Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 8

Federal

EIA increases projections for crude oil production from shale formations. Citing the increased adoption of cutting edge technologies and processes, the Energy Information Administration (EIA) increased its projections for productivity in shale oil plays. EIA projects that producers will exceed the agency’s prior projections of 5.7 million barrels per day (bpd) for 2013 and increased its 2015 projections to 7.1 bpd. However, the EIA reduced its overall crude oil production forecast by 100,000 bpd to account for projected weather-related production delays.

States

California: Coastal Commission seeks additional oversight of outer continental shelf permits. The California Coastal Commission has requested additional authority to review federal applications for drilling permits in the outer continental shelf. Currently the commission reviews initial outer continental shelf permits submitted to the Bureau of Safety and Environmental Enforcement for consistency with state law, but has no oversight of the subsequent drilling permits. Asserting a need for more transparency and a lack of information about hydraulic activities off of California’s coast, the commission is requesting that existing review programs be extended to the drilling permits.

Colorado: Opponents of hydraulic fracturing seek to intervene in challenges to Fort Collins moratorium. In a motion filed by the University of Denver Environmental Law Clinic, the Sierra Club, Earthworks, and Citizens for a Healthy Fort Collins are seeking to intervene in a lawsuit challenging the legality of Fort Collins’ 5-year moratorium on hydraulic fracturing. The moratorium was enacted last year through a general election. The groups assert that the City of Fort Collins cannot adequately represent their interest in upholding the moratorium because the city council opposed the moratorium during the election and has since raised concerns regarding the costs of defending the lawsuit. The groups argue that the moratorium should be left in place so that additional studies of hydraulic fracturing can be completed before any drilling occurs.

New York: Landowners file lawsuit to compel New York to end moratorium on hydraulic fracturing. On February 14, 2014 the Joint Landowners Coalition of New York sued the state of New York in an effort to compel the state to complete its review of high volume hydraulic fracturing and end the effective moratorium on hydraulic fracturing in the state. Until New York completes an environmental review that was begun in 2008 and a health review that was begun in 2012, the state will not issue a permit to allow the use of high volume hydraulic fracturing to produce natural gas. The complaint alleges that Governor Cuomo has unlawfully placed himself in the middle of the environmental review process and has delayed it for political reasons. The complaint requests that the court order the state to complete the reviews or, alternatively, to hold a hearing and jury trial where state officials can testify as to the reasons for the delay.

Kansas: Task force to study cause of earthquakes. A governmental task force in Kansas announced plans to study the cause of earthquakes occurring along the Kansas Oklahoma border. The task force will include representatives from the Kansas Geological Survey, the Kansas Corporation Commission, and the Department of Health. Over the past six months, Kansas has experienced several earthquakes strong enough to be felt. Drilling activities in the Mississippi Lime field have expanded recently, leading some to question whether the earthquakes are linked to hydraulic fracturing and the underground injection of wastewater.

Louisiana: Research projects increased demand for natural gas in Louisiana. A recent white paper released by consulting firm ICF International projects that Louisiana’s demand for natural gas could nearly double by 2020. The white paper concludes that the primary demand drivers will be an expansion of LNG export facilities, construction of new petrochemical facilities, and increased demand throughout the Southeast. At the same time, ICF projects that natural gas supplies from Texas and the Gulf of Mexico will decrease, resulting in an increased reliance on the Marcellus Shale to keep pace with demand.

Michigan: Court of Appeals affirms decision excluding hydraulic fracturing from injection well regulations. A Michigan Court of Appeals affirmed the state Department of Environmental Quality’s (DEQ) decision to exclude hydraulic fracturing activities from regulations governing underground injection wells. The Court agreed with DEQ’s reasoning that differentiates between well injection for “initial stimulation” of oil and gas well injections for disposal, storage, or secondary recovery. One of the Plaintiffs in the case, Ban Michigan Fracking, is also pursuing a ballot initiative to prohibit hydraulic fracturing in the state.

Wyoming: Former regulator reverses position on cause of pollution in Pavillion. Robert Johnson, a former employee of the Wyoming State Engineer’s Office is no longer asserting that groundwater contamination was caused by the use of hydraulic fracturing techniques. Johnson had previously asserted that the contamination was caused by the use of unlined pits to hold hydraulic fracturing flowback. Johnson explained that the Wyoming Oil and Gas Conservation Supervisor convinced him that his prior conclusions were incorrect. State officials in Wyoming have consistently rejected claims that any groundwater contamination in Pavillion is related to hydraulic fracturing.

Governors form bipartisan group to promote state regulation of hydraulic fracturing. In a bipartisan effort to promote states as the primary regulators of oil and gas drilling, the governors of Alabama, Alaska, Colorado, Kentucky, Montana, Mississippi, Nevada, North Dakota, Oklahoma, Pennsylvania, Texas, and Utah have formed the States First Initiative in conjunction with the Interstate Oil & Gas Compact Commission and the Groundwater Protection Council. In a press release, the States First Initiative asserts that states are “the primary and appropriate regulators of oil and gas development.” While no formal lobbying activities are currently planned, the Initiative is expected to advocate against a new federal regulations in the field.

International

Russia: Siberian shale reserves could fuel hydraulic fracturing boom. The discovery of significant shale reserves in Siberia could allow Russia to rival the United States for shale oil and gas production. Recent estimates for the Bazhenov formation in western Siberia range up to 2 trillion barrels, with 22-360 billion barrels potentially recoverable using hydraulic fracturing. While some concerns regarding the geology of the Bazhenov formation remain, the plentiful water and existing pipeline and processing infrastructure are expected to aid in development. Further, Russia’s decision last year to eliminate its mineral tax for the Bazhenov formation for the next 15 years has resulted in investments by international producers such as Exxon and Shell, along with Russian producers. If estimates prove correct, the Bazhenov formation would rival the Bakken formation for productivity.

Business

Occidental announces plan to spin off California business. On February 14, 2014 Occidental Petroleum Corp. announced that it would spin off its California business unit, which includes assets in California’s Monterey Shale. The decision follows a number of recent shareholder friendly actions that included selling $1.4 billion in shale assets in the central United States, raising dividends, and announcing a plan to stock purchase plan. Occidental projects that the new California business will be the state’s largest gas producer and the largest holder of oil and gas mineral acreage.

Research

Study finds that methane leakage exceeds EPA estimates. A recent study published in Science entitled “Methane Leaks from North American Natural Gas Systems” reported that methane leakage from natural gas lines could exceed EPA estimates by as much as 50%. The study found that a significant portion of the leakage may come from locations at conventional well sites, gas processing plants, storage tanks, and distribution facilities. The study did not find any increase in methane leakage as a result of hydraulic fracturing. In a second phase of the study, researchers are seeking to identify automated sensing technologies to pinpoint methane leaks.

If you have any questions regarding this Report, please contact us.

SHARE
EmailShare

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 7

Federal

EPA Inspector General begins study of agency authority over water resources. In a memorandum to the Environmental Protection Agency’s (“EPA”) Assistant Administrator for Water, the EPA Office of the Inspector General (“OIG”) stated that it is beginning preliminary research on the agency’s “ability to manage potential threats to water resources from hydraulic fracturing.” OIG stated that it will gather information from state agencies, environmental groups, and industry to determine how to improve “preventative and response measures” in responding to “the impacts of hydraulic fracturing.” The memorandum could be the start of EPA developing a strategy to increase its regulation over oil and gas production, which has traditionally been regulated at the state level. </p>gt;

DOE approves new LNG export terminal as applications mount. The Department of Energy’s (“DOE”) Office of Fossil Energy approved the sixth application to export LNG to countries without a free-trade agreement with the United States. The approval allows Sempra Energy’s Cameron LNG to export up to 1.7 billion cubic feet per day from its proposed Cameron, Louisiana terminal, pending approval from the Federal Energy Regulatory Commission. The next project for review is the Jordon Cove Energy Project, which would export up to 2 billion cubic feet per year from a greenfield site in Oregon. Collectively, approved LNG projects are now authorized to sell up to 40 billion cubic feet per day. LNG export proponents, however, continue to urge DOE to move faster on applications. There are currently 25 pending applications seeking authorization to export LNG to countries without free-trade agreements. The latest is a proposal by Texas LNG to construct two floating terminals that would sell 270 million cubic feet per day.

BLM cancels South Park, Colorado oil and gas leases. After protests by environmental groups, BLM agreed to withdraw six oil and gas lease parcels in South Park, Colorado from auction and committed to developing a master leasing plan that would guide where oil and gas may be developed in the area. The groups have argued that the South Park region slated for leasing is untouched wilderness area and that development would harm wildlife habitat pronghorn, mule deer, and elk. The region in question rests atop of the Niobrara Shale formation, which is rich in tight oil and gas. Master leasing plans typically take several years to develop, putting oil and gas leasing off the table for the near future.

States

California raises objections to prior Federal approvals for off-shore hydraulic fracturing. The Bureau of Safety and Environmental Enforcement (“BSEE”) approved three requests to allow hydraulic fracturing at off-shore oil platforms in March 2013. California officials, however, recently questioned whether the approvals were provided with the proper prior notice to the California Coastal Commission even though the Commission had previously raised concerns to the federal government about the potential environmental impacts of off-shore hydraulic fracturing. The Commission is trying to convince BSEE to allow the state more oversight of off-shore hydraulic fracturing, arguing that federal reviews do not collect enough data about the practice and there is little understanding of the potential environmental impacts. Although BSEE regulates off-shore operations occurring more than three miles from the coast, the Commission argues that hydraulic fracturing could raise environmental concerns within the three mile area. The Commission acknowledged, however, that even if it were granted additional oversight authority, it still would lack the authority to ban off-shore use of hydraulic fracturing.

North Dakota likely to create oil pipeline inspection program. The Chairman of the North Dakota Public Service Commission stated it was “very likely” that the Commission will seek a budget from the state’s legislature to create a new oil pipeline inspection program. The Commission already handles siting for all pipelines as well as inspections of natural gas pipelines. The Pipeline and Hazardous Materials Safety Administration (“PHMSA”) already met with the Commission to discuss delegating the inspection of nearly 1,855 miles of crude oil pipeline in North Dakota. As much as 80% of the state’s inspection program can be reimbursed from PHMSA.

International

Poland drops idea of government fund for shale gas licenses. In order to spur foreign investment in Polish shale gas reserves, Prime Minister Donald Tusk announced that the government would scrap plans to create a government owned and operated fund that would hold stakes in all shale gas licenses. Several companies were concerned that the proposed fund would muddy the understanding of the government’s rights in exploration projects. Poland is currently Europe’s most active country in exploring its shale gas potential and its legislature is expected to consider a new law to promote development in the next few weeks.

If you have any questions regarding this Report, please contact us.

SHARE
EmailShare

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 6

Federal

EPA releases final guidance for the use of diesel fuel in hydraulic fracturing. On February 11, 2014 the Environmental Protection Agency (EPA) issued a final Permitting Guidance for Oil and Gas Hydraulic Fracturing Activities Using Diesel Fuels: Underground Injection Control Program Guidance #84. Under the Safe Drinking Water Act’s Underground Injection Control (UIC) Program, EPA’s regulatory authority over hydraulic fracturing is limited to operations that include diesel fuels in hydraulic fracturing fluids. The new Guidance defines diesel fuel by reference to five specific chemicals, CAS Registry Nos. 68334-30-5, 68476-34-6, 68476-30-2, 68476-31-3, and 8008-20-6. While drafted specifically for hydraulic fracturing operations that use diesel fuels, EPA asserts that the Guidance incorporates what EPA describes as best practices for all hydraulic fracturing activities, including technical recommendations for well casing integrity and background water quality sampling, as well as other provisions. EPA also indicates that it expects the Guidance’s recommendations will be used by permit writers in states that have been delegated authority to implement the UIC program.

EPA’s Inspector General to evaluate EPA’s regulation of hydraulic fracturing. In a February 5, 2014 memorandum, EPA’s Inspector General (IG) announced plans to evaluate how EPA and the states have used their regulatory authority to address potential impacts of hydraulic fracturing on water resources. Specifically, the IG will “evaluate what regulatory authority is available to the EPA and states, identify potential threats to water resources from hydraulic fracturing, and evaluate the EPA’s and states’ responses to them.” The evaluation will be conducted concurrently with EPA’s ongoing assessment of potential water quality impacts of hydraulic fracturing.

Interest groups ask EPA to require oil and gas sector to report chemical releases to the Toxics Release Inventory. In a January 30, 2014 letter to the acting director of the Toxics Release Inventory (TRI), a number of interest groups asked EPA to include the oil and gas sector in the TRI reporting requirements under the Emergency Planning and Community Right to Know Act (EPCRA). The letter follows a formal petition that the same organizations submitted to EPA in October 2012. To date, EPA has declined to expand the TRI program to the oil and gas sector, as very few wells exceed the 10,000 pounds per year threshold for reportable releases. The interest groups assert that recent data show that certain oil and gas sector facilities, such as compressor stations, processing plants, and facilities used to separate natural gas liquids during processing exceed EPA’s release thresholds and, therefore, should be required to report their releases.

PHMSA sent violation notices to oil companies for rail shipments in North Dakota. As part of a so-called “Bakken Blitz,” the Pipeline and Hazardous Materials Safety Administration (PHMSA) announced that it was seeking nearly $100 million in civil penalties for allegedly assigning improper safety packing categories to crude oil shipments. PHMSA stated that notice letters were sent to Hess Corp., Whiting Petroleum Corp., and Marathon Oil Co. PHMSA’s enforcement initiative comes on the heels of several train derailments involving crude oil in the past year.

Senators ask EIA to study potential impacts of lifting ban on crude oil exports. In a February 3, 2014 letter, Senators Wyden (D-Ore) and Cantwell (D-Wash.) asked the Energy Information Administration (EIA) to evaluate how domestic gasoline prices would be impacted if the ban on crude oil exports were lifted. The senators also asked the EIA to evaluate potential routes and methods for transporting crude oil to ports for export. The senators cited possible concerns over increased rail transport of crude oil to the Pacific Northwest for export to Asia.

States

Iowa: Think tank report on silica mining warns of risks to water resources. The Iowa Policy Project asserts that silica mining may pose risks to water quantity and quality in Iowa. Silica is mined in several counties in northeast Iowa, and the report states the geology that produces high-quality silica also makes the region more susceptible to water depletion and groundwater contamination. The authors recommended that counties considering expanded silica mining should complete hydrologic mapping, monitor local wells to establish baseline conditions, and provide setbacks for trout streams and other hydrologic resources. Silica sand is often used as a proppant in hydraulic fracturing.

Nevada: Draft rules for hydraulic fracturing. In response to a growing interest in exploring unconventional oil reserves in Nevada, the state has drafted regulations to address hydraulic fracturing. The draft regulations would require background water quality sampling, additional well casing requirements, and above-ground storage tanks for flowback. The Nevada Commission on Mineral Resources intends to hold a series of workshops and a public hearing on the draft regulations later this spring.

North Dakota: Proposed natural gas pipelines could curtail flaring in Bakken Shale. WBI Energy Inc. has proposed building a $650 million dollar natural gas pipeline in North Dakota that could provide well operators with the means to collect and transport natural gas that is produced along with oil in the Bakken Shale. The 400 million cubic feet per day Dakota Pipeline would start near gas processing plants in Williams and McKenzie Counties and extend 375 miles into Minnesota, where it would connect with existing pipelines. WBI Energy is currently gauging interest, but could begin construction as soon as 2016. If built, the pipeline would provide new opportunities for natural gas, which is often flared due to the lack of transport opportunities.

Ohio: American Energy Partners L.P. adds to its stake in the Utica Shale. American Energy Partners LP (American Energy), a firm founded by the former head of Chesapeake Energy Corp. Aubrey McClendon, has dramatically increased its stake in the Utica Shale. At the end of January, American Energy purchased 74,000 acres held by Hess Corp. for $924,000. A week later, American Energy added another 56,000 acres held by ExxonMobil Corp. and Paloma Partners, LLC for an undisclosed sum. The company plans to drill as many as 2,700 wells in the Utica Shale in the next decade.

Texas: ExxonMobil increases holdings in the Permian Basin. ExxonMobil subsidiary XTO Energy Inc., recently acquired a stake in 34,000 acres in the Wolfcamp Shale formation in the Permian Basin in Texas. XTO will work with co-owner Endeavor Energy Resources L.P. to develop the property. The acquisition increases XTO’s holdings in the Permian Basin to more than 1.5 million acres.

International

Hydraulic fracturing banned in Catalonia, Spain. In a January 27 vote, the legislature in Catalonia, Spain amended its Urban Planning Law to prohibit hydraulic fracturing on undeveloped lands. This position contrasts with Spain’s official position in support of hydraulic fracturing. While hydraulic fracturing would be regulated at the national level, each region in Spain has a number of regional permits that are also required. Thus, by using Urban Planning Laws and related programs, each region has effective veto power over the national government’s policy with respect to hydraulic fracturing.

Business

Reports suggest that shale gas boom is fueling growth in manufacturing sector. Recent reports suggest that the expansion of natural gas production in the United States is fueling growth in the manufacturing sector. The American Chemistry Council recently reported that increased natural gas production has prompted more than $91 billion in domestic corporate investments, and in a separate report, projected that 13,000 new jobs will be created in Arkansas, largely due to the Fayetteville Shale play. IHS Global Insight similarly projects that 3.8 million new jobs will be created by 2025 that directly or indirectly related to the natural gas sector.

Ceres report highlights water sourcing risks of hydraulic fracturing. In a February 5, 2014 report, Ceres reported on the risks to hydraulic fracturing stemming from water supply issues. Many areas with significant shale plays, including California and Texas, are in the midst of droughts, and hydraulic fracturing operators must compete with other water users for scarce supplies. The Ceres report singled out Anadarko Petroleum Corp., Encana Corp., Pioneer Natural Resources Co., and Apache Corp. as having the highest exposure to water sourcing risk. Representatives from Anadarko, Pioneer, and Apache each responded to the report by highlighting their implementation of recycling programs to reduce their overall water demand.

Shareholder resolutions seek greater disclosures regarding hydraulic fracturing activities. Citing insufficient information to make informed investment decisions, a group of shareholders including Green Century Capital Management, As you Sow, the Investor Environmental Health Network, the sisters of St. Francis of Philadelphia, and two financial comptrollers from New York filed shareholder resolution. The resolutions seek greater disclosure with respect to hydraulic fracturing’s impacts on ground and surface water, air quality, and local communities. To date, Exxon Mobil Corp., Chevron Corp., EOG Resources, Inc., Occidental Petroleum Corp., and Pioneer Natural Resources Co. have been targets of such resolutions.

If you have any questions regarding this Report, please contact us.

SHARE
EmailShare

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 5

Federal

President Proposes “Shale Zones.” A White House fact sheet released for the State of the Union included a proposal for “Sustainable Shale Gas Growth Zones.” According to the proposal, which was not part of the State of the Union speech, the federal government would provide technical assistance and planning for shale-producing regions to avoid “boom-bust” cycles that can occur when an area becomes too dependent on a single industry. A White House official stated that details would be fleshed out in the near future.

NTSB Suggests More Stringent Crude Oil Rail Standards. The National Transportation Safety Board (“NTSB”), issued recommendations to the U.S. Department of Transportation (“DOT”) to avoid crude oil spills from trains. Among the recommendations are that railways adopt hazardous materials route planning that would take trains around populated or environmentally sensitive areas, ensure adequate spill response capabilities that could handle worst-case spill scenarios, and have DOT institute audits to ensure that crude oil is being properly classified and subject to appropriate safety and security plans. The suggestions came shortly after the Federal Railroad Administration issued final rules strengthening railroad inspection standards.

NGOs Seek Uinta Basin Non-Attainment Designation. The Uinta Basin in Colorado and Utah is home to extensive conventional and unconventional gas drilling operations. Environmental groups claim that these activities are responsible for violations of federal ozone ambient air quality standards and have filed a petition asking the Environmental Protection Agency (“EPA”) to designate the Uinta Basin as a non-attainment area. If EPA grants the designation, it could significantly restrict new drilling in the area. Colorado has already proposed new regulations to reduce fugitive emissions that contribute to ozone formation, estimating that the proposed changes could cut those emissions by one-third. The groups previously lost a challenge to EPA’s refusal to designate the Uinta Basin as being non-attainment after finding that the air quality data cited by the environmental groups was unreliable.

States

NGO Suit to Block Hydraulic Fracturing in California Dismissed. A California state court dismissed claims by the Center for Biological Diversity and other NGOs alleging that the Department of Oil Gas & Geothermal Resources (“DOGGR”) unlawfully authorized the use of hydraulic fracturing without performing an environmental impact review under the California Environmental Quality Act. The court held that the case was moot, citing passage of S.B.4 which requires DOGGR to issue permits for hydraulic fracturing until it completes a study of potential environmental impacts by January 1, 2015.

Hydraulic Fracturing Decision in New York Delayed Until 2015. New York’s Environmental Department Commissioner announced that the state’s 2014 budget includes no funding for hydraulic fracturing rulemaking or enforcement. This means that the New York Department of Environmental Conservation cannot lift the current de facto ban until April 2015, when a new fiscal year begins.

New York Assessing Crude Rail Shipments. Citing recent train derailments in Quebec and North Dakota, Governor Andrew Cuomo signed an executive order requiring state agencies to assess the safety practices of railroads shipping crude oil through the state and submit the results of the assessment by April 30, 2014. Approximately 65,000 barrels of oil move through Albany per day en route to east coast refineries. Environmental group Hudson Riverkeeper is urging the Governor to impose a moratorium on shipping crude oil through the state.

Colorado ballot initiative seeks authorization for local bans. The Colorado Community Rights Network filed a proposed state-wide ballot amendment that would allow local governments to impose moratoria or bans on the use of hydraulic fracturing techniques to develop shale oil and gas. Although several towns have already imposed moratoria and bans, some are being challenged in court where the state and industry groups argue that local laws on oil and gas operations are preempted by state law. The proposed ballot initiative would amend Colorado’s constitution to allow for local control over industrial activities, including shale oil and gas development. The proponents must collect over 86,000 signatures to get the question put on the state ballot.

Landowner Suit Delays Drilling in Michigan. A landowner near Pere Marquette State Forest in Cadillac, Michigan, obtained a temporary judicial stay of drilling by Encana Oil & Gas in the Forest. Citing a published report, the landowner claimed the possibility of “frack hits,” a phenomenon where fracturing from one well may breach the integrity of another well, creates an environmental risk and threatens mineral rights of adjacent owners. The landowner has also petitioned the Michigan Department of Environmental Quality to require companies to determine how far well fractures will travel before drilling. Encana has already drilled exploratory wells in the forest, seeking to tap into the Utica-Collingwood shale formation, and is seeking permits for 16 more. Under current Michigan law, Encana is required to survey the area within 1,320 feet of the well pads to determine if any abandoned wells are present.

International

Spain Challenges Provincial Ban on Hydraulic Fracturing. The Spanish government filed suit against the province of Cantabria, arguing that its ban on the use of hydraulic fracturing ban is illegal. Cantabria is home to Spain’s most promising shale formation, but the provincial government banned shale development in April 2013, citing the threat of adverse impacts to local scenery and the potential for groundwater contamination. The national government, however, argues that the ban is inconsistent with new rules requiring environmental reviews that will speed up permitting for hydraulic fracturing.

If you have any questions regarding this Report, please contact us.

SHARE
EmailShare

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 4

States

CSSD to Begin Independent Audits of Natural Gas Operations in the Marcellus Shale. The Center for Sustainable Shale Development (CSSD) announced that four member companies—Chevron Corp., Consol Energy, Inc. EQT Corp., and Royal Dutch Shell PLC—have agreed to participate in voluntary audits of their drilling and hydraulic fracturing operations in the Marcellus Shale. The audits will assess conformity with 15 CCSD performance standards. The standards go beyond what is required in many states’ regulations and include extensive pre-drilling surveys, above-ground storage tanks with double-lined reserve pits, and limitations on venting and flaring gas during well development and workovers. CSSD is a collaborative organization whose members include environmental organizations, philanthropic foundations, and energy companies.

New Mexico: Mora County sued over hydraulic fracturing ban. On January 10, SWEPI LP, a subsidiary of Royal Dutch Shell PLC, filed a lawsuit in federal court alleging that Mora County’s anti-drilling ordinance violated the U.S. Constitution and state law. The ordinance bans all oil and gas development, prohibits the use of water for hydraulic fracturing, and limits the legal rights of corporations. SWEPI alleges that the ordinance violates the First Amendment, the due process and equal protection clauses of the Fourteenth Amendment, the Commerce Clause, and is preempted by the Supremacy Clause. A complaint alleging similar claims was filed in 2013 by landowners, lessees, and trade associations.

Texas: Regulators Claim Limited Authority to Address Seismic Activity. After announcing plans to hire a seismologist to work with other state researchers to study the cause of seismic activity located near injection wells used to dispose of hydraulic fracturing wastewater, the Texas Railroad Commission Chairman explained that the Commission has limited authority to address the issue. Speaking at a public hearing, Chairman Smitherman explained that there are no provisions related to seismic activity in the current or proposed rules for Class II injection wells in Texas. He further stated that even if seismic activity were linked to an injection well, the Commission lacks authority to investigate surface damage and would have to comply with procedural requirements before shutting down a well.

International

European nations to form coalition to promote LNG exports. A dozen European nations are working with U.S.-based oil and gas trade associations to form a coalition to promote exports of liquefied natural gas (LNG) from the United States. The coalition, which will be called LNG Allies, is expected to include Austria, the Czech Republic, Estonia, Finland, Latvia, Lithuania, Poland, Romania, the Slovak Republic, Croatia, Hungary, Slovenia, and Greece. These countries currently depend heavily on Russia for natural gas and are seeking to loosen U.S. restrictions on natural gas exports in order to provide a significant alternative supply source.

Australia: Shell sells stake in LNG Project. Royal Dutch Shell PLC announced plans to sell for $1.14 billion its interest in the Wheatstone LNG project, an LNG project under development in Western Australia. Shell’s interest will be purchased by the Kuwait Foreign Petroleum Exploration Co., another member of the joint venture project that is led by Chevron Australia Pty Ltd. The $29 billion Wheatstone LNG project, which began construction in 2011, is expected to include an 8.9 million ton-per-year LNG export facility. Shell also owns a 25% stake in the Gorgon LNG project in Australia, which began construction in 2009 and is expected to begin production in 2015.

Business

IHS Global Insight Report projects low natural prices for next 20 years. A recent report by IHS Global Insight, “Fueling the Future with Natural Gas: Bringing It Home,” projects that natural gas prices could remain in the $4-5 per BTU range for the next 20 years. Based on its analysis, IHS projects that the significant increase in demand that is expected for natural gas over the next two decades can be supplied from low-cost resources without requiring a significant price increase, as continued improvements in technology have also lowered the cost of producing natural gas. IHS also cited a number of potential growth markets, such as the conversion of trucking fleets to natural gas, which could increase long-term demand for natural gas.

If you have any questions regarding this Report, please contact us.

SHARE
EmailShare

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 3

Federal

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

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

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

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

States

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

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

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

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

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

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

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

International

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

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

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

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

Business

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

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

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

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

If you have any questions regarding this Report, please contact us.

SHARE
EmailShare

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 2

Federal

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

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

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

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

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

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

States

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

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

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

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

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

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

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

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

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

International

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

Business

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

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

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

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

If you have any questions regarding this Report, please contact us.

SHARE
EmailShare
SHARE
EmailShare