18,000 gallons of crude condensate into the South Platte and St. Vrain rivers from two Anadarko storage tanks. The company is currently working to clean up the spills. Clean Water Action, an environmental group, criticized the response and demanded civil and criminal action against Anadarko. The group also wants COGCC to inspect every one of the 1,900 wells potentially impacted by the flooding and to report the types of chemicals used in hydraulic fracturing fluid that could have been released during the flood. Industry groups have stated there were no releases of either fracturing fluid or wastewater.

Colorado expands wildlife habitat areas. COGCC added 2.2 million acres to state wildlife habitat areas, including areas for protected winter elk, bighorn sheep, Gunnison sage grouse, and lesser prairie chickens. Environmental groups often cite the potential for harm to these species when opposing development. Companies proposing to drill in wildlife habitats must consult with Colorado Parks and Wildlife on how to minimize their impact. The new rules also added 40,000 acres of restricted surface occupancy areas where development is all but prohibited. Additional protected acreage may be added after Colorado Parks and Wildlife completes its analysis of sage grouse habitat. The U.S. Fish & Wildlife Service (“F&WS”) is considering whether the lesser prairie chicken and greater sage grouse should be listed as endangered species, and part of F&WS’ evaluation is whether state measures are preserving critical habitat sufficiently.

Environmental groups rally state opposition to LNG export terminal. Environmental NGOs are pressing Maryland Governor Martin O’Malley (Dem.) to block the Dominion Cove Point LNG export terminal project. The groups argue that the LNG export terminal would pollute the Chesapeake Bay, increase energy costs, and worsen climate change, asserting that the terminal’s lifecycle GHG emissions would be greater than all of the state’s seven coal-fired power plants combined. Dominion stated that most of the infrastructure is already in place, greatly reducing the environmental impacts that would be involved with constructing a green field terminal. The project is still undergoing an environmental review before Federal Energy Regulatory Commission (“FERC”), and the environmental groups want the state of Maryland to oppose the project before FERC.

Proposed North Carolina regulations would preclude local bans. A North Carolina Mining and Energy Commission study group proposed rules for hydraulic fracturing that would prevent municipal governments from imposing bans on hydraulic fracturing. Local governments would still be able to regulate light, noise, odors, and setbacks at well sites but would be prevented from using zoning or other measures to block drilling. The North Carolina League of Municipalities immediately protested the proposal, stating that the draft rules would prevent local governments from keeping heavy industrial operations out of residential areas. North Carolina, which holds a portion of the Deep River shale formation, has no history of hydrocarbon development and is writing wholly new oil and gas regulations. A state-wide moratorium is in place until the Commission issues rules for drilling and hydraulic fracturing.

New Jersey borough bans hydraulic fracturing. Highland Park became the first New Jersey municipality to ban hydraulic fracturing. The ordinance is mostly symbolic. Although the U.S. Geological Survey identified the potential for shale gas development in the South Newark Basin, which partly underlies the state, no companies have considered exploring the basin. A state-wide moratorium on hydraulic fracturing expired at the beginning of 2013.

International

Canada releases new hydraulic fracturing filing rules. The National Energy Board proposed new filing requirements for hydraulic fracturing operations in Canada’s Northwest and Nunavut Territories. The proposed rules would address financial responsibility obligations, pre-drilling environmental assessments, safety and environmental management plans, and well construction requirements. The Board will take comments on the new proposals.

Chevron: China shale exploration disappointing so far. Trade press reports state that, at a recent conference, a Chevron official asserted that exploratory drilling shows that U.S. government estimates of shale reserves in China are overstated. Chevron is reportedly now more pessimistic about the quantity of shale gas available in potentially accessible Chinese reserves. Chevron is both drilling in China and building LNG export terminals in Australia to supply Chinese demand.

Repsol looking for North American shale investments. Spanish oil company, Repsol S.A., is reportedly seeking to invest between $5 and $10 billion on shale assets in the United States or Canada. The press reports that the company is discussing the matter with investment banks, hoping to gain more stable oil production assets. The company currently produces oil in high risk areas, such as North Africa, and Argentina’s government recently seized its subsidiary, YPF S.A. Repsol has been buying up stakes in the Gulf of Mexico, Oklahoma, Kansas, and Alaska.

Study: biggest shale fields are outside U.S. Industry research firm IHS released a study finding that many of the biggest tight oil fields are in countries like Argentina, Russia, and Algeria. Major oil companies have shown interest in Argentina’s Vaca Muerta shale play, with some estimating that it could produce more oil than the Eagle Ford or Bakken shale plays. According to IHS, the top 23 shale plays outside of the United States could hold up to 175 billion barrels of oil. The company warns that geological data is only preliminary and that oil development in other countries is often much more expensive than within the U.S. Yet, IHS estimates that these shale plays could realistically produce 5 million barrels per day within a decade.

Business

Companies plan increase in gas gathering from Bakken. Calgary-based Aux Sable Midstream LLC and Dallas’ Summit Midstream Partners announced that they will upgrade capacity on their pipeline systems to ship 30 million cubic feet of gas per day from the Bakken Shale play. The increased capacity may allow for a reduction in flaring, which has drawn increasing scrutiny from North Dakota regulators. Oil companies operating in the Bakken Shale play frequently flare off gas as a waste, citing the lack of infrastructure available to capture the gas. The companies anticipate that the upgrades will be completed by mid-2014.

BNSF pledges investments for Bakken oil shipments. BNSF Railway Co. CEO Matt Rose stated BNSF would spend $4.3 billion to upgrade tracks and follow more stringent safety standards in order to increase the amount of crude oil it ships out of the Bakken Shale play. At 600,000 barrels per day, BNSF ships more crude oil out of the Bakken than any other railroad but is facing increased scrutiny after the Montreal, Maine & Atlantic Railway train derailment in Quebec. In addition to the infrastructure improvements, BNSF is reviewing how it handles, labels, and ships hazardous materials.

Research

Study: fugitive methane from well sites is minimal. A University of Texas study, performed in conjunction with the Environmental Defense Fund, determined that natural gas wells were releasing approximately 0.42% of the methane they produced, equivalent to 48 million metric tons of carbon dioxide. The finding is somewhat lower than EPA’s estimate of 0.47% but far less than what many environmental groups feared to be released to the atmosphere. The study, published in Proceedings of the National Academy of Sciences, rebuts a recent National Oceanic and Atmospheric Administration (“NOAA”) study where scans of methane leakage from an airplane estimated fugitive emission rates as high as 9%. The Texas study authors stated that NOAA measured all methane emissions in Utah’s Uinta Basin, regardless of whether they were coming from wells, processing equipment, pipelines, or sources unrelated to oil and gas production, whereas the Texas study was restricted to on-the-ground measurements of 529 hydraulically fractured wells in several different producing areas. It also included 27 wells subject to green completions and pneumatic controllers and pumps at 489 producing wells. NOAA researcher Colm Sweeney criticized the Texas study’s sample size as being too small and averaging out what he calls “super emitters,” wells that can emit methane 100% above background levels or more. Environmental groups criticized the study for being funded by industry and allowing participating companies to identify the wells for sampling.

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This Week in Hydraulic Fracturing

Volume 2, No. 37, September 9, 2013 to September 15, 2013

Federal

Dep’t of Energy approves Cove Point LNG export terminal. Dominion Cove Point LNG’s application to export liquefied natural gas (“LNG”) was the fourth approved by the U.S. Department of Energy’s (“DOE”) Office of Fossil Energy. The company proposed to convert its Lusby, Maryland LNG import terminal into an export terminal at a cost of $3.8 billion. Cove Point could begin construction as early as 2017, provided the company obtains FERC approval and several state permits over expected opposition from the Sierra Club and other environmental groups. Sen. Ron Wyden (D-Or.), Chair of the Senate Energy & Natural Resources Committee, noted that 6.37 billion cubic feet of gas per day has been approved for export and suggested additional approvals may face resistance from Congress unless applicants establish that further export terminals are in the public interest. Sen. Wyden and others have expressed concerns that gas prices could increase for domestic manufacturers unless exports are limited.

EPA withdraws rule that would have disclosed trade secrets. EPA withdrew a proposed rule under the Toxic Substances Control Act which would have disclosed the identity of all chemicals in health and safety studies, even if they were protected as confidential trade secrets. Currently, all new chemicals must be registered with EPA, along with related health and safety studies, but when a company designates a chemical as a trade secret, its identity is redacted from studies released to the public. This protection is important to the oil and gas service industry, which frequently creates new chemicals for use in their processes to improve hydraulic fracturing fluid. Environmental groups criticized EPA’s decision, arguing that redactions make the health and safety studies less valuable to the public.

House Members comment on proposed hydraulic fracturing rule. Over a dozen House Members urged the Department of Interior to adopt components of the prior draft U.S. Bureau of Land Management (“BLM”) rule on hydraulic fracturing on federal lands. Claiming that the prior proposed rule struck a better balance between development and protecting public health, the Members urged BLM to prohibit the use of lined pits to contain wastewater, require chemical disclosure before wells are stimulated, impose more stringent well cement logging requirements, and ban hydraulic fracturing in “sensitive areas.” By contrast, Rep. Rob Bishop (D-Utah) wrote the National Park Service (“NPS”) arguing that NPS comments on methane leakage at hydraulically fractured wells were not based on the best available science and presented opinions as facts, contrary to federal policy. NPS had cited in its comments an op-ed for the New York Times by Cornell professor Anthony Ingraffea claiming that methane leakage was as high as 17%. Claims of high methane leakage have been disputed in other academic studies and by DOE.

Water providers resist development in George Washington Nat’l Forest. The U.S. Forest Service is considering whether to ban hydraulic fracturing in the George Washington National Forest, which spans portions of Virginia and West Virginia. Local water providers support a ban, arguing that too little is known about the potential for hydraulic fracturing to contaminate groundwater to allow development in the National Forest and that the Forest’s proximity to the Potomac and James River headwaters is a further reason to support a ban. The oil and gas industry has opposed the ban, contending that it would set a bad precedent and needlessly prevent the development of a valuable resource.

States

California passes bill regulating hydraulic fracturing. The California legislature passed a bill regulating hydraulic fracturing in the State, and Governor Jerry Brown is expected to sign the bill. Among other requirements, companies using hydraulic fracturing would have to notify nearby landowners, test groundwater before starting a fracturing job and disclose chemicals used in fracturing fluids that are not confidential trade secrets. Four large environmental groups pulled their support from the bill, however, after an amendment (sought by Gov. Brown) was adopted that would streamline review of individual well permits under the California Environmental Quality Act. An Environmental Impact Report (“EIR”) will not be required for every well permit; rather, the California Department of Conservation’s Division of Oil, Gas and Geothermal Resources will do a state-wide EIR that examines the potential effects of hydraulic fracturing. The Western States Petroleum Association has also publicly opposed the bill.

XTO Energy indicted for wastewater disposal. The Pennsylvania Attorney General obtained an indictment charging that XTO Energy illegally discharged wastewater containing chlorides, barium, strontium, and aluminum. XTO allegedly stored wastewater at a well site in mobile storage tanks without the proper equipment to safely store or process it in violation of the state’s Clean Streams Law and Solid Waste Management Act. A Pennsylvania Department of Environmental Protection inspector allegedly found that wastewater had discharged from an open storage tank valve onto the ground. The indictment also claims XTO allegedly failed to properly secure the site from unauthorized access, implement a spill containment system, and discharged wastewater without a permit. XTO has responded the spill was a minor accidental release resulting in no environmental harm. XTO had already entered into a federal consent decree arising out of the incident, agreeing to pay a $100,000 civil fine and spend $20 million to upgrade its wastewater handling practices.

Ohio town reconsidering ordinance banning hydraulic fracturing. Three weeks after passing an ordinance prohibiting hydraulic fracturing within city limits, the Niles, Ohio City Council may rescind the ban. During a town meeting, council members opined that the ordinance might violate state and federal law and lead to unintended consequences, such as prohibiting the city from selling water. The council will consider whether the ordinance should be rescinded or amended to avoid legal action.

No timetable for hydraulic fracturing decision in New York. Testifying before the New York Assembly’s Environmental Conservation Committee, the New York Department of Environmental Conservation (“DEC”) deputy commissioner, Anne Reynolds, stated that the DEC is still reviewing comments from its 2011 draft Supplemental Generic Environmental Impact Statement (“SGEIS”) for hydraulic fracturing. The draft SGEIS attracted over 100,000 public comments and DEC does not know when it will complete its review of those comments. Even when that review is completed, the state Department of Health (“DOH”) is still conducting its own study on hydraulic fracturing. DOH announced in February 2013 that its study would be completed within a few weeks but it has yet to issue a draft. New York has now effectively had a moratorium on hydraulic fracturing for six years.

International

British Minister: shale gas is vital to energy mix. British Secretary of State for Energy and Climate Change, Ed Davey, stated that shale gas development is vital to energy diversity in Britain and could bring a major economic boost as well. Although he warned that shale gas is not a “silver bullet,” it could ease the country’s heavy reliance on imported natural gas. The UK’s Department of Energy and Climate Change recently released a report finding that overall carbon emissions from UK shale gas would be lower than importing LNG from Qatar, and Davey stated the findings should “reassure environmentalists” that domestic shale gas development would reduce overall GHG emissions. The UK has not yet moved beyond preliminary exploration despite recent tax cuts for developers and the promise of abundant gas. Because there are no privately-owned mineral rights local planners must approve development, making protests against hydraulic fracturing a more effective way to influence municipal decision makers.

Environmental groups move to block shale development in Argentina. Despite facing an energy crisis, activists are seeking a 10-year ban on shale development in Argentina, claiming hydraulic fracturing will pollute groundwater and cause earthquakes. The Argentine Association of Environmentalist Attorneys, one of the groups seeking the moratorium, also cited the $19 billion judgment against Chevron in Ecuador for environmental contamination as a reason to ban shale exploration. The group claims hydraulic fracturing cannot be done safely and is rallying municipal lawmakers to block drilling and lead protests, including one that led to a significant clash with police. The U.S. Energy Information Administration (“EIA”) estimates that Argentina has the world’s second largest shale gas reserve, enticing Chevron to sign a $1.24 billion development deal with the country despite Argentina’s recent re-nationalization of YPF S.A., seizing the company from Spain’s Repsol S.A. Chevron and YPF will jointly drill over 100 exploratory wells in the Vaca Muerta field over the next year. Argentina is currently importing up to $15 billion in oil and gas per year.

Business

LNG exporters targeting small shipments. Argent Marine Management is the next company up for DOE review for exporting LNG. Unlike other applicants, however, it will not use a multi-billion dollar LNG export terminal to move product. Argent Marine, working with shipping company A.P. Moller Maersk, will export up to a billion cubic feet of LNG per year in truck-sized cargo containers. Pivotal LNG will compress the gas from its existing Trussville, Alabama plant and the containers will be hauled to ports in Houston, Jacksonville, and Norfolk. The containers would be destined for smaller LNG markets, such as the Dominican Republic, instead of Asia or Europe. Further, Argent Marine is only seeking to do business in countries that have a free-trade agreement with the U.S., bypassing the controversial review required for non-free trade countries. Similar approaches were submitted by Advanced Energy Systems (which pulled and then re-submitted its export application) and Venture Global LNG.

Shale gas prompted $84 billion in U.S. investment. The American Chemistry Council, which keeps a database of new chemical plants and expansions, touted shale gas development as leading to 126 new projects and $84.4 billion in U.S. investments. According to the trade association’s Weekly Chemistry and Economic Report, over half of that investment came from foreign companies.

Research

Fed: Permian Basin driving regional economy. The Federal Reserve Bank of Dallas issued a report on the economies of Texas and New Mexico, concluding that Permian Basin shale development has led to two of the best performing economies in the nation. Eddy and Lea Counties in New Mexico, underlying the Permian Shale play, outperformed the rest of the state. Unemployment in those counties was 3.7%, compared to the New Mexico state average of 6.7% (national unemployment is at 7.4%). Both showed job growth more than double the national average of 1.6%. Texas also experienced job growth well above the national average with state-wide unemployment at 6.5%. The lowest unemployment rates in the state were near the Permian Basin.

Academic predicts downturn in shale development. University of California-Davis professor, Amy Myers Jaffe, has published a paper predicting a steady decline in oil prices within three to five years. She predicts that continued unrest in the Middle East will prevent large oil producers like Saudi Arabia from cutting production because they will need revenue for military preparation and deployment. Combined with declining international demand due to a rising dollar, increasing fuel economy standards, and reduced driving in the U.S., Jaffe predicts that oil prices could fall below the threshold which makes shale development profitable. Jaffe is best known for correctly predicting oil prices would fall dramatically in the 1980’s, contributing to large losses and a number of mergers between large North American oil companies.

EIA: U.S. crude production highest since 1989. In its latest Short-Term Energy Outlook, EIA reported that August crude oil production hit an average of 7.6 million barrels per day, the highest output since 1989. EIA analysts predict that average daily production should rise to 8.4 million barrels per day by the end of 2014. Increasing U.S. crude oil production was welcomed by the International Energy Agency, which has reported not only more demand for oil than it had previously anticipated, but 2.7 million barrel per day decrease in crude oil output in August from Libya and other OPEC countries.

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This Week in Hydraulic Fracturing

Volume 2, No. 36

Federal

Comments sought on new crude oil tank car regulations. The Pipeline and Hazardous Materials Safety Administration (“PHMSA”) announced that it would take public comments on petitions seeking new crude oil rail car integrity standards, citing a July explosion in Quebec when an unattended train derailed. The train was hauling several DOT-111 crude oil tank cars from the Bakken Shale play. Among the options PHMSA is considering will be to make the American Association of Railroads’ new industry standards for DOT-111 cars mandatory. Companies have been building DOT-111 cars to that standard since October 2011. It will also take comment on requiring modifications to older DOT-111 cars. The American Association of Railroads has publicly opposed requiring the modifications, calling them technically infeasible and costing over $1 billion. The comment period will close in 60 days.

Employee pleads guilty to illegally pouring hydraulic fracturing wastewater down storm drains. Michael Guesman, an employee of Youngstown, Ohio’s Hardrock Excavating LLC, pleaded guilty in federal court to illegally pouring thousands of gallons of hydraulic fracturing wastewater down a storm drain which flowed to the Mahoning River. Charges are still pending against Hardrock Excavating and its owner, Benedict Lupo. According to the indictment, Lupo ordered employees to pour wastewater from the company’s storage facility down the storm drains after dark. The practice lasted for at least three months until the Ohio Department of Natural Resources received an anonymous tip. Inspectors found puddles of oil in a tributary to the Mahoning River and traced it to Hardrock Excavating’s storage facility.

Suit challenges BLM leases in Michigan under NEPA. Two Michigan residents filed suit in federal court asking a judge to prohibit the U.S. Bureau of Land Management (“BLM”) from leasing blocks of federal land for oil and gas development, arguing BLM failed to review alleged environmental issues related to hydraulic fracturing under the National Environmental Policy Act (“NEPA”). Specifically, the suit argues that BLM failed to examine the impacts of water usage by hydraulic fracturing and the management of wastewater. According to the suit, BLM also violated NEPA by not examining the potential impacts of oil and gas development on the endangered Indiana bat and Karner blue butterfly. The Center for Biological Diversity has also sent BLM a 60-day notice letter stating it likewise intends to filed suit in an attempt to stop the lease sale.

States

Antero Resources appeals decision prohibiting Lone Pine orders. Antero Resources petitioned the Colorado Supreme Court to review a lower court decision striking down the use of Lone Pine orders, arguing that the decision stops trial courts from exercising discretion to tailor discovery proceedings in toxic tort cases. Lone Pine orders can require plaintiffs to provide basic evidence supporting their allegations before discovery commences. In this case, the trial court ordered plaintiff William Strudley to provide preliminary medical testimony establishing that his alleged injuries exist and that they could be attributed to drilling by defendants Antero Resources, Frontier Drilling, and Calfrac Well Services Corporation. When Strudley failed to provide sufficient evidence, the trial court dismissed the case. The Court of Appeals reversed, finding Colorado law did not provide for Lone Pine orders and that trial courts do not have the discretion to modify basic discovery procedures.

Loveland Colorado rejects challenge to hydraulic fracturing ballot initiative. The Loveland, Colorado city clerk issued an order upholding the city’s approval of a ballot initiative that seeks to impose a two year moratorium on hydraulic fracturing within Loveland. A resident had challenged the approval, arguing it violated the city’s single-subject rule. Unless the resident appeals the ruling, the ballot initiative will go forward in November 2013.

California hydraulic fracturing bill passes out of committee. California Senate Bill 4, which would regulate hydraulic fracturing, passed out of the Assembly Appropriations Committee by a 12-5 vote. Among other things, the bill would require companies to disclose the chemicals used in hydraulic fracturing fluid, require notification of nearby residents before drilling begins, and mandate groundwater testing. Acid stimulation, a well stimulation method used in California, would also be covered by the bill. Environmental groups generally support the bill, but are still lobbying to exclude confidentiality protections for hydraulic fracturing fluids that are company trade secrets. The Western States Petroleum Association opposes this bill. The current legislative session ends on September 13, 2013.

International

Dutch ministry study supports hydraulic fracturing. The Dutch Ministry of Economic Affairs released a study finding that environmental concerns from hydraulic fracturing can be “easily controlled” and that the government should consider allowing exploratory drilling to gauge the country’s potential for shale development. The Netherlands is heavily dependent on natural gas but hydraulic fracturing is opposed by environmental groups, a group of university professors, and Netherlands’ largest water supplier. Dutch bank Rabobank previously stated that it would not provide any financing for gas development using hydraulic fracturing due to claims of environmental harm, but the bank announced that it is now re-assessing its position. The Netherlands Commission for Environmental Assessment will evaluate the study and make recommendations on exploratory drilling to Parliament. The country imposed a moratorium on hydraulic fracturing in 2011.

Business

Fourth Circuit sides with Chesapeake in waste disposal suit. The Fourth Circuit held landowners failed to provide sufficient evidence that Chesapeake Appalachia’s waste disposal pits imposed a substantial burden on their property. Chesapeake owned the mineral rights for the land owned by Martin and Lisa Whiteman. Under a permit issued by the West Virginia DEP, Chesapeake disposed of drilling wastes in pits on ten acres of the Whitemans’ 101 acre property without paying for the use of that property. The Whitemans alleged the pits constituted a trespass, but the court ruled that, as the mineral rights owner, Chesapeake was entitled to use a portion of the surface land for its operations unless it caused a “substantial burden.” Chesapeake presented expert testimony that the disposal pits would not endanger the Whitemans or the sheep raised on their ranch, and both the trial and appellate court found the Whitemans’ testimony that they feared future contamination insufficient to establish the necessary showing of burden.

Chesapeake settles class action over royalty deductions. A class of Pennsylvania landowners won $7.5 million in a settlement with Chesapeake Appalachia LLC for what they claimed were excessive deductions from their royalty payments. Chesapeake had charged landowners for post-production costs, such as gathering, processing, and transporting the gas for sale. Under the settlement, reached after a two month mediation, landowners will pay reduced processing and transportation costs. Chesapeake is facing similar suits in Kansas, Texas, and Ohio.

Chesapeake settles leasing dispute with New York landowners. New York landowners and Chesapeake Energy Corporation have settled a dispute over the company’s attempt to extend leases providing development rights. Plaintiffs had claimed that Chesapeake sought to extend the lease terms, citing the state-wide moratorium on the use of hydraulic fracturing as a force majeure event that allowed for an extension without re-negotiating lease terms. The landowners filed suit disputing Chesapeake’s claim and prevailed in federal district court. Chesapeake appealed to the Second Circuit before the negotiations led to the settlement. The terms have not been disclosed, but the landowners had argued Chesapeake had gained rights to 12,000 acres at low prices because the leases were signed before the Marcellus Shale boom and that they could negotiate much better terms with other companies, despite the moratorium.

Carrizo sells off dry gas assets. Houston’s Carrizo Oil & Gas, Inc. agreed to sell its dry gas assets to unnamed buyers for $268 million. The sale was part of the company’s strategy to liquidate its dry gas holdings and invest more in oil-rich shale plays such as Texas’ Eagle Ford play and Colorado’s Niobrara Formation. Carrizo previously sold off its Barnett and Marcellus assets to raise money for its new investments.

Company to experiment with using natural gas to stimulate wells. New York’s Expansion Energy LLC is working toward field testing the use of hydraulic fracturing with a foam made primarily of natural gas instead of hydraulic fracturing fluid. The company stated that its experimental method would not require large amounts of water, which is scarce in the American Southwest, and would eliminate wastewater that must be treated or injected underground for disposal.

Institute may set training and assessment standards for well workers. The International Association of Drilling Contractors announced the formation of The Well Control Institute which will develop training and assessment standards for well service company employees. The Institute would begin training next year, covering safety and environmental practices for workers at both onshore wells and offshore rigs. Training would be provided for all positions in a well service crew, ranging from floor hands to supervising engineers.

Research

Natural gas development provides significant benefits to low income families. Natural gas brokerage firm Mercator Energy has prepared an analysis showing that the decline in natural gas prices, dropping from an average of $7.20/MMBtu during 2003-2008 to $2.80/MMBtu in 2012, produced $32.5 billion in savings in 2012 on the roughly 7.4 billion MMBtus used for home heating and electricity. Mercator also found the savings disproportionately benefitted lower low-income households who spend a higher portion of their family income on heating and electricity, estimating that low income families in the U.S. saved approximately $10 billion in 2012 as a result of lower energy costs. When industrial users are included, the analysis found the savings to all natural gas consumers was approximately $110 billion.

Sustainability Institute study: hydraulic fracturing will provide little economic boost. The University of Michigan’s Graham Sustainability Institute released a study concluding that the potential environmental impacts of hydraulic fracturing make whatever economic benefits to the state inconsequential. Hydraulic fracturing has been used in Michigan for years in about 12,000 vertical wells but the state’s Antrim Shale play brings the prospect of widespread horizontal drilling. Despite Michigan’s 8.8% unemployment rate, the fifth highest in the country, the study asserts the potential for environmental harms from the practice “significant,” citing potential for surface water contamination, habitat fragmentation, groundwater depletion, air pollution, increased traffic accidents, and stress to surrounding residents. By contrast, it estimated that any new employment from the oil and gas industry would be modest, citing low natural gas prices as the reason why there is unlikely to be substantial investment in the state.

Barclays: oil prices to stay high in 2014. Barclay’s Capital released its Global Energy Outlook which anticipates that oil prices are likely to stay between $100 and $120 per barrel in 2014, citing volatility in the Middle East and Nigeria. It predicts a turnaround for struggling energy companies despite predicting that U.S. natural gas prices will remain below $4 per MMBtu. It recommended investing in North American oil companies, well service companies and pipeline developers as it estimated that U.S. oil production will increase by 1 million barrels per day in 2014.

Wood Mackenzie: Bone Spring and Wolfcamp plays could be major oil producers. According to a new report by research and consulting firm Wood Mackenzie, the Permian Basin’s Bone Spring and Wolfcamp shale plays could boost the area’s oil production by 38%. The two plays are seeing increased investment by Apache Corporation and ConocoPhillips, believing the plays could produce up to one million barrels of oil per day with stacked horizontal wells. Wood Mackenzie warned, however, that the shale plays are complex and there is still uncertainty surrounding the method of stacking horizontal wells.

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This Week in Hydraulic Fracturing

Volume 2, No. 35

Federal

Federal safety inspection of crude oil railways. Safety inspectors from the Federal Railroad Administration (“FRA”) and the Pipeline and Hazardous Materials Safety Administration are conducting unannounced safety inspections of railroads carrying Bakken crude oil. The officials cited last month’s railroad explosion in Lac-Megantic, Quebec as the reason for the inspections. Railroads have doubled the carloads of crude oil they carried in the first half of 2013, compared to the same timeframe in 2012, mostly from the Bakken shale play. FRA is also considering proposals to require retrofits to a type of tanker car involved in the Lac Megantic explosion, as well as to require a minimum of two engineers per train.

DOE gets new deputy assistant secretary for oil and natural gas. U.S. Department of Energy Secretary (“DOE”) Ernest Moniz named Paula Gant, formerly of the American Gas Association, a trade association representing gas utilities, as the Deputy Assistant Secretary for Oil and Natural Gas. Working out of the Office of Fossil Energy, Gant will supervise DOE’s research on hydraulic fracturing and will be involved in LNG export policy. The American Gas Association has supported LNG exports.

OSHA proposes new rules for silica dust exposure. The Occupational Safety & Health Administration (“OSHA”) announced proposed rules to reduce the permissible exposure limit for crystalline silica dust. OSHA claims the lower limit would reduce deaths from silicosis, lung cancer, and other diseases. The rule also proposes methods for controlling worker exposure, training for workers on silica-related hazards and recordkeeping measures. Oil and gas service companies that use silica sand as a proppant in hydraulic fracturing fluids would be subject to the new rules under the proposal. Industry groups have opposed aspects of the rule, questioning, among other things, OSHA’s analyses of expected costs and benefits, particularly given the substantial reductions in silica-related deaths and illnesses over the past several decades.

States

New York Court of Appeals to hear appeal of municipal ordinances restricting hydraulic fracturing. New York’s highest court agreed to review two intermediate appellate court decisions upholding the right of municipalities to prohibit hydraulic fracturing within their jurisdictional boundaries. Land owners and developers seeking the right to drill in New York’s portion of the Marcellus Shale play challenged bans on hydraulic fracturing passed by the upstate towns of Dryden and Middlefield. They argued that ordinances prohibiting hydraulic fracturing are preempted by the state’s oil and gas law, but the lower courts rejected those challenges. New York is still effectively under a state-wide moratorium while state officials continue to study the alleged effects of hydraulic fracturing.

Initial approval given for new Pennsylvania regulations. The Pennsylvania Department of Environmental Protection (“PDEP”) announced that the state’s Environmental Quality Board gave its initial approval for new regulations governing Marcellus Shale gas drilling. The new rules include a duty to notify federal agencies when drilling will be near federal lands, require developers to survey an area 1,000 feet from the well pad for abandoned wells, establish contingency plan guidelines, and impose new requirements for the drilling of wastewater from hydraulic fracturing operations, such as pit liner thickness and PDEP approval for storage tanks. The proposed rules still must be reviewed by the Office of the Attorney General, the Governor, a General Assembly committee and the Independent Regulatory Review Commission before they could become final.

Dallas rejects hydraulic fracturing permit within city limits. The Dallas City Council denied Trinity East Energy’s request for a special use permit that would allow it to employ hydraulic fracturing within the city limits. Dallas sits on a portion of the Barnett Shale and Trinity leased the parcel of land from the city for $19 million. The council voted 9-6 in favor of the permit, short of the 12 votes required to overrule the city planning commission, which opposes the permit. Mayor Mike Rawlings urged the council to overrule the planning commission, citing the possibility that Trinity could sue the city for refusing to let it develop the lease. The Dallas City Council is still debating a new set of rules governing hydraulic fracturing and anticipates a vote on the fall.

International

U.S. companies seeking partnerships in Brazil. According to Brazil’s Undersecretary of Commerce for International Trade, several U.S. companies have approached the Brazilian government offering their expertise to help develop the country’s shale gas reserves. Brazil’s National Oil Agency (“ANP”) plans to hold its first shale gas auction in November of this year. ANP has estimated that Brazil has approximately 515 trillion cubic feet of natural gas reserves, although the International Energy Agency has recently published a lower (266 trillion cubic feet) estimate. The Undersecretary welcomed bids by U.S. companies and praised the importance of trade with the U.S. Brazil officials, speaking at a recent energy conference, acknowledged the country may require additional infrastructure to transport equipment, water, and gas before Brazil could experience a natural gas boom similar to that of the United States.

Business

Dow will invest over $1 billion in Louisiana chemical plants. Dow Chemical Company announced that it would spend over $1 billion to build two new ethylene plants in Iberville and West Baton Rouge, Louisiana, as well as make major capital improvements to its Plaquemine Parish ethylene plant. Ethylene is a chemical feedstock refined from natural gas used for plastics manufacturing. The projects are part of a $4 billion investment in the Gulf Coast where Dow can access cheap natural gas from nearby shale plays.

Chesapeake, BHP Billiton settle Arkansas suits. Chesapeake Energy Corporation and BHP Billiton settled suits by five Arkansas residents alleging that the use of underground injection during 2010 and 2011 to dispose of hydraulic fracturing wastewater from Chesapeake and BHP operations caused earthquakes that damaged their homes. The suits were the first to claim damages from the companies that produced the wastewater, despite the fact that neither Chesapeake nor Billiton owned or operated the injection wells at issue. The settlement amounts are confidential. Both companies are defending similar suits in Arkansas federal court and purportedly may face additional suits in state court.

Research

Federal study attributes endangered fish kill to hydraulic fracturing fluid spill. A joint U.S. Geological Survey and U.S. Fish & Wildlife Service study attributed the deaths of endangered Blackside dace in a Kentucky creek to a 2007 release from a gas well site. The agencies reported that samples taken shortly after the release showed the creek’s pH dropped below 6, and asserted that high stream conductivity evidenced that significant concentrations of dissolved metals were present in the creek. Some fish developed gill lesions and liver and spleen damage, according to the study which was published in the journal Southeastern Naturalist.

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This Week in Hydraulic Fracturing

Volume 2, No. 34

Federal

Comments on BLM hydraulic fracturing rule vary widely. The comment period closed on the revised U.S. Bureau of Land Management (BLM) draft regulations for hydraulic fracturing, leaving BLM to sift through 900,000 comments. The comments vary:

  • A number of state agencies, that currently regulate hydraulic fracturing, opposed the rule. For example, the North Dakota Department of Mineral Resources argued that federal rules will introduce uncertainty that will discourage potential investors away from the Bakken Shale play.
  • Industry groups and members of Congress representing states with significant shale deposits argued that state agencies are much more experienced in oil and gas regulation and their own state’s unique geology, and that the absence of aquifer contamination under state regulations makes the rule unnecessary. They also contend the federal rules would discourage production on federal and tribal lands by increasing costs (15 times greater than BLM estimated), imposing lengthy permitting times, and creating substantial uncertainty.
  • A coalition of environmental and sporting groups support the draft rule, but urged BLM to make it more stringent by eliminating exemptions for state regulations meeting federal standards, eliminating the option to submit cement logs for well groups instead of individual wells, mandating closed-loop tank systems for wastewater, requiring pre- and post-drilling ground and surface water sampling, imposing flaring reductions, and prohibiting any drilling near surface water. The comments also criticized the FracFocus.org website used by many states for the reporting of chemicals used in hydraulic fracturing fluid and urged BLM to establish its own database. The groups also want BLM to drop protections for chemicals identified as trade secrets by well service companies.

BLM declines to offer Colorado parkland for oil and gas leases. After an initial decision to include eight parcels of federal land near Colorado’s Mesa Verde National Park in a November lease sale, BLM is now withholding them from the sale, stating that it is still conducting an environmental review. The National Park Service and La Plata County, Colorado officials had urged BLM to exclude the parcels from the lease sale. Depending on the final environmental review, the parcels could be leased in 2014. BLM has previously deferred the leasing of these parcels, citing similar environmental concerns and the need to update resource management plans.

Environmental group and Texas debate conservation program. Defenders of Wildlife issued a report alleging a Texas conservation program is not protecting the dunes sagebrush lizard, a species which is proposed for listing as endangered under the Endangered Species Act and which is located in areas of the Permian Basin in west Texas. The report claims satellite and aerial photos show projects and related roads are being developed within the protection area. The Texas Comptroller has responded that Texas A&M University and the Texas Habitat Conservation Foundation, which monitor aerial photos and drilling permits to enforce the plan, believe the report misinterprets low resolution images. Colorado and Wyoming have adopted similar habitat conservation plans in order to steer clear of ESA restrictions on development. Environmental groups have protested those plans, preferring a formal listing for various species found near shale plays. A court challenge to the Texas conservation plan is pending.

States

Wisconsin county imposes moratorium on silica mining. The Trempealeau County Board passed a moratorium on mining silica until a health study can be completed. Silica mined in Wisconsin and Minnesota is preferred by shale developers as a proppant used in hydraulic fracturing fluid. The Board passed the moratorium on a 12-0 vote with two abstentions and three board members not attending the vote despite a previous 8-8 deadlock on a similar measure. Although other jurisdictions in Wisconsin and Minnesota have passed silica mining moratoria, Trempealeau County was seen as friendly to the practice, approving 26 permits for mines and processing plants over the past three years. Under the moratorium, no new mines or mine expansions will be permitted.

Ballot measures against hydraulic fracturing continue. Environmental groups continue to pursue local ballot measures to ban hydraulic fracturing. The Athens Community Bill of Rights Committee gathered the signatures needed to place a ban on hydraulic fracturing on the Athens, Ohio November 2013 ballot, but the local elections board invalidated the proposed initiative, because its language was misleading and the proposed ban extended beyond the city limits. In Colorado, the Fort Collins city council approved a ballot measure that would impose a five-year moratorium on hydraulic fracturing and storage and disposal of hydraulic fracturing wastewater. Supporters claim five years is required to study the potential impacts on public health and property values. Prospect Energy is the only shale developer in Fort Collins. It is already subject to an ordinance prohibiting new wells under an agreement with the City that the company’s existing operations will meet environmental and safety standards more stringent than state regulations. A representative for Prospect stated that the moratorium would nullify its agreement with the city.

Wyoming proposes new water testing, accelerated well plugging program. The Wyoming Oil & Gas Conservation Commission issued a draft rule that would require drilling companies to sample nearby surface and groundwater before drilling and after production begins. The sampling requirements are subject to the consent of landowners, which is sometimes difficult to obtain. The Commission will take public comments on the draft until October 7, 2013 and make a final decision during its November meeting. The Petroleum Association of Wyoming supports pre-drilling sampling, but to keep costs down, would support post-drilling only when there may be reason to suspect a problem. Local environmental groups support both pre- and post-drilling sampling, calling it “cheap insurance” for the industry. The Commission is also considering new taxes on drilling companies to expedite its program to plug approximately 1,200 abandoned oil and gas wells. Locating and plugging abandoned wells could reduce residual emissions from those wells, as well as the risk presented when new horizontal wells are drilled.

North Dakota to designate lands for increased protection. The North Dakota Industrial Commission, a panel comprised of the State’s governor, attorney general, and agriculture commissioner, is examining 40 sites that may be placed off-limits from shale development or subject to additional restrictions. The sites were nominated based on historical, cultural, recreational, or natural significance and are located predominantly in the western part of the state, home of the Bakken Shale play. The commission members are currently touring the nominated sites, which are a mix of publicly and privately owned lands. There is no schedule for when the commission will issue its decisions.

West Virginia: current air regulations provide necessary protections. Representatives from the West Virginia Department of Environmental Protection (WVDEP), appearing before the state legislature, testified that its studies on noise, light, and air pollution show that current regulations on shale drilling are protecting public health but that the legislature may want to extend existing setback requirements. Under current law, the center of a well pad must be 625 feet away from an occupied dwelling, but wells, engines, and other emitting sources are not always in the center of the well pad. The studies presented included a joint WVDEP-EPA analysis of air quality at a Morgantown elementary school, which showed that levels were well within public health limits. Some of the studies, however, did show that emissions from vehicle traffic necessary to develop the wells can impact area air quality. WVDEP continues to study air quality near drilling sites and urged legislators to wait for those studies to finish before considering new regulations.

International

Pemex will form U.S. subsidiary. Petroleos Mexicanos (Pemex), Mexico’s state-owned oil company, will form a new U.S. subsidiary to develop shale resources and deep-water oil. The company’s CEO stated that the U.S. venture will be a learning experience that will allow Pemex to better exploit Mexico’s own shale and oil resources. Despite having substantial shale and deep-water assets, Mexico’s constitution prohibits outside companies from playing a major role in development, restricting Pemex’s ability to draw upon U.S. and other technical expertise.

Australian court vacates approval of $40 billion Woodside LNG export terminal. The Supreme Court of Western Australia invalidated the project assessment for Woodside Petroleum’s proposed LNG export terminal, finding that it was directed by three Western Australia Environmental Protection Authority (WAEPA) ministers with financial ties to the project. Although the ministers were removed during the process, the WAEPA continued to rely on the assessment. The court held that their initial involvement required WAEPA to start the assessment over. A local landowner and The Wilderness Society successfully challenged the project in court. Woodside had already abandoned the project, citing unanticipated costs, labor shortages, and technical difficulties, but if Woodside decides to resume the project, it would have start with a new assessment.

UK environmental groups protest hydraulic fracturing. Members of environmental groups blockaded the gates of a Cuadrilla Resources exploratory drilling site in Balcombe, Sussex and the corporate office of Cuadrilla’s public relations firm in London. Approximately 25 protesters were arrested, including a Green Party Member of Parliament. The protestors complained that hydraulic fracturing causes harm to the environment.

Business

Shale acreage acquisitions slowing. BHP Billiton and Shell are reducing their shale asset purchases after writing down their existing oil and gas assets due to falling prices. A Bloomberg report asserts that Billiton and Shell are now devoting their resources to developing their assets instead of acquiring new ones. Last quarter, Billiton wrote down the value of its Arkansas shale assets by $2.8 billion dollars and Shell wrote down $2 billion on its North American assets. A Citigroup analyst reported that North American energy deals in the first half of 2013 are at their lowest point since 2004 and may stay there for years due to low natural gas prices.

Companies leaving Fayetteville Shale play. Arkansas’ Fayetteville Shale play is seeing drilling companies departing despite initial optimism. Southwestern Energy Company, BHP Billiton, and XTO Energy are withdrawing from the play despite heavy investments. Rig counts dropped from 60 in 2008 to 11 rigs today. An analyst with WTRG Economics cited low prices for natural gas, which makes plays without significant natural gas liquids or crude oil such as the Fayetteville Shale unprofitable. The University of Arkansas, Fayetteville estimated that gas companies invested $12.7 billion in area acreage but have yet to make the play a moneymaker.

Chesapeake’s former CEO investing in Utica Shale. Aubrey McClendon, co-founder and former CEO of Chesapeake Energy, is buying up acreage in Ohio’s Utica Shale play with a new company, American Energy Partners. McClendon obtained $1.2 billion in equity and debt financing from private equity firms Energy & Minerals Group and First Reserve to fund the purchases. American Energy Partners recently purchased 22,500 acres of leases from EnerVest, one of the drilling companies looking to exit the area. McClendon believes the Utica will yield large quantities of oil and natural gas liquids, a belief that led Chesapeake Energy to invest heavily in the play during his tenure as CEO.

Research

Study: single injection well may have been responsible for Ohio seismic events. A study by Columbia University researches reports that a single injection well may have resulted in 109 tremors in Youngstown, Ohio between January 2011 and February 2012. The study found the tremors were mostly low level, but one was a noticeable 4.0 on the Richter Scale. The well began disposing of hydraulic fracturing wastewater on December 29, 2010. The first Youngstown tremors were noted 13 days later, and as the operators continued to inject fluids, the seismic activity increased. Seismic activity was also observed after the well was closed in 2011. The researchers found that the well was injecting wastewater into a fractured and unstable fault, requiring very little pressure to induce seismicity.

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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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