This Week in Hydraulic Fracturing

Volume 2, No. 30

Federal

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

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

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

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

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

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

States

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

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

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

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

International

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

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This Week in Hydraulic Fracturing

Volume 2, No. 29

Federal

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

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

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

States

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

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

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

Research

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

International

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

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

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

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

Business

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

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

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