Important Developments from Two Influential Fracturing Litigation Jurisdictions

Over the past two years, an increasing deluge of stories has flooded our lay media and popular culture concerning hydraulic fracturing. Indeed, barely a day now passes without at least one widely-distributed article debating the various scientific and economic issues related to fracturing, which then echoes throughout all manner of social media. To date, most discussions address state-wide or local regulatory efforts to either encourage or restrict fracturing as well as varied scientific studies concerning the practice — both “pro” and “con.” Most articles about fracturing from the litigation perspective have centered on outlining theories of recovery, corresponding defenses as well as tracking the filing of the ever-expanding universe of cases. However, two important events from fracturing “hot-beds” will soon create reverberations across the national litigation landscape.

Texas Trial

A Dallas jury is now being asked to award a Texas family $9 million in a “nuisance suit” against one remaining defendant – Aruba Petroleum, Inc. (Parr, et al. v. Aruba Petroleum Inc., CC-11-01650-E, in the County Court at Law No. 5 of Dallas County). The Parr family alleges that Aruba’s fracturing of the Barnett Shale Deposit exposed them to hazardous gases, chemicals and industrial waste – causing various illnesses. The Parrs settled with other defendants while Halliburton won summary judgment before trial. Aruba obtained the dismissal of the Parrs’ negligence claims, also via summary judgment. As such, the jury will now focus upon theories of trespass and nuisance to determine potential liability. In another important pre-trial holding, Judge Mark Greenberg ruled that the Parrs could not recover any damages for personal injury claims requiring expert witness testimony.

What is perhaps most interesting for those watching this early trial from a key fracturing jurisdiction is how the jury approaches claimed damages, assuming Aruba is even found liable. For example, the Parrs must prove not only that their claimed injuries did not pre-exist Aruba’s drilling, but also that they were caused by Aruba’s wells and not other companies’ wells which also surround the Parrs’ property. The Parrs must carry these significant burdens not only without the aid of expert testimony as to the causation of injuries, but also in the face of Aruba’s argument that their wells’ emissions were within the applicable air quality limits. While most other jurisdictions would permit, if not require, litigants to carry their specific medical causation burden with the support of expert testimony, the following two issues will likely be important considerations in future cases throughout the country: (1) how does a litigant prove claimed damages are from a particular defendants’ wells when litigants’ properties tend to be situated in an area surrounded by other companies’ active wells; and (2) how much protection, if any, will compliance with local environmental regulations afford defendants, at least within the context of trespass and nuisance theories of liability (as opposed to negligence where they would be admitted as evidence of but not per se compliance with reasonable care).

By the time of our next report (UPDATE), we should know the answers to these two questions, and perhaps begin to see how this particular Texas jury’s answers might affect other future cases.

Colorado Constraint

Over the past several years, defendants in toxic tort and product liability lawsuits have achieved increasing success in convincing courts to enter Lone Pine orders as a case management tool to cull significant numbers of cases before undertaking time-consuming and expensive pre-trial fact and expert discovery. A Lone Pine order, named after a leading New Jersey case, typically requires a plaintiff to put forward prima facie evidence of specific causation for claimed injuries before full-blown discovery from a defendant is permitted. If a plaintiff fails to comply, the case is dismissed. In contrast, if sufficient evidence is proffered “normal” discovery activities take place, although plaintiff still carries his or her evidentiary burden as to causation. Defendants have a better chance of persuading courts to employ this tool in cases which would involve drawn-out and expensive discovery typically involving complicated and unsettled scientific and medical issues. As such, fracturing defendants have understandably pursued Lone Pine orders with great vigor.

Colorado’s Supreme Court just announced that it would review an appellate court’s ruling in a fracturing case forbidding the use of a Lone Pine order. The underlying case involved claims by Mr. William Strudley that several defendants caused him and his family to become sick from their drilling activities near his property. The trial court entered a Lone Pine order which led to the eventual dismissal of the case after the Strudleys were unable to comply with its requirement that they proffer sufficient prima facie evidence that their claimed injuries were caused by defendants’ fracturing. The appellate court resurrected the case in July of 2013 by ruling that the trial court erred when it entered the Lone Pine order.

Defendants convinced the Supreme Court to hear this matter by arguing that the appellate court’s ruling not only impermissibly inhibited trial courts’ abilities to tailor discovery to individual cases, but also was inconsistent with the Supreme Court’s general endorsement of trial courts’ use of early and active case management strategies. In accepting the matter for its consideration, the Supreme Court announced it address two issues: (1) whether a trial court is barred as a matter of law from entering case management orders requiring a plaintiff to produce evidence essential to his or her claims after initial disclosures but before further discovery (i.e., a Lone Pine order); and (2) assuming such an order is not barred as a matter of law, whether the trial court in this case acted within its discretion in entering and enforcing the order at issue.

Along with Texas and Pennsylvania, Colorado is one of the most influential fracturing jurisdictions. As such, the Supreme Court’s eventual holding on these important issues will not only affect Colorado’s future docket, but will likely have a significant extra-jurisdictional impact. We will report the Court’s eventual ruling and provide our analyses of its impact for Colorado and other jurisdictions.

SHARE
EmailShare

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 15

Federal

Environmental groups will challenge prairie chicken listing. Arguing that the lesser prairie chicken requires more protection from oil and gas operations and other development, environmental groups announced they intend to sue the U.S. Fish & Wildlife Service to overturn its determination that the bird is “threatened” under the Endangered Species Act. The groups claim that the lesser prairie chicken should be classified as “endangered,” which would impose more stringent restrictions on actions that could result in bird deaths or the loss of its habitat. The groups assert a series of voluntary state action plans that protect 3.6 million acres of habitat are insufficient to allow the lesser prairie chicken population to recover. The lesser prairie chicken’s habitat runs through portions of Colorado, Kansas, New Mexico, Oklahoma, and Texas. The states and industry groups that created the voluntary conservation measures in hopes of avoiding any listing for the bird have not announced any plans to challenge the designation.

Federal Railroad Commission to require two-man crews. The Federal Railroad Administration (FRA), in response to the train derailment and explosion in Lac Mégantic, Canada, announced it will issue a proposed rulemaking requiring two-man crews on regional and short-line trains carrying crude oil. The Association of American Railroads (AAR) opposes the rule, stating there is no evidence that a two-man crew would prevent train derailments and arguing the proposal is not based on FRA data or studies. AAR also noted that the Railroad Safety Advisory Committee, which advises the FRA, did not adopt a subcommittee recommendation to require the use of two crew members. Other aspects of the proposal would prohibit unattended or standing freight trains in certain circumstances and require railroads to obtain advance approval for leaving cars or equipment unattended.

States

Alaska: Commission finalizes hydraulic fracturing rules. The Alaska Oil & Gas Conservation Commission (OGCC) issued a final version of its controversial regulations governing hydraulic fracturing. For more than a year, environmental groups and industry have negotiated with OGCC over its initial draft that prohibited the use of trade secret protections for chemicals in hydraulic fracturing fluids. The final rules allow companies to submit the names of propriety chemicals to OGCC confidentially. Members of the public would then be allowed to challenge those confidentiality designations in court. The rules also require developers to perform baseline water-well sampling for all wells within one-half mile of a drill site, with the possibility of a waiver when groundwater is too frozen to use as drinking water.

California: Senate committee passes moratorium on hydraulic fracturing. A bill that would impose an indefinite moratorium on all unconventional well stimulation techniques, including hydraulic fracturing and well acidization, passed the California Senate’s Natural Resources and Water Committee by a 5-2 vote. The bill, S.B. 1132, would halt all hydraulic fracturing in the state until a study of environmental, public health and economic impacts is completed, and the Department of Conservation conclusively determines that the practice is safe. The Department would also have to consult with several other agencies before sending the study’s conclusions to the Governor to decide whether or not to lift the moratorium. Under the bill, if not persuaded, the Governor may require new studies. The bill will now move on to the Environmental Quality Committee, although some of the senators that voted for the bill raised several concerns about how it would interact with S.B. 4, which authorized hydraulic fracturing in California after a study is completed. The proposal is strongly supported by over a dozen environmental groups. Governor Brown has not issued a statement on the bill.

Colorado: State Supreme Court Will Hear Lone Pine Case. The Colorado Supreme Court agreed to hear Antero Resources’ appeal of a decision rejecting the use of a Lone Pine case management order in a toxic tort suit alleging that the company’s use of hydraulic fracturing led to the plaintiffs’ illnesses. Lone Pine orders can simplify toxic tort cases, requiring plaintiffs to provide prima facie evidence that their injuries can be attributed to the defendant before discovery begins. The trial court had ordered the plaintiffs to provide expert evidence showing that a specific chemical used in Antero’s operations caused their alleged illnesses. The court of appeals reversed, holding Lone Pine orders should be reserved for unusually complex toxic tort cases. The drilling companies, however, argue the orders are necessary for trial courts to tailor discovery requirements. The Colorado Supreme Court granted certiorari on the questions of whether a trial court is prohibited by law from imposing such a case management order before discovery begins but after initial disclosures were exchanged, and if they are not prohibited, whether the district court abused its discretion in this case.

North Dakota: Department of Mineral Resources issues new rules for filter disposal. After North Dakota investigators found illegal dumps containing wastewater filter socks laced with radioactive wastes, the Department of Mineral Resources announced new rules for disposing of the filters. Beginning in June 2014, filter socks must be stored in covered, leak-proof containers at drilling sites and may only be hauled away by licensed disposal companies. The filters are fabric tubes that strain solids from hydraulic fracturing wastewater. The state estimates that shale oil operations produce nearly 20 tons of filter socks each day.

Ohio: Ohio EPA adopts leak detection rules. The Ohio Environmental Protection Agency (Ohio EPA) promulgated new regulations requiring oil and gas operations to inspect equipment for methane leaks and repair leaking components. Under a revised general permit for oil and gas operations, companies must scan equipment with an infrared camera or other detection devices once per quarter. If leaking valves, pumps, or other equipment are detected, a company will have five days to repair the leak. All leak inspections and repairs will have to be summarized in an annual report to Ohio EPA. Ohio became the third state, after Wyoming and Colorado, to require leak detection and repair programs for methane.

Markets

Albany may become oil trading hub. The CME Group, the company that owns the New York Mercantile Exchange, is considering Albany as a new trading hub for crude oil due to changes in the ways that oil is transported to refiners. Tight oil extracted from shale is being shipped by railway from North Dakota to Albany before moving down the Hudson River to New Jersey refineries, bypassing the slew of storage tanks in Cushing, Oklahoma, a major post for oil futures trading and the current settlement point for West Texas Intermediate crude. The plans could be complicated, however, by a recent move by the New York Department of Environmental Conservation to slow the permit process for two proposed expansions of crude-by-rail and oil heating operations. Some oppose the expansions, asserting shipping crude oil by rail endangers small communities along the routes.

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

SHARE
EmailShare

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 14

Federal

FAA approves drilling plan for Pittsburgh airport. On March 27, Consol Energy obtained Federal Aviation Administration (FAA) approval to drill for oil and gas at the Pittsburgh International Airport. The FAA approved the plan after conducting an environmental assessment and issuing a finding of no significant impact. The FAA consulted with the Environmental Protection Agency (EPA), US Fish & Wildlife Service, Federal Housing Administration and the Army Corps of Engineers before making its finding. Consol Energy intends to drill 45 wells across 6 well pads. The company expects the project will generate $1 billion in investment for the region, and royalty payments to Allegheny County could exceed $450 million over the next twenty years.

States

Alaska issues hydraulic fracturing regulations. On April 1, the Alaska Oil and Gas Conservation Commission issued final regulations governing hydraulic fracturing activities within the state. The Commission first proposed regulations in December 2012 and has revised the draft regulations several times. The regulations require oil and gas developers to share trade secrets with the state, but allow developers to protect confidential information from public disclosure. The regulations also include requirements for background water quality testing and notification of nearby landowners before and after hydraulic fracturing occurs.

Colorado: Report finds proposed statewide ban on hydraulic fracturing would harm economy. An April 1 report by the Leeds School of Business at the University of Colorado-Boulder found that a statewide ban on hydraulic fracturing would have a significant, detrimental effect on the state’s economy. Between 2015 and 2040, such a ban would reduce jobs by 93,000, reduce GDP by $12 billion, and cost state and local governments $985 million in lost tax revenue. The report was issued in response to a ballot initiative by Local Control Colorado, which would allow local governments to ban hydraulic fracturing. The issue has also taken on political overtones, as Republican Senate candidate Cory Gardner is seeking to use his opposition to the ballot initiative to distinguish himself from Democratic incumbent Mark Udall.

Pennsylvania: Local residents challenge EPA UIC permit for failure to consider seismicity. Residents and officials in Brady Township, Pennsylvania are challenging a permit issued by EPA under the Safe Drinking Water Act Underground Injection Control (UIC) program, alleging that the Agency failed to properly consider potential pressure and seismicity issues. The lawsuit, titled In re: Windfall Oil and Gas is pending before the EPA Environmental Appeals Board (EAB). The well at issue is a Class II well intended to inject oil and gas wastewater. While opponents of hydraulic fracturing have repeatedly urged EPA to regulate hydraulic fracturing waste under the UIC programs rules for hazardous waste, this is the first challenge alleging that EPA failed to consider the potential effects of seismicity on underground sources of drinking water.

Texas: Texas Railroad Commission hires seismologist. The Texas Railroad Commission announced that it has hired Dr. David Craig Pearson to serve as its in-house seismologist. The Commission committed to hire a seismologist in response to public concerns that recent seismic activity near Azle, Texas was linked to underground injection wells used to dispose of hydraulic fracturing wastewater. Dr. Pearson earned his Ph.D. from Southern Methodist University and has worked in the oil and gas industry and as a staff member at the Los Alamos National Laboratory.

International

China increases projections for shale gas development. Recent projections for shale gas development by Hong Kong-based Gavekal Gragonomics show that China is on pace to meet the 2015 target of 6.5 billion cubic meters of gas production. The report cited three primary reasons for increasing its forecast. First, China approved a 40% increase in the price that operators can charge for natural gas, making key markets such as Beijing and Shanghai more profitable. Second, state-owned Sinopec now projects that it will produce 5 billion cubic meters of gas from the Fuling Shale field in 2015 and 10 billion cubic meters by 2017. Third, China’s National Energy Administration announced that it will require pipeline producers to open access to all third-party producers. While Sinopec is expected to produce the majority of China’s shale gas in the term, opportunities for smaller, independent oil and gas development companies are increasing.

Markets

Chevron Phillips Chemical begins construction of ethane cracker. Chevron Phillips Chemical, a joint venture between Chevron and Phillips 66, recently broke ground on a new ethane cracker in Baytown, Texas. The facility will convert ethane from natural gas development in ethylene, which will then be converted into polyethylene pellets in a nearby Chevron Phillips Chemical facility. The project, which is estimated to cost $6 billion and create 400 jobs, is expected to be completed by 2017. Increased production of natural gas liquids has decreased the cost of ethane production in the United States when compared to other countries. Approximately 20 companies are taking steps to construct, expand or restart ethane crackers.

Studies

FracTracker Alliance launches mapping program for oil and gas wells. The FracTracker Alliance, a foundation-funded non-profit, recently launched an interactive map allowing users to locate 1.1 million oil and gas wells in the United States and Canada. The program allows users to focus specifically on shale extraction wells or on specific shale plays. FracTracker relies on publicly available data and noted that there are significant differences in data availability by state. At present, the program includes 21 states and British Columbia, although Texas is not included in the mapping program due to proprietary issues related to well location.

ICF study highlights benefits of allowing crude oil exports. A recent study commissioned by the American Petroleum Institute has found that permitting crude oil exports will create domestic jobs while reducing the price of gasoline. The study, conducted by ICF International and EnSys Energy found that easing the ban on crude oil exports would create as many as 300,000 jobs while reducing the U.S. trade deficit by $22 billion by 2020. At the same time, consumers could expect to see a 3-4 cent reduction in gasoline prices. Permitting certain crude oil exports would also allow oil producers to better match the demand by U.S. refineries and consumers.

Pennsylvania: Environmental group critical of air pollution monitoring. A recent article published by the Southwest Pennsylvania Environmental Health Project (EHP) concludes current methods of collecting emissions data, as well as the analyses of these data, are not sufficient to accurately assess impacts from hydraulic fracturing. EHP argues the use of EPA’s NAAQS compliance monitoring criteria do not provide sufficient information to assess risks from acute exposure. EHP urges that more localized, continuous monitoring should be used to account for periods of higher emissions and to reflect local weather conditions.

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

SHARE
EmailShare

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 13

Federal

White House issues methane reduction strategy. As part of the President’s Climate Action Plan, the White House has directed the Environmental Protection Agency (EPA) to determine whether it should regulate directly methane emissions from oil and gas production, processing and distribution operations. According to an interagency guidance document, EPA will evaluate whether new regulations are necessary, and if so, finalize them by the end of 2016. EPA issued New Source Performance Standards for natural gas production wells in 2012 that reduced volatile organic chemical emissions that had the co-benefit of also reducing methane emissions. Environmental groups have sought the direct regulation of methane and argued the rules should extend to oil production wells. Industry groups have countered the sector has already made substantial reductions, as it has the financial incentive to capture as much natural gas as possible; additional capture of methane is a matter of creating new infrastructure, such as pipelines, not imposing new regulations. In addition to oil and gas, the guidance calls on the Departments of Agriculture, Energy, Interior, Labor, and Transportation to consider regulations and voluntary measures to reduce GHG emissions in other sectors, such as coal mines, farming and landfills.

Prairie Chicken designated as “threatened.” The U.S. Fish & Wildlife Service (FWS) announced that the prairie chicken will receive protection under the Endangered Species Act as a “threatened” species. The prairie chicken’s habitat spans portions of Colorado, Kansas, New Mexico, Oklahoma and Texas. States, industry, farmers and ranchers had been working to create voluntary conservation measures that would limit the impact of oil and gas drilling, agricultural operations, and wind turbines on the prairie chicken’s habitat in order to avoid an FWS designation. To date, the five states and over 30 companies collectively agreed to protect 3.6 million acres of habitat. The FWS final rule, however, stated that it will allow for special flexibility where those voluntary state programs are in place. A further study is still to be done to delineate the extent of the prairie chicken’s critical habitat.

BLM hydraulic fracturing rule anticipated by year end. Testifying before a House Committee, Secretary of the Interior Sally Jewel stated that the Department of the Interior (DOI) expects the Bureau of Land Management (BLM) will finalize its proposed regulations governing hydraulic fracturing on federal and Indian lands before the end of 2014. Secretary Jewell noted that BLM must review 1.3 million comments received on the proposed rule and that its final regulations will be informed by more recent scientific studies on well integrity and seismic activities.

Wastewater treatment owner pleads guilty. Benedict Lupo, the former owner of Hardrock Excavating, pled guilty to violating the Clean Water Act for ordering employees to illegally discharge hydraulic fracturing wastewater into a storm drain leading to the Mahoning River. The Ohio Environmental Protection Agency had received an anonymous tip about the dumping, leading to a federal indictment. Former employee Michael Guesman admitted to the illegal discharges and received three years’ probation in exchange for his cooperation. Sentencing for Lupo is scheduled for June 16, 2014. Lupo could receive a maximum prison sentence of three years along with $3 million in restitution and $1 million in criminal fines.

States

California: Culver City considering moratorium. The City Council of Culver City, California, is preparing an ordinance that would impose a moratorium on hydraulic fracturing and other unconventional well development methods within the city. This marks a third city in California to take up the issue publicly, as the City Council of Los Angeles likewise previously voted to prepare an ordinance imposing a ban, and the City of Carson imposed a 45-day moratorium. Culver City council members stated the city would likely look to language developed by Los Angeles. A portion of the Inglewood Oil Field sits in Culver City with 26 active wells within the city’s jurisdiction, but those wells would not be covered by the proposed moratorium.

California: NGOs sue to stop crude oil rail shipments. Earthjustice, representing several environmental groups, filed suit in San Francisco Superior Court seeking to halt shipments of crude oil in the Bay Area by rail, claiming the practice is too dangerous. In their complaint, the groups assert the Bay Area Air Quality Management District allowed Kinder Morgan to transport Bakken crude through the area without public notice and comment or complying with the California Environmental Quality Act. They characterize Bakken crude as dangerous and that the shipments will add to GHG emissions.

International

China: Sinopec brings China’s first commercial shale gas field on-line. Sinopec announced it had begun commercial operations at its Fuling shale gas field. Companies attempting to develop China’s substantial shale gas reserves have faced challenges, due to difficult geology, limits on water resources and lack of needed infrastructure. Sinopec, however, has begun commercial operations in Fuling ahead of schedule. The company is seeking to produce 10 billion cubic meters of natural gas by 2017.

<strong>gt;South Africa: Government to issue hydraulic fracturing regulations. South Africa’s Mineral Resources Department announced it would issue final regulations to allow for the use of hydraulic fracturing to develop the country’s shale gas resources. Several companies had been planning to apply for permission to drill exploratory wells, but the Parliament passed a law earlier this month claiming 100% ownership of any natural gas recovered. Most companies following South Africa’s regulatory development had planned on 20% government ownership and are now evaluating whether they will move forward. The country’s Karoo region is estimated to hold 40 trillion cubic feet of shale gas.

Business

Oil rig counts hit high. Well field services company Baker Hughes reported that oil rig counts hit 1,473 rigs, the highest number since the company began recording the metric in 1987 and up by nearly 150 since this time last year. The number shows how far energy companies have swung towards producing tight oil – which still trades at around $100 per barrel – and away from shale gas, which totaled only 326 rigs across the country. The Permian Basin continues to dominate shale development with 513 total rigs (oil and gas), more than twice the number working in the next most productive area, the Eagle Ford shale play (219 rigs). Baker Hughes counted 186 rigs in Williston, North Dakota, home of the Bakken Shale play, along with 78 rigs in the Marcellus Shale, 73 in the Mississippian, and 55 off-shore.

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

SHARE
EmailShare

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 12

Federal

EPA seeks advice on addressing recent methane emissions data. EPA has requested public comments on how it can incorporate a series of ongoing studies of methane emissions from natural gas sources into its annual GHG Inventory. In contrast to EPA’s current reliance on emissions estimates, the studies conducted by the Environmental Defense Fund (EDF) and the University of Texas at Austin (UT) provide actual measurements of methane emissions leaks during well development and flowback. The emissions reported by the EDF and UT studies are significantly lower than EPA’s emissions estimates and may undercut calls for EPA to regulate methane emissions from the oil and gas sector.

BLM holds first public forum to discuss methane emissions from oil and gas development. On March 19, 2014 the Bureau of Land Management (BLM) held a public forum in Colorado to discuss options to address methane emissions released during oil and gas development. Developing rules for methane emissions has been on BLM’s regulatory agenda since 2010, and the Administration’s Climate Action Plan has targeted reducing methane emissions as part of its overall efforts to address climate change. In presentations at the forum, BLM explained that it believed existing rules were out of date and provided a range of options that could be considered in a future rulemaking. BLM plans to hold additional listening sessions during May in North Dakota, New Mexico and Washington, D.C.

States

California: Carson issues temporary moratorium on oil drilling. The city council of Carson, California, which sits above the Dominguez field, unanimously voted to prohibit oil development temporarily. The moratorium is for 45 days, but the council can extend it to last as long as two years. The city council vote marks the first time that a California city with oil reserves has issued such a moratorium. Reportedly, the city council adopted the temporary moratorium to allow it to consider for itself the potential effects associated with using hydraulic fracturing to develop oil resources, as well as the content of the state regulations that are to be issued in response to California’s hydraulic fracturing legislation.

Illinois: Johnson County voters defeat effort to ban hydraulic fracturing. In a March 18, 2014 referendum, voters in Johnson County, Illinois defeated a non-binding ballot measure that would have directed the county commissioners to ban hydraulic fracturing within the county. Proponents had argued that hydraulic fracturing is contrary to Johnson County residents right to a safe and clean environment. The referendum was the first local vote involving a ban on hydraulic fracturing since Illinois passed the Hydraulic Fracturing Regulatory Act in 2013.

Oklahoma: New rules would increase data collection from oil and gas disposal wells. The Oklahoma Corporate Commission has proposed new rules that would require daily recordkeeping of volume and pressure data for oil and gas disposal wells. The rules require approval by the Oklahoma legislature and governor. The Commission believes the increased data will help the state evaluate whether disposal wells are contributing to recent increases in seismic activity in the state. The rules have widespread support, and the Oklahoma Independent Petroleum Association has stated that, while burdensome, additional data would ultimately help to alleviate public concern over hydraulic fracturing.

Minnesota: Minnesota EQB approves silica mining regulations. The Minnesota Environmental Quality Board (EQB) approved model regulations that could be used by local governments seeking to regulate silica mining. While an earlier draft had included some mandatory requirements, such as the enclosure of silica mining operations, the final regulations provide a “toolbox” of standards as guidelines that local governments can consider when developing their own regulations. The EQB was required to issue the guidance under the terms of legislation passed in 2013.

North Dakota: State to issue regulations to track radioactive waste. North Dakota Governor Jack Dalrymple has directed the state’s health department to prepare regulations requiring the tracking of radioactive waste generated during oil and gas development. The directive came after potentially radioactive filter socks were found in Watford City and Noonan, North Dakota earlier this month. Radioactive waste is a natural byproduct of oil and gas development in North Dakota, but the state prohibits in-state disposal. The draft rules are expected to be released for public comment in June.

Texas: City of Denton to hold vote on hydraulic fracturing moratorium. Frack Free Denton, a grassroots organization opposed to hydraulic fracturing, announced that it has collected enough signatures to place its proposal to ban hydraulic fracturing on the November ballot. Landowners in the Denton area recently filed lawsuits regarding alleged emissions from gas wells and royalties from gas production. Last fall, the City of Denton unsuccessfully sought an injunction barring new gas wells within the city limits.

International

EU excludes shale gas operations from environmental assessment directive. The European Parliament voted recently to strengthen an environmental assessment directive that will apply to approximately 200 types of projects including bridges, ports and landfill sites. Shale gas operations, however, were excluded from the revised directive. Analysts observed that the EU’s decision reflects an increased concern over energy security which has been exacerbated by the ongoing conflict in Ukraine.

Studies

ICF: North American oil and gas industry must invest more than $30 billion per year in infrastructure. A recent ICF International study projects that over the next twenty years, the oil and gas industry in the United States and Canada will need to invest $641 billion on midstream infrastructure. The $30 billion per year projection is more than double what ICF projected in 2011 and nearly three times more than current investments. Necessary infrastructure would include new pipelines, pumping stations, gas compressors and other equipment. While natural gas will require the most significant expenditures, oil and natural gas liquids account for a large and growing share of the total costs. ICF found that the necessary investments would create more than 432,000 jobs and generate $300 billion in taxes. ICF also noted that political issues, including U.S. approval of liquefied natural gas exports and international conflicts in places like Ukraine will also influence the market and infrastructure needs for domestic oil and gas.

CATF: Oil and gas industry have cost-effective options to reduce methane emissions. The Clean Air Task Force (CATF) released a report suggesting that new technology would allow the oil and gas industry to cost effectively reduce methane emissions from gas processing plants, compressor stations and well sites. The report highlighted the use of infrared cameras, as opposed to visual inspection, to detect leaks, claiming that the costs to use infrared cameras are low and in 90% of cases, offer a payback period of less than one year by preventing the loss of saleable product. The report focused on annual inspections, finding that the costs associated with more frequent monitoring programs would not be cost effective. CATF is using the study as part of a campaign urging EPA to adopt regulations that include expanded leak detection requirements.

Wood Mackenzie: U.S. is leader in world ethylene market. According to a recent report by Wood MacKenzie, a worldwide shift from oil to natural gas as a feedstock for plastics production has put the United States in the forefront of this field. Shale gas development has produced an abundance of low-cost ethane which has fueled expansion and investment in plastics production in the United States. At the same time, previously strong markets in Europe and East Asia that rely on naphtha for ethylene production are struggling to compete with newly available feedstocks. The Wood MacKenzie report projects strong growth in the ethylene market with worldwide production increasing from 130 million metric tons to 230 million metric tons by 2030.

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

SHARE
EmailShare

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 11

Federal

EPA: Advanced notice of proposed rulemaking on TSCA reporting for chemicals used in hydraulic fracturing sent to OMB. On March 11, the Environmental Protection Agency (EPA) sent to the Office of Management & Budget for regulatory review a draft Advanced Notice of Proposed Rulemaking (ANPR) related to reporting on the health and safety of chemicals used in hydraulic fracturing fluid under sections 8(a) and 8(d) of the Toxic Substances Control Act (TSCA). EPA prepared the ANPR in response to petitions for a rulemaking submitted by environmental groups urging EPA to require disclosure of more information on hydraulic fracturing fluid chemicals. EPA previously rejected the groups’ request TSCA Section 4 rule that would have required manufacturers and processors to undertake toxicity testing for hydraulic fracturing fluid chemicals. EPA reported previously that it intends to use the ANPR to conduct a stakeholder outreach process to gather input on any TSCA reporting requirements before issuing a proposed rule. EPA may seek input on, for example, the need for a rule, as EPA stated it is not committed to a particular outcome. The ANPR would also likely seek input on the scope and type of information that users might be expected to gather and report, the ways in which information already collected may be used to avoid duplication of effort, and how to address information that contains confidential business information.

DOE: Updated study reports LNG exports still an economic benefit. NERA Economic Consulting updated its December 2012 macroeconomic study of the economic costs and benefits of LNG exports commissioned by the Department of Energy (DOE). The update, using more recent data on domestic natural gas usage, confirmed its initial finding that unlimited LNG exports will provide the greatest economic benefit to the U.S. It predicted that LNG exports would increase natural gas prices by about $1 per thousand cubic feet of gas, but that the increase would not dampen the ongoing revitalization of the U.S. chemical manufacturing industry, in part because of increases in natural gas liquid supplies that would not be exported. The update was funded by Cheniere Energy, which received approval for one LNG export terminal and is seeking approval for a second.

Congress: Bill would speed gas gathering lines. The Natural Gas Gathering Enhancement Act, proposed last week in the Senate, would speed consideration under the National Environmental Protection Act of new gathering pipelines that would cross most federal and tribal lands. The bill also proposes to require the Interior and Agriculture Departments to issue rights of way for gathering lines within 30 days of any request. The primary reason for seeking an expedited approval process for these gathering lines is to reduce flaring in North Dakota’s Bakken shale play and other tight oil fields where less valuable natural gas is often flared due to a lack of available infrastructure to take the gas. NGOs, state officials and mineral rights owners have criticized flaring practices in the Bakken where approximately 300 million cubic feet of natural gas is flared off as waste each day instead of sold. Flaring practices in Wyoming and Texas have also been questioned for similar reasons.

States

Wyoming: Supreme Court sends trade secret case back to trial court. NGOs challenging designations by Halliburton that its hydraulic fracturing fluid chemicals were trade secrets won a reprieve from the Wyoming Supreme Court. The petitioners had challenged the Wyoming Oil & Gas Conservation Commission’s determination that Halliburton’s designations protected the chemicals’ identities from disclosure. The lower court dismissed the case, but the Wyoming Supreme Court held that the trial court must perform a chemical-by-chemical review applying the federal definition of “trade secret,” as used under the Freedom of Information Act. This would, according to the Wyoming Supreme Court, require Halliburton to demonstrate a “direct relationship” between the chemicals as trade secrets “and the productive process.” This is a narrower standard than that initially adopted by the lower court.

Pennsylvania: Act 13 hydraulic fracturing regulations in doubt. Industry groups are pushing back against proposed regulations that would govern surface operations at wells, arguing that the Pennsylvania Supreme Court’s decision struck down the authorizing legislation for the rules, Act 13, as unconstitutional. The groups argue the Court’s opinion invalidated Chapter 78, the section of Act 13 that delegates authority to the Department of Environmental Protection and Environmental Quality Board to issue regulations. The groups also raised a number of substantive concerns with the proposed Chapter 78 regulations, including requirements to improve the quality of water wells above their initial condition when drilling began, special authorization where “species of special concern” may be present, and the general costs of the regulations on smaller oil and gas companies.

Ohio: State investigating seismic activities. The Ohio Department of Natural Resources (DNR) is searching for the cause of four small earthquakes in Poland Township. Ohio DNR ordered Hilcorp Energy to shut down seven nearby gas drilling operations until the agency can conduct further study. Although Hilcorp complied, it stated that there was no evidence that its drilling was the cause. Some have linked underground injection wells used to dispose of wastewater to increases in seismic activity in Ohio and other states, but in this instance Ohio DNR determined that there were no underground injection wells in the vicinity. The incident comes as the Utica shale play is increasing its production, producing more than 2 ½ times more natural gas in 2013 than it did in 2012 and with oil production doubling over that same period.

DRBC: NGOs push for permanent ban on development in Delaware River watershed. Environmental groups are lobbying the incoming executive director of the Delaware River Basin Commission (DRBC) to make permanent the current restrictions on hydraulic fracturing in the Delaware River watershed. The DRBC, created by a regional compact, has five voting members – one from each of the governments of Pennsylvania, Delaware, New York and New Jersey, as well as the federal government (the U.S. Army Corps of Engineers is the federal representative). The DRBC effectively imposed a moratorium on permitting natural gas development using hydraulic fracturing within the watershed in 2010, pending the issuance of new regulations governing development.

Business

Shell plans to reduce spending and divest assets in shale. Shell announced its intention to reduce its capital spending by 20% this year and to divest $15 billion in assets in the Americas by the end of 2015, including investments in U.S. tight oil and gas shale plays. Among the North American assets Shell may sell are holdings in Kansas, Texas and western Canada. Executives reported the company intends to focus on projects in Malaysia and the Gulf of Mexico, among others. The announcement came shortly after BP stated that it would reorganize its U.S. onshore operations as a separate business unit with independent management.

International

European nations seek expedited approval of U.S. LNG exports. In a letter to House Speaker John Boehner (R-Ohio) and Senate Majority Leader Harry Reid (D-Nevada), ambassadors from the Czech Republic, Hungary, Poland and Slovakia urged the U.S. Congress to adopt fast-track approval for LNG exports to Central and Eastern Europe. Concerned with the situation in Ukraine, the four countries are seeking to reduce their dependence on Russian natural gas to supply their energy needs. Amendments were introduced in the House and Senate last week as part of an aid package to Ukraine that would allow for faster approval of LNG exports to countries belonging to the World Trade Organization, but the amendments were ultimately dropped.

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

SHARE
EmailShare

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 10

Federal

Sen. Murkowski: President has power to increase crude oil exports. Senator Lisa Murkowski (R-AK) is continuing her efforts to convince the Obama Administration that it has the power to authorize increased crude oil exports. In a report released last week, Sen. Murkowski catalogued actions taken by past administrations to allow targeted crude oil exports over the past 30 years. At a recent IHS CERA conference Murkowski argued that increased ability to export crude oil will promote economic and political stability in Europe, Asia, and across the world. While there is some support in Congress to reverse a 1970’s law that largely prohibits the export of crude oil, others have suggested that administrative action may prove to be a more viable option in the near term.

Ukraine crisis prompts calls for LNG exports. Congressional supporters of Liquefied Natural Gas (LNG) exports are pointing to the conflict in Ukraine as a reason to fast-track permitting of LNG terminals to facilitate exports to U.S. allies. Members on both sides of the political aisle have argued that increased export capacity is needed to counter the leverage Russia currently wields in Ukraine and parts of Europe where it is the primary natural gas supplier. Members of Congress are proposing legislation and appealing directly to the Department of Energy (DOE) to simplify the process for LNG projects so that the United States can respond to international crises. Speaker of the House, Rep. John Boehner (R-OH), noted in a press briefing that DOE had only approved permits for 6 LNG facilities in the last 3 years, while 24 more permits are still pending. Although the Ukraine crisis has provided a sense of urgency, LNG supporters assert there is a much broader need for secure energy sources for U.S. allies throughout Europe and Asia. At the same time, analysis by Barclays Capital suggests that the stakes of natural gas trade were too high for all parties involved for the Ukraine crisis to pose any concerns for grid stability in Europe.

SEAB makes recommendations for disclosure of hydraulic fracturing fluids. In a March 5, 2014 report, the Department of Energy Secretary of Energy Advisory Board (SEAB) recommended “full disclosure of all known constituents” of hydraulic fracturing fluids. The report assessed FracFocus, a commonly used web-based registry of chemicals used in hydraulic fracturing. The SEAB asserted that trade secrets could be adequately protected if companies reported a list of all chemical constituents separately from the commercial products that contain them because the information would not permit a competitor to reverse engineer the protected products. The SEAB also made recommendations to improve FracFocus’ website interface, its data quality protocols, and its funding structure. The SEAB’s recommendations are not binding on FracFocus.

Railroad representative testifies that shale oil is more volatile than conventional oil. In a March 6, 2014 hearing before the House Energy and Commerce Committee, Edward Hamberger, president of the Association of American Railroads (AAR) testified that oil from shale formations is more volatile than conventional oil because it contains more national gas liquids including methane and butane. Hamberger’s statement was based on conversations with the Pipeline and Hazardous Materials Safety Administration (PHMSA). Hamberger’s statement was supported by a recent report by the Canadian Transportation Safety Board, which reported that samples from crude in the Lac Megantic tragedy had a flash point similar to gasoline. PHMSA is currently working to develop new regulations for railroad tanker cars. Hamberger also defended the rail industry’s safety record, noting that 99.98 percent of carloads reached their destination without incident.

States

Colorado: Court upholds vote to ban hydraulic fracturing in Broomfield. A court in Colorado affirmed the legality of the voting process used to enact a 5-year moratorium on hydraulic fracturing activities within the city of Broomfield. The vote had been challenged by a number of groups who had challenged the legality of moratoria. The moratorium was passed last November by a very narrow margin. A number of local moratoria have been passed recently in Colorado, and several have been challenged in court, based on the argument that such moratoria are preempted by state law.

Colorado: City enacts short-term ban on hydraulic fracturing. Brighton, Colorado enacted a four-month moratorium on any permitting activity associated with hydraulic fracturing. The city claims the moratorium is needed to address “issues of local concern” and designed to give staff adequate time to educate government leaders about oil and gas development as well as regulatory changes adopted or under consideration by the state. Under the moratorium, the city will begin processing applications again on July 15, 2014.

Colorado: State to surpass 60-year record for oil production. Oil production in Colorado increased by more than 17% from 2012 to 2013. Total output is expected to exceed the record 58.6 million barrels produced in 1956. The increase in oil production is due in part to changing market conditions, as low gas prices have resulted in a 12% reduction in gas production over the same time period.

California: Los Angeles moves forward with efforts to ban hydraulic fracturing. In a 10-0 vote, the Los Angeles city council voted on February 28, 2014 to draft an ordinance banning hydraulic fracturing. The ordinance would be expansive, banning both well stimulation and the use of waste disposal wells within city limits. Los Angeles, which has 1,880 active and 2,932 abandoned oil and gas wells, would be the first city in California with active oil and gas development to ban hydraulic fracturing. Critics have pointed out that by banning waste disposal wells, the proposed ordinance would also have a detrimental effect on conventional oil and gas development.

Michigan: Attorney General files antitrust charges against Chesapeake and Encana. Michigan Attorney General Bill Scheutte has charged Chesapeake Energy Corp. and Encana Oil and Gas USA, Inc. with criminal antitrust violations based on allegations that they colluded to limit bid prices in oil and gas auctions on public land. The auctions involved land in northern Michigan’s Collingwood shale formation. The charges carry a fine of up to $1 million. The companies are also defendants in a civil antitrust suit filed by Northstar Energy LLC. Chesapeake and Encana representatives stated that internal investigations revealed no violations.

North Dakota: Industrial Commission announces plan to reduce natural gas flaring. The North Dakota Industrial Commission has adopted a new plan to reduce natural gas flaring. Beginning June 1, 2014, drilling permit applicants must prepare a gas capture plan and must also make the plans available to natural gas gathering companies working in the area. Currently, one third of the natural gas produced in the state is flared, and the commission hopes to reduce that to five percent by 2020. In related action, Governor Jack Dalryple highlighted the importance of increasing investments in processing plants and chemical manufacturing to provide a market for the natural gas that is currently being flared in the state.

International

China falls behind targets for shale gas production. Recent analyses suggest China will fall short of its goal of producing 6.5 billion cubic meters of natural gas from unconventional sources by 2015. Projections from China National Petroleum Corp. and China Petrochemical Corp., the two largest producers in China, indicate the production will be closer to 3.0 billion cubic meters. China, which potentially has larger shale reserves than the United States, is seeking to reduce its reliance on coal and turning to natural gas as an alternative.

Studies

ACC study projects shale gas will fuel investment boom in chemical industry. A recent study by the American Chemistry Council (ACC) projects that more than $100 billion in new chemical facilities will be constructed in the United States over the next decade in response to low natural gas prices caused by increased shale gas production. ACC estimates that this growth will result in $81 billion in annual chemical output, along with 600,000 permanent jobs. This contrasts with the situation 10 years ago when high natural gas costs were driving investments abroad. Potential challenges to continued growth cited in the report include local moratoriums on hydraulic fracturing and the need for additional infrastructure to connect chemical facilities in the Gulf Coast to natural gas supplies, such as in the Marcellus Shale.

EDF reports control options available to reduce methane emissions. A study commissioned by the Environmental Defense Fund (EDF) reports that methane emissions from the oil and gas sector could be reduced by 40% using available control methods. ICF International concludes for EDF that the majority of methane emissions came from oil wells as a byproduct of oil production. According to the report, improved leak detection and repair, replacement of pneumatic devices with low-bleed alternatives, reduced venting from wells and equipment, and capturing gas using wet-seal compressors would require an investment of $2.2 billion, but would result in annual savings of $108 million per year.

Research paper asserts 2011 Oklahoma earthquake attributed to underground injection. Scientists from the United States Geological Survey (USGS) and several universities published a research paper supporting their hypothesis that a 2011 earthquake near Prague, Oklahoma which registered 5.7 on the Richter scale was triggered by the underground injection of oil and gas wastewater. Oklahoma now ranks second behind only California in the lower 48 states for seismic activity, leading to speculation that injection of flowback from oil and gas production into deep disposal wells is causing or contributing to the change in seismic activity.

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

SHARE
EmailShare
SHARE
EmailShare