This Week in Hydraulic Fracturing

 

Volume 2, No. 44

 

Federal

Coast Guard proposes new policy for shipping wastewater. The U.S. Coast Guard is proposing a new policy that would allow companies to ship hydraulic fracturing wastewater over inland waterways by barge. If finalized, the policy would require companies shipping wastewater to analyze it for hazardous or radioactive materials. Wastewater deemed to be hazardous or radioactive would be subject to requirements for venting, cleaning, and re-using the barges. Although the Coast Guard currently allows some hazardous chemicals to be transported under a general classification known as “listed cargo,” this option will not be available because the composition of wastewater can vary from well to well. The Coast Guard has asked for public comments on its proposal, including specifically regarding the disclosure of proprietary information present in the wastewater and the applicability of certain testing requirements. Comments are due November 29.

Environmental group asks BLM to stop permits in Greater sage grouse area. WildEarth Guardians petitioned the Bureau of Land Management (“BLM”) to stop work on permit applications submitted by Chesapeake Energy to drill on federal lands in the Douglas Core area of eastern Wyoming because it includes habitat for the Greater sage grouse, a candidate for listing under the Endangered Species Act. The group objects to an agreement between Wyoming and Chesapeake allowing the company to drill several hundred oil wells in the area, while imposing well construction and operating restrictions wells. The petition argues that BLM must stop all drilling and construction of new roads or well pads until the Bureau adopts restrictions on work during Greater sage grouse nesting and breeding seasons. BLM stated that it is reviewing the petition and has not yet begun processing Chesapeake’s permit applications.

BLM proposes Greater sage grouse management plans. BLM published new resource management plans covering 31 million acres in California, Idaho, Montana, Nevada, and Utah with the aim of protecting the Greater sage grouse. The Administration has stated that it would amend dozens of management plans in western states to protect priority and general habitat for the animal, including Colorado and North Dakota. Both habitat classifications include land use restrictions, but BLM has declined to propose “Areas of Critical Environmental Concern” that would have virtually prohibited shale resource development.

DOE: Department can revoke LNG export licenses. In a letter to the Senate Energy and Natural Resources Committee, Paula Gant, the deputy assistant secretary for the Department of Energy’s (“DOE”) Office of Oil and Gas, stated that DOE has the power to revoke LNG export licenses over the objections of the license holder. In the past, DOE has only revoked import or export licenses when they went unused and with the consent of the license holder. The letter cautioned that revocation authority without consent would only be used in “extraordinary circumstances” because DOE must protect the “investment-backed expectations of private parties….” Any suspension or revocation of an export license would be subject to an adjudicatory hearing. The letter did provide assurances to both LNG exporters and their customers that “extraordinary circumstances” do not mean that DOE would use revocations as “a price maintenance mechanism.” The letter also noted that the President has the power under the Energy Policy and Conservation Act, to restrict commodities exports “under such terms and conditions as he determines to be appropriate and necessary.” This power has been delegated to the Commerce Department.

House members urge OMB to quickly release diesel guidance. Representatives Henry Waxman, the ranking member of the House Energy & Commerce Committee, and Diana DeGette, the ranking member of the Subcommittee on Oversight and Investigations, are urging the White House Office of Management and Budget (“OMB”) to quickly approve EPA’s proposed guidance on the use of diesel fuels in hydraulic fracturing fluids without weakening the guidance from the proposal. EPA sent the guidance to OMB at the end of September, over a year after the public comment period on the guidance closed. It is not yet known what changes EPA made to the guidance in response to public comments, if any. OMB does not have any deadlines by which it must act on the guidance.

States

Four ballot initiatives on hydraulic fracturing voted on this week. Four municipalities in Colorado’s Front Range will vote this week on ballot initiatives to institute bans or moratoria on hydraulic fracturing. If their initiatives are adopted, Lafayette, Colorado would ban the practice while Boulder, Broomfield, and Fort Collins would stop hydraulic fracturing for some period of years pending further studies. Initiative proponents characterize their efforts as a “community rebellion” against energy companies, while developers have said proponents greatly exaggerate the purported risks from development using hydraulic fracturing and, if passed, the initiatives could deal a significant blow to Colorado’s economy. The Lafayette initiative, which if passed would also bar oil and gas companies from transporting equipment, water, or wastewater through the city on public roads, and would likely face litigation.

ConocoPhillips to explore shale in Northwest Territories. Canada’s National Energy Board announced that it is allowing ConocoPhillips to drill the first exploratory wells in the Northwest Territories’ Canol shale formation. Some have estimated that the Canol shale could hold two to three billion barrels of recoverable light sweet crude oil, but the area imposes unusual challenges on developers. ConocoPhillips’ exploratory wells will be just 100 miles south of the Arctic Circle and well north of the closest major city, Yellowknife, presenting both technological and logistical challenges. Several other major companies have purchased land in the Northwest Territories, including Shell and ExxonMobil.

New Mexico collects information on “frack hits.” The New Mexico Oil Conservation Division is collecting information from companies drilling on New Mexico’s side of the Permian Basin on accidental communication between horizontal well bores. These incidents are referred to by drillers as “frack hits,” cases in which a fracture travels from one well to another well. In late September, a frack hit from a horizontal shale well reportedly caused a conventional oil well to discharge 200 barrels of crude oil and produced water. New practices may be required to minimize the risk of these occurrences, such as additional well spacing requirements and sealing off older perforations.

Environmental group sues wastewater treatment company. Clean Water Action sued Waste Treatment Corporation alleging that its Pennsylvania wastewater treatment plant illegally discharged 200,000 gallons of shale gas wastewater into the Allegheny River per day in violation of the Clean Water Act, Endangered Species Act, and the state Clean Streams Law. The complaint cites a 2012 Pennsylvania Department of Environmental Protection (“PDEP”) study which allegedly found increased salts, metals, and radioactive materials downstream from the facility that reportedly was indicative of drilling wastewater. The plaintiff claims the discharges killed off Northern Riffleshell mussels, an endangered species. PDEP stated that it is negotiating a settlement with the company, but Clean Water Action accused the state of trying to protect the company. Waste Treatment Corporation denied that it processed or discharged shale gas wastewater because PDEP banned wastewater treatment plants from accepting the wastewater in May 2011.

California environmental review of hydraulic fracturing could take 18 months. California Governor Jerry Brown stated that an Environmental Impact Report by the Division of Oil, Gas, and Geothermal Resources (“DOGGR”) should be completed within 18 months. Governor Brown promised that it would be the most comprehensive review of potential environmental, health, and safety risks ever performed. The California legislature passed a law in September regulating how hydraulic fracturing may be conducted in the state, including a provision requiring DOGGR to complete an environmental review under the California Environmental Quality Act by July 1, 2015 before it develops a permitting process. California’s Monterey Shale formation is estimated to hold 15.4 billion barrels of oil – twice as large as estimates for North Dakota’s Bakken Shale play.

Wyoming abandons flaring tax proposal. Citing the potential for lawsuits, the Wyoming legislature will not pass a tax on flared gas. The legislature’s Joint Revenue Committee estimated that a 6% tax on the value of flared gas could raise $300,000 per year and reduce flaring emissions. The Petroleum Association of Wyoming argued that the Wyoming Constitution prohibited taxes on products that are not processed or sold and that a tax on flared waste gas would violate that prohibition.

International

Russia may end Gazprom’s monopoly on LNG exports. Citing increased competition, a bill in Russia’s Federal Assembly would end the monopoly on exporting natural gas currently held by state-controlled OAO Gazprom. President Vladimir Putin has announced he supports the bill. The bill would allow privately-owned gas company OAO Novatek, as well as another government-controlled company, OAO Rosneft, to construct their own LNG export terminals. Gazprom currently owns one LNG export terminal, Sakhalin-2, which exports oil and gas to Japan and Korea. Currently planning an Arctic LNG export terminal, Novatek believes the bill would give it regulatory certainty, as well as a series of tax breaks. Rosneft is partnering with Exxon Mobil to design its own LNG export terminal that it hopes to begin operations in 2018.

Sinopec looking for Western Canadian shale play investors. Chinese state-owned oil company Sinopec announced that it intends to sell a share in approximately half of its 500,000 acres in Western Canada’s Montney and Duvernay shale plays, which it acquired in 2011 for over $2 billion. A company spokesman characterized the sales as seeking joint venture partners to help Sinopec develop the assets.

Business

Louisiana well service company declares bankruptcy. Lafayette, Louisiana’s Green Field Energy Services, which marketed energy-efficient drilling equipment that partially operated on natural gas, is declaring Chapter 11 bankruptcy. The firm’s failure is significant given that many industry experts saw gas-fired field equipment as providing a substantial savings and environmental benefit over diesel-fueled equipment. A company spokesman cited Green Field’s rapid expansion followed by a nationwide drop in rig counts as the cause for it missing a loan payment in September, leading investor services firm Moody’s to downgrade its credit rating. Larger well service companies, such as Halliburton and Baker Hughes, have used some gas-fired or bi-fueled equipment (running on a mix of natural gas and diesel), but most equipment still run exclusively on diesel fuel.

Research

U.K.: Hydraulic fracturing poses a low risk to public health. Public Health England (“PHE”) released its review of hydraulic fracturing, concluding that the practice carries a low risk to public health if it is properly regulated. Since hydraulic fracturing has yet to begin in the U.K., PHE examined practices in the United States. It found that good construction, operation, and maintenance standards can preclude groundwater contamination, the most prominent concern cited by British environmental groups opposing the practice.

Oklahoma continues to study tremors but recommends earthquake insurance. The Oklahoma Geological Survey (“OGS”) will study a wastewater injection well that will soon resume operations to determine if it triggers seismic activity. The study is part of ongoing effort by Oklahoma to determine if shale gas wastewater injection, including injections at the studied well, caused a series of tremors in September 2013. The state is expected to shut down the well if it is linked to tremors reaching a magnitude of 1.8 on the Richter scale. Although Oklahoma has thousands of injection wells, OGS believes this particular well may have led to a magnitude 3.4 earthquake that damaged nearby buildings. Fears that both natural and man-made factors have caused a recent increase in seismic activity prompted the Oklahoma Insurance Commissioner to recommend that state residents buy earthquake insurance for the homes and businesses.

NGO report: Shale gas more water-intensive than previously estimated. Citing public databases documenting water withdrawals, fluid injections, and waste recovery and disposal, a report prepared for Earthworks concludes that Marcellus Shale gas drilling consumes more water for every thousand cubic feet of gas produced in West Virginia and Pennsylvania than previously reported. Among other things, the authors recommend that states expand reporting requirements, enforce new rules governing surface water withdrawals, and increase oversight of those activities. Regulators in both states responded that new laws require companies to file water use plans before they begin drilling and that neither state is facing a shortage of water.

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This Week in Hydraulic Fracturing

 

Volume 2, No. 43

 

Federal

EIA launches drilling productivity reports. The U.S. Energy Information Administration (“EIA”) issued its first Drilling Productivity Report that will show how efficient oil and gas companies are at developing shale resources. In its initial report, EIA found that the Bakken and Eagle Ford shale plays were responsible for 75% of the country’s crude oil production. Production in these plays increased by 700,000 barrels per day over last year. The Permian Basin is the biggest oil-producing region, with production increasing by 93,000 barrels per day over 2012. The Marcellus Shale play remains the largest gas-producing shale play and its production is also increasing. The reports will be issued each month, compiled from information provided by state agencies and Baker Hughes.

States

Judge rejects doctor’s challenge to chemical disclosure rules. A federal district court found that a Pennsylvania doctor lacked standing to challenge state rules requiring treating physicians to sign a confidentiality agreement before learning the identity of confidential chemicals used in hydraulic fracturing fluids. Dr. Alfonso Rodriguez claimed that being forced to sign a confidentiality order would infringe on his First Amendment rights and his professional ethical obligations by prohibiting him from sharing information about hydraulic fracturing fluid chemicals with colleagues. Although Dr. Rodriguez treated employees exposed to chemicals during a well blowout, the court dismissed his case because the company never asked him to sign a confidentiality agreement or otherwise interfered with his ability to provide medical care. The requirement is part of Pennsylvania’s Act 13, governing hydraulic fracturing. Under the law, chemicals that companies designate as trade secrets are not disclosed to the public but may be disclosed to physicians treating a person believed to be exposed to chemicals in hydraulic fracturing fluids if the physician signs a confidentiality agreement. Dr. Rodriguez’s attorney stated that he would appeal the decision.

Michigan drafting new rules for hydraulic fracturing. The Michigan Department of Environmental Quality (“MDEQ”) announced that it is considering proposing new regulations that would require a driller to collect groundwater samples six months before starting to drill a well in which hydraulic fracturing would be used, estimate the amount of water the well would withdraw from local waterbodies using a water withdrawal assessment tool, and disclose chemicals used in hydraulic fracturing fluid on the FracFocus.org website. A company would also be required to provide two days’ notice to MDEQ before starting hydraulic fracturing, as well as to monitor and report fluid volumes and pressures. Once published, the proposed rules will be available for public comment.

Texas Supreme Court declines to hear Houston drilling ban. The Texas Supreme Court declined to review an appeals court ruling that reversed a $17 million judgment after a trial court found that the City of Houston improperly imposed a ban on oil and gas development near Lake Houston. Trail Enterprises, Inc. sued the city, claiming that the ban on development, first implemented in 1967, was a regulatory taking of property rights without compensation. The trial court sided with Trail Enterprises and awarded $17 million in damages. The Fourteenth District Court of Appeals, however, reversed. It found that the environmental concerns surrounding oil and gas development were legitimate reasons for imposing a ban under the U.S. Supreme Court’s Penn Central test, given that Lake Houston serves as a source for drinking water, and because Trail Enterprises had no reasonable investment-backed expectation of developing its mineral rights given the longstanding ban.

Texas town sues to enjoin gas drilling. Denton, Texas, north of Fort Worth is asking a state judge to halt EagleRidge Energy from drilling oil and gas wells within its jurisdiction, alleging that the company lacks necessary permits. The court denied an application for a temporary restraining order but will soon hear the town’s argument that EagleRidge must first obtain a permit that complies with city ordinances regarding development planning and setbacks. EagleRidge claims that it previously obtained a municipal permit before the town changed its regulations doubling setback distances, and claims that the permit is still valid. The town acknowledged that EagleRidge obtained all of the required permits from the Texas Railroad Commission.

California groups planning for ballot measures. Environmental groups, failing to obtain a statewide ban on hydraulic fracturing from the California legislature, are now gearing up for an initiative to place municipal bans on the ballot. A spokesman for Food & Water Watch stated that local communities are now responsible for implementing moratoria and bans to protect local sources of drinking water. Several cities and counties have implemented bans already, including Santa Cruz County last month, however none of these municipalities are over the Monterey Shale formation targeted by oil and gas companies.

Youngstown hydraulic fracturing ban may return to this year’s ballot. Despite Youngstown, Ohio residents voting down a ban on hydraulic fracturing in May of this year, local environmental groups vowed to put the ban on the November ballot as well. Called a “community bill of rights,” the ban would exempt a local steel pipe manufacturer which would have been shut down under the prior version of the initiative that prohibited all manufacturing products related to hydraulic fracturing as well as shale gas development. Opponents cite the initiative as discouraging business investment in Youngstown, which is still trying to recover after the exit of coal, steel, and automobile manufacturing companies from the area decades ago. If passed, the initiative could trigger a lawsuit by opponents who argue that the Ohio Department of Natural Resources has exclusive regulatory authority over oil and gas development.

International

Train carrying oil and gas derails, explodes. A Canadian National Railway (“CN Rail”) tanker train derailed near Edmonton, Alberta and exploded. The CN Rail train was carrying four tankers of crude oil and nine with liquefied petroleum gas. A spokesman for Greenpeace Canada called railroad accidents involving crude oil “the new normal” and demanded new safety regulations. A spokesman for CN Rail countered that the crude tankers were not damaged during the derailment and did not cause the explosion. The accident occurred while rail shipments of crude oil have faced increasing scrutiny after a July 2013 train derailment and explosion in Lac-Megantic, Quebec. Following that incident, the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration has been considering new oil tanker car regulations.

Ukraine announces imminent shale gas development deal. Government officials in Ukraine stated that the country is on the verge of signing a production-sharing contract with Chevron that would allow the company to begin developing shale gas. Despite political resistance due to environmental concerns, Ukraine’s government has been seeking international partnerships to produce its own shale gas and ease its reliance on Russia’s OAO Gazprom.

Business

Mississippi Lime output disappoints drillers. After an estimated $1 billion in investment, companies such as Shell oil and Tug Hill Operating are pulling out of the Mississippi Lime formation. The promise of significant crude development and the low cost of acreage attracted several independent companies to the area, as Kansas had promoted the Mississippi Lime as the “New Bakken.” Production wells, however, are either underperforming or inconsistent with total crude output in 2012 at 43.6 million barrels. SandRidge Energy, which banked heavily on the Mississippi Lime’s success, saw its board of directors shaken up after disappointing the company’s investors.

BASF, Yara planning ammonia plant on Gulf Coast. BASF and Norway’s Yara International announced plans to construct an ammonia plant to support the companies’ chemical businesses. The companies are currently eyeing the Gulf Coast of Louisiana, which has already seen a number of proposed new plants or plant expansions, including CF Industries’ announced $2.1 billion expansion of a nitrogen complex, EuroChem’s new $1.5 billion fertilizer plant, and Mosaic’s $700 million expansion of its existing ammonia plant. Louisiana’s proximity to cheap shale gas has made it a prime location for new chemical manufacturing facilities.

Research

USGS, Oklahoma issue earthquake warning. The U.S. Geological Survey and Oklahoma Geological Survey warned of an “earthquake swarm” in central Oklahoma. The agencies stated that their study shows earthquakes are now six times more likely than in prior years and no longer follow familiar geological sequences. They stated that deep injection of hydraulic fracturing wastewater may be contributing to the change in earthquake patterns but is not the sole cause. The agencies’ statement noted the 2010 “Jones Swarm,” a series of small earthquakes east of Oklahoma City, was not attributable to underground injection. The agencies recommended that Oklahoma consider modifying its building codes to withstand more frequent low-level tremors.

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This Week in Hydraulic Fracturing

 

Volume 2, No. 42

 

Federal

Environmental group seeks federal moratorium on off-shore hydraulic fracturing. The Environmental Defense Center (“EDC”) has asked the Bureau of Safety and Environmental Enforcement (“BSEE”) to issue a moratorium on the use of hydraulic fracturing to enhance recovery from oil wells off the California coast. EDC claims hydraulic fracturing has been approved for offshore wells 15 times over the past two decades, and argues the practice should not be allowed until proven safe through a programmatic environmental impact statement (“EIS”). EDC is also asking the federal government to rescind categorical exemptions used to approve use of hydraulic fracturing, review the approvals to ensure compliance with the Endangered Species Act, Coastal Zone Management Act, and the Marine Mammal Protection Act, and revise Clean Water Act permits for offshore oil platforms to account for wastewater from hydraulic fracturing.

States

Colorado announces fines for late chemical reporting. The Colorado Oil & Gas Conservation Commission (“COGCC”) has fined 11 companies for allegedly not timely reporting chemicals used in hydraulic fracturing fluid on the FracFocus.org website. Environmental groups have been critical of the reporting website, claiming companies have not filed timely reports, and the Interstate Oil & Gas Compact Commission and Groundwater Protection Council, which operate the site, have responded that they have no power to enforce deadlines and that it is up to states to enforce them. Colorado announced earlier this year that it would begin actively enforcing reporting deadlines starting July 1, 2013. Since then, while noting increased compliance, COGCC initiated actions against 11 companies. Seven cases have settled, with four still pending. The settling companies stated the violations stemmed from technical and clerical errors that will not be repeated.

Wyoming Supreme Court to hear chemical disclosure suit. Environmental groups are appealing the Wyoming Oil and Gas Conservation Commission’s hydraulic fracturing chemical disclosure rule to the Wyoming Supreme Court. Wyoming was the first state to require public disclosure of the list of chemicals used in hydraulic fracturing fluid, but the groups claim the rule improperly protects from disclosure chemicals found to be trade secrets. The groups argue that limiting disclosure prevents landowners from determining whether hydraulic fracturing was responsible for groundwater contamination. The groups filed an open records request seeking a list of all chemicals disclosed to the Wyoming Oil & gas Conservation Commission but were denied a list of those chemicals marked as trade secrets. A district court upheld the denial, prompting the groups’ appeal. Well service company Halliburton Energy Services has intervened in the Supreme Court litigation on behalf of the state.

North Dakota companies look to reduce flaring. The North Dakota Petroleum Council created a task force of companies operating in North Dakota to identify ways to reduce flaring of waste gas that could otherwise be sold. Among the possibilities the task force will investigate is optimizing existing pipelines to carry more gas and building new pipelines and processing facilities. Some studies claim that nearly 30% of all gas produced by Bakken Shale play wells are flared off. The practice prompted mineral rights owners to file class action lawsuits against ten North Dakota oil producers, claiming that flaring gas is wasteful and deprives them of hundreds of millions of dollars in royalties. They argue that state law requires the companies to pay royalties on the gas even if it is never brought to market.

Weather, Bakken development strain North Dakota’s infrastructure. Recent heavy rains caused McKenzie County officials to close roads to heavy equipment, stranding wells in North Dakota’s most productive county for tight oil. Most county roads are gravel and were built for low volumes of farm equipment traffic. As North Dakota’s oil production is poised to reach one million barrels per day in early 2014, the state is committing over half a billion dollars to fix damaged roads. Even without the rains, companies are losing working days due to road closures when they cannot transport water, fuel, and crude oil into and out of well sites. The state’s power grid is also strained by oil production, with power failures shutting down gas processing plants in July, and state officials have expressed concerns a harsh winter could result in further power outages.

Dallas City Council debates ban on hydraulic fracturing. Dallas sits atop a portion of Barnett Shale, making it attractive to gas companies. However, residents, citing fears of air and water pollution as well as truck traffic, are urging the city council to ban hydraulic fracturing within city limits. The Dallas City Planning Commission has recommended an ordinance requiring a 1,500 foot setback from homes, business, and churches, an increase from the current 500 foot setback, but the council has not yet acted on the recommendation. Trinity East Energy, which signed a $19 million lease with the city, has been trying to develop its leasehold and is threatening legal action if it is not allowed to begin work. The council rejected Trinity’s zoning permit application in August 2013 but the company has said it is continuing to negotiate with the city. If the parties do not reach an agreement and Trinity files suit, the litigation could set a precedent establishing whether incorporated cities in Texas have the power to block companies from developing their mineral rights.

Wisconsin bill seeks to stop local ordinances against sand mining. A new bill introduced in the Wisconsin Senate would stop municipalities from regulating non-metallic mining within the state, including sand used for hydraulic fracturing. Sand mining has rapidly expanded in Wisconsin, growing from 10 mines and processing facilities in 2010 to 170 today. Municipal governments have sought to regulate the mines, citing potential health concerns. The bill would overturn a Wisconsin Supreme Court decision from last year that upheld the town of Crooks Valley’s power to restrict sand mining through zoning ordinances. Proponents of the bill argue that the industry needs relief from a patchwork of inconsistent and multi-layered government regulations.

International

Protest against hydraulic fracturing in New Brunswick. Hundreds of protestors from the Elsipogtog tribe gathered to protest against shale gas development in Rexton, New Brunswick. SWN Resources Canada obtained an injunction to prevent protestors from blocking the entrance to its site while it undertakes seismic testing, but the protestors ignored the court order and stopped SWN’s heavy equipment from entering the site. Clashes with the Royal Canadian Mounted Police resulted in 40 arrests as protestors burned police cars. The tribe claims that hydraulic fracturing will pollute drinking water and reservation land.

Romanian shale exploration on hold after protests. Chevron is suspending its shale gas exploration activities in eastern Romania in light of protests by local residents. The company obtained the necessary permits to drill exploratory wells in the town of Pungesti. Country residents, however, held several rallies to block both shale exploration and government plans to open a nearby gold mine. Chevron stated that it will cease operations pending further negotiations with the government and local residents. The Pungesti local council will hold a referendum in late November on whether to ban Chevron’s exploration activities but Chevron stated that the council lacks the power to stop the project. The U.S. Energy Information Administration estimates that Romania shale reserves hold 51 trillion cubic feet of recoverable natural gas.

Saudi Arabia to develop shale gas. Saudi Aramco, Saudi Arabia’s state-owned energy company, announced that it will begin shale gas development within the next few years and use that gas to meet a new supply agreement signed with a large phosphate mining power plant. The company estimates that Saudi Arabia holds up to 600 trillion cubic feet of recoverable shale gas, approximately double its proven conventional reserves. Exploratory drilling is already underway at three sites. Saudi Aramco is still grappling with how to use hydraulic fracturing in an area where water is scarce.

Environmental group vows to fight South Africa’s shale development regulations. The Karoo Action Group warned that the South African government can expect lawsuits challenging proposed regulations that would allow hydraulic fracturing in the Karoo region. The area is estimated to hold nearly 500 trillion cubic feet of natural gas. The group argues that hydraulic fracturing will impact drinking water, which is scarce in the arid Karoo region. South Africa rescinded its ban on hydraulic fracturing last year and is now promoting shale gas development to reduce the country’s reliance on imported energy.

Greenpeace organizing challenges to hydraulic fracturing in the U.K. Greenpeace is urging British landowners to file trespass claims against companies planning to develop shale gas. Greenpeace claims companies cannot drill horizontally under a landowner’s property in the UK without the landowner’s express permission, and they are urging landowners to block exploratory drilling by withholding their consent and threatening suits for trespass. The government is currently trying to incentivize shale development with tax breaks and clear regulation, but environmental groups and some landowners oppose the practice.

Research

FERC: Plenty of gas to get through winter. Federal Energy Regulatory Commission (“FERC”) issued its winter assessment, finding that gas supplies should easily meet the demands of a mild winter predicted by the National Oceanic and Atmospheric Administration. Despite the ready supply of gas, Henry Hub prices have risen slightly, well above the lows of 2012. Gas prices in New England are expected to remain high due to constraints on supply. Although Pennsylvania’s Marcellus Shale play is the country’s largest gas-producing region, existing pipelines cannot carry enough gas to meet demand in the Northeast. New pipelines are under construction, but FERC’s assessment noted that grid operators are wary that the construction may not be proceeding quickly enough to head off grid reliability concerns.

Study: U.S. fifth in “oil security.” Analytical firm Roubini Global Economics ranks the United States fifth out of 13 countries in its Oil Security Index. The metric considers how exposed countries are to price shocks and supply disruptions. Although the United States’ position has improved compared to prior years due to dramatically increased domestic oil production and reduced consumption, the study still finds that the country relies significantly on imported oil, leaving it exposed to short- and medium-term price volatility. The U.S. ranks behind Japan, the U.K., Canada, and Germany.

Colorado State, Carnegie Mellon announce fugitive methane study. Researchers from Colorado State University and Carnegie Mellon University will undertake a six-month study of methane leaks from natural gas processing plants and compression stations. The study will cover 100 processing plants in 12 states and measurements will be used to model fugitive emissions from processing facilities nationwide. Results are expected to be published in a peer reviewed journal in the summer of 2014. The amount of fugitive methane emissions has been the subject of considerable debate among academic and government researchers, with studies reporting different conclusions regarding the percentage of methane that is released during processing.

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This Week in Hydraulic Fracturing

 

Volume 2, No. 41

Federal

Environmental groups challenge U.S. investment in liquefied natural gas (“LNG”) projects. The Center for Biological Diversity and other environmental groups filed suit in the U.S. to block the Export-Import Bank from funding two LNG export terminals in Australia. The Ex-Im Bank invested $2.9 billion in the Australia Pacific LNG export terminal and $1.8 billion in the Curtis LNG export terminal. The groups argue that, even though the projects are outside of the United States, Ex-Im Bank must perform an environmental impact analysis under the National Environmental Policy Act, as well as evaluate the projects’ impact on the Great Barrier Reef under the National Historic Preservation Act, before funding the projects. The groups claim various alleged environmental impacts should cause Ex-Im to withdraw its funding.

Non-governmental organizations (“NGOs”) push for ban in George Washington National Forest. Environment Virginia, Potomac Riverkeeper, and the American Hiking Society jointly urged the U.S. Forest Service to prohibit hydraulic fracturing in the George Washington National Forest. The NGOs claim that hydraulic fracturing would diminish natural views in the Virginia forest, reduce recreational opportunities, and threaten drinking water supplies for area municipalities. The Forest Service is expected to decide later this year whether it will allow hydraulic fracturing in parts of the forest which overlay the Marcellus Shale play. Approximately 12,000 acres have already been leased to oil and gas companies, but only a handful of exploratory wells have been drilled.

States

Zoning laws blocking compressor station preempted. A federal district court judge ruled that Myersville, Maryland zoning laws, used by the town council to block the construction of a compressor station, are preempted by the Natural Gas Act because the project already received a certificate of public convenience and necessity from the Federal Energy Regulatory Commission. Dominion Resources, the project developer, sued the town, seeking an injunction blocking enforcement of the zoning laws. Myersville argued that the compressor station was inconsistent with local development plans and a threat to public health, but the court held that these reasons were not within preemption exemptions found in federal environmental laws. Dominion recently won a separate suit where the D.C. Circuit compelled the Maryland Department of Environment (“MDE”) to process Dominion’s application for an air quality permit by June 2014. Because Dominion cannot begin construction until MDE issues an air quality permit, the district court judge denied Dominion’s request for a permanent injunction against the town of Myersville because the company suffered no irreparable harm.

Group sues to force vote on hydraulic fracturing moratorium. A group called Protect Our Loveland filed suit in state district court to compel the Loveland, Colorado city council to put the question of whether the city should institute a two-year hydraulic fracturing moratorium on the November 5th ballot. The city council rejected the ballot measure 5-4 in September. Protect Our Loveland claims that the city council could not reject the ballot initiative because the group collected the required signatures under state law.

No oil found in Colorado rivers after flooding receded. Despite reports that over 1,000 barrels of oil were released from flooded wellsites, sampling by the Colorado Department of Public Health and Environment (“CDPHE”) in eight rivers found no signs of oil contamination. Earlier reports of oil and produced water flowing into the South Platte River sparked demands by environmental groups for tougher regulations and calls for congressional hearings. Environmental groups criticized the state’s sampling work, claiming that it waited a week after rains ended to conduct the testing. Local group Clean Water Action argued that the pollutants likely flowed into Nebraska by the time the state began its investigation. A CDPHE spokesman stated that its inspectors had to wait until high water receded to avoid safety concerns. The agency stated that high e. coli concentrations from releases of raw sewage continue to be the most serious public health concern and that oil and gas operators were well prepared for flooding.

Plans for Alaska LNG export plant coming into focus. A consortium of Exxon Mobil, BP, ConocoPhillips, and TransCanada announced the selection of the town of Nikiski on Alaska’s Kenai Peninsula as the site of a future LNG export terminal. ConocoPhillips already owns a mothballed LNG export terminal at the town. The LNG export terminal would handle gas produced at the North Slope and shipped by an 800-mile pipeline. The companies previously delayed plans to construct the pipeline, estimated to cost between $45 and $65 billion, after the continental shale gas boom made the project unprofitable. Alaska, however, has been pressing the companies to revive the project as it would lower natural gas prices for state residents. Governor Sean Parnell hailed the export terminal site selection as “real progress.”

Environmental group seeks tighter air regulations for Colorado oil and gas development. Citing increasing ground level ozone concentrations, WildEarth Guardians urged the Colorado Air Pollution Control Division to adopt unidentified measures to reduce air emissions from oil and gas operations. Portions of Colorado have ground level ozone levels in excess of federal ambient air quality standards, and the Environmental Protection Agency (“EPA”) is requiring the state to reduce emissions to bring the areas into attainment by 2015. The Colorado Department of Public Health and Environment previously estimated that nearly half of all ozone precursor emissions are tied to oil and gas development in the Niobrara shale play. The state is looking to propose new emission limitations in November, but WildEarth Guardians charged the state with delay and questioned the need to work with industry. In response, a spokesman for the Colorado Petroleum Association pointed out that WildEarth Guardians, unlike the Environmental Defense Fund, has refused to participate in joint working groups to explore emission reduction strategies.

International

French high court upholds ban on hydraulic fracturing. The Constitutional Council of France, the highest court that reviews legislative actions, rejected a challenge to the country’s ban on hydraulic fracturing. Schuepbach Energy argued that the ban, passed by Parliament in 2011, was illegal as it effectively revoked drilling permits issued before the ban in violation of its property and enterprise rights. President François Hollande supported the decision and stated that it should end the debate on whether hydraulic fracturing should be permitted in France.

New rules for hydraulic fracturing in Europe make headway. The European Parliament passed new regulations that would require extensive “environmental audits” on the direct and indirect effects of hydraulic fracturing before drilling. The proposed revisions to the EU Environmental Impact Assessment Directive would impose stringent study requirements before hydraulic fracturing could commence. European business groups bemoaned the ruling as adding even more bureaucratic obstacles to shale development that was already facing significant legal hurdles in Europe. BusinessEurope, a business advocacy group, stated that the EU should be seeking to minimize regulations at a time of stagnant economic growth and high energy prices. As a result of the vote, Italian MEP Andrea Zanoni was authorized to develop final regulatory language with the European Union Council before the regulations become law. A spokesman for the European Commission stated that a final version should be promulgated before the end of the year.

Diplomats urge U.S. to export LNG. At a House committee hearing, representatives from Japan, India, Haiti, Singapore, and Hungary asked Congress to speed up the current process for reviewing LNG export applications to countries without a free trade agreement with the United States. The representatives argued that LNG exports would lower global carbon emissions, increase international security, and raise the United States’ standing among other countries. Witnesses also warned that the U.S. is competing with other countries to supply LNG and the long, uncertain process of reviewing export terminals could leave U.S. exporters without buyers. The Industrial Energy Consumers of America criticized the hearing and argued that easing the LNG approval process would lead to higher costs for domestic manufacturers and undermine the country’s ability to negotiate free trade agreements in the future.

Shale gas providing U.S. industry with significant competitive advantage. CEOs for European energy companies Total and Eni recently cited the impacts of shale development on European industry while speaking at the Council on Foreign Relations. They stated that European gas prices are three times those in the United States and that electricity is twice as expensive, giving U.S. manufacturers a competitive advantage from which it will take several years to recover. They pointed to the U.S. legal structure that assigns mineral rights to property owners, a structure which does not exist in Europe, as a key driver behind shale gas development. Because European governments would have to turn over mineral rights to land owners, the CEOs were pessimistic about shale development in Europe.

South Africa issues hydraulic fracturing regulations. The South African Ministry of Mineral Resources proposed regulations for hydraulic fracturing in order to promote shale gas development. The country’s Karoo region, once the subject of a moratorium, may hold one of the world’s largest shale gas reserves. Minister Susan Shabangu stated that shale gas development could trigger South Africa’s re-industrialization and relieve dependence on coal. Environmental groups in South Africa are wary of water consumption and the potential for drinking water contamination, given that Karoo is semi-arid. Minister Shabangu stated that proposed regulations would protect water quality, regional wildlife, and area fossil deposits.

China exceeds U.S. energy consumption. The International Energy Agency (“IEA”) issued a report finding that China is now the world’s largest consumer of energy, reflecting its rapid growth as an industrial nation as China’s consumption is largely driven by heavy industry and infrastructure projects. The U.S. has consumed more energy than any other country since the early twentieth century, and as of ten years ago, China consumed half as much energy as the U.S. According to the IEA, the change has implications for U.S. foreign policy, energy prices, and U.S. energy security, as well as Chinese policy on greenhouse gas emissions. Organization of the Petroleum Exporting Countries member states, expecting that future U.S. oil imports will be flat, are constructing refineries and storage facilities in China, which is now Saudi Arabia’s largest oil customer.

U.K. shale developer abandons exploratory drill site. Citing concerns that drilling could harm migrating birds, Cuadrilla Resources agreed to abandon its Lancashire exploratory well site. Cuadrilla had been exploring the Bowland Hodder shale formation, estimated to hold 1,300 trillion cubic feet of natural gas. Cuadrilla previously conducted an environmental assessment that examined the potential impact on migrating birds, making local environmental groups skeptical of Cuadrilla’s stated rationale. Those groups claim that local opposition drove Cuadrilla’s decision.

Business

OriginOil announces first contract water recycling technology. OriginOil signed its first contract to provide a new technology to recycle hydraulic fracturing wastewater. The system uses a process called electro-coagulation, where electric current separates contaminants from wastewater, allowing hydrocarbons to be captured and treated water to be reused. Colorado-based Industrial Systems, a well field service company, will pay a fee to OriginOil for each barrel of wastewater treated with the technology. If the technology performs as advertised, Industrial Systems will begin using it in the Permian Basin, where water is scarce, as well as in the Bakken Shale play. OriginOil believes that its new technology can dramatically reduce the volume of freshwater used and wastewater disposed of, while also improving overall oil recovery.

Icahn targets Talisman Energy. Calgary’s Talisman Energy is likely due for a shakeup after investor Carl Icahn disclosed holding a major stake in the company. Icahn announced he would hold discussions with company management, likely centering on the company’s heavy reliance on natural gas, which makes up 70% of the company’s assets. Analysts depict Talisman as overspending on large projects with little near term return and possibly needing to divest assets in Algeria, Columbia, Sierra Leone, and Kurdistan in order to take a more focused approach on North American shale production. Both Fitch and S&P recently revised their outlook for Talisman to “negative.” Icahn has a reputation for forcing major management changes at the companies in which he invests, and he was part of an investor group that ousted CEO Aubrey McClendon from Chesapeake Energy. Analysts are now wondering whether Icahn will push management to sell the company off or commit to restructuring the company for higher profitability.

Jordan Cove LNG signing contracts with buyers. Veresen, Inc.’s proposed Jordan Cove LNG export facility announced supply agreements with India, Indonesia, and other Asian buyers. The deals are a sign of confidence that the facility, along with its Pacific Connector Gas Pipeline, will be constructed despite opposition from environmental groups who are challenging construction permits issued by Oregon’s state government. Veresen’s applications to construct are still pending with the Department of Energy’s Office of Fossil Energy, which must approve LNG gas exportation to countries without a free trade agreement with the U.S., and the Federal Energy Regulatory Committee. The company touts that, unlike other proposed U.S. export facilities, Jordan Cove will receive nearly all of its natural gas supply from Canada.

American Energy raises $1.7 billion for Utica shale. American Energy, the new company created by Chesapeake Energy founder Aubrey McClendon, raised $1.7 billion from several private equity firms. The money will finance the acquisition of approximately 110,000 acres in the southern Utica shale play with the company’s subsidiary, American Energy Utica, starting to drill with twelve rigs over the next few years. Energy & Minerals Group was American Energy Utica’s lead equity investor, along with First Reserve Corporation. Debt investors included GSO Capital Partners, Magnetar Capital and BlackRock.

Research

Study: Modeling the economic or climate benefits of the natural gas boom. A group called the Energy Modeling Forum, consisting of representatives from Stanford University, EPA, and the U.S. Department of Energy, claims that modeling shows that low gas prices will not necessarily improve the economy or provide climate benefits. The group ran 14 different models simulating future energy supply and demand to estimate economic impacts and emissions. According to the models, natural gas would rise to between $4.03 and $6.24/ MMBtu by 2020, adjusting for inflation, as demand catches up to supply. According to the models, shale gas development would contribute $1.1 trillion (in 2010 dollars) to the economy by 2020. The study also claimed that, while switching from coal- to gas-fired generation would reduce carbon dioxide emissions, it would also limit the adoption of new nuclear or renewable energy generation.

First Energy: Gas exports to Mexico will rise sharply. An analyst for Ohio-based First Energy, speaking at a Petroleum Club panel in Calgary, predicted that U.S. natural gas exports to Mexico will rise from less than a billion cubic feet per day to over four billion cubic feet per day by 2018. New pipelines connecting the U.S. to Mexico will allow for the increased exports, contributing to new demand for gas. First Energy also predicts increased use of natural gas for electricity generation and that LNG terminals will export up to 100 billion cubic feet per day by 2017. To accommodate the new demand, natural gas supply may need to grow aggressively over the next year or two, but current natural gas prices are keeping capital investment down.

Studies duel over environmental risks from shale development. Two studies, released nearly simultaneously, paint opposing pictures of air quality in Texas’ Barnett Shale play. Industry group Barnett Shale Energy Education Council, published its study in the Science of the Total Environment, finding that natural gas production in the Barnett Shale play has not caused significant increases in air pollution. Using eleven years’ of air quality monitoring data, consultant ToxStrategies found only one incident where shale gas development was linked to volatile organic compound (“VOC”) emissions exceeding federal and state air quality standards. Overall, however, VOC emissions did not rise with shale gas development, and benzene emissions actually decreased over time. Activist group Environment Texas countered with its own report, compiling various journal and newspaper articles and concluding that hydraulic fracturing wastewater poses extreme risks to rivers and sources of drinking water. It also questioned shale developers for consuming approximately 250 billion gallons of fresh water despite a long-standing drought. The group seeks an immediate statewide moratorium on hydraulic fracturing, citing these potential environmental risks.

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This Week in Hydraulic Fracturing

 

Volume 2, No. 40

 

Federal

Government shutdown has had a limited impact to date on drilling on federal lands. The government shutdown resulted in the furlough of most Bureau of Land Management (“BLM”) employees, some of whom process oil and gas drilling permits for federal lands and Indian reservations, including the Fort Berthold reservation in the Bakken Shale play. A spokeswoman for industry group Western Energy Alliance shrugged off the delays, noting that most companies can wait a year or more for permits to drill on federal land, limiting the impact of a relatively short shutdown. Several environmental groups have criticized the National Park Service for allowing oil and gas companies that have permits to continue operating in national parks that are closed to the public. Industry and the Park Service, however, responded that many operators have shut wells during the shutdown or are operating from private lands within the parks.

NGOs ask BLM to stop California leasing. A group of environmental NGOs have asked the U.S. Bureau of Land Management to cancel all existing oil and gas leases on federal land in California until BLM finishes an analysis of hydraulic fracturing. BLM previously cancelled all California oil and gas leasing from May through September 2013, citing the budget sequester. The NGOs want BLM to extend this stoppage until an environmental impact statement and scientific review on hydraulic fracturing in California is completed. The Western States Petroleum Association disputed the claims by NGOs that hydraulic fracturing presents unknown hazards, noting the practice has been done safely in California for decades and that the state just passed legislation providing for new regulation.

Offshore hydraulic fracturing challenged. The Center for Biological Diversity is urging the federal Bureau of Ocean Energy Management and the Bureau of Safety and Environmental Enforcement to shut down offshore operators that use hydraulic fracturing or face a lawsuit. The group claims that any authorization for offshore hydraulic fracturing must be vetted through the National Environmental Policy Act and other federal laws, arguing that hydraulic fracturing threatens ocean wildlife.

U.S. will pass Russia as the top oil & gas producer this year. The Wall Street Journal reports that Russia, facing declining output from conventional oil and gas fields, is expected to lose its title as the top oil and gas producing country. Although the U.S. is not currently exporting oil or gas in significant numbers, the amount it imports has dramatically declined over the past few years, making more available for other countries. Increases in U.S. gas exports, through liquefied natural gas (“LNG”) export terminals and increased pipeline shipments to Mexico, could further erode the clout of the Gazprom (owned by the Russian government) and other producers. At the same time, Russia has shale formations that may be developed in the future, while the U.S. could see its shale production impacted by lower prices, increased regulation, and NGO opposition.

States

Ohio chemical reporting law yields to federal reporting regulations. The Ohio Environmental Protection Agency (“Ohio EPA”) has agreed with US EPA that a 2001 state law, requiring oil and gas drillers to report chemicals used in hydraulic fracturing fluid to the Ohio Department of Natural Resources, did not satisfy federal reporting requirements under the Emergency Planning and Community Right-to-Know Act (“EPCRA”). Under EPCRA, a site that stores at least 10,000 pounds of any chemical designated as “extremely hazardous substances” by OSHA must report to local first responders. Oil and gas companies were informed they need to begin reporting covered chemicals under EPCRA, while Ohio EPA considers whether its own rules require a legislative or regulatory amendment to satisfy federal law.

Oklahoma disposal well closed after seismic activity. The Oklahoma Corporation Commission (“OCC”) ordered an underground injection disposal well near Marietta, Oklahoma to shut down after OCC recorded a series of tremors near Marietta, Oklahoma. The well had only started operations two weeks before the tremors which peaked at magnitude 3.4 and damaged nearby buildings. The Oklahoma Geological Survey stated that earthquakes increased as the well’s injection volumes increased, but that further investigation is needed. The well operator stated the well was also shut down because it was uneconomic. Before start-up, OCC had severely limited wastewater injection volume and pressure as part of a cautious approach to regulating new wells.

Colorado inspectors continue to monitor spills in flood’s wake. Inspectors from the Colorado Oil & Gas Conservation Commission (“COGCC”) continue to review the integrity of nearly 1,900 wells previously underwater from flooding. COGCC has reported 15 spills that released approximately 43,000 gallons of oil and 18,060 gallons of wastewater. Damaged roads have slowed the inspectors, who still need to assess some wells in the Wattenberg Field. Companies are also starting to put dollar values on the flood damage, with Noble Energy, the state’s biggest oil producer, putting its losses at $7-17 million in damaged equipment and lost production. Rep. Jared Polis (D-Colo.) is seeking Congressional hearings to investigate the impact of drilling site releases. By contrast, Colorado Gov. John Hickenlooper, Colorado environmental officials, and an EPA Region 8 spokesman characterized them as small when compared to the large amounts of raw sewage and household chemicals released during the floods.

Business

Shell selling off Eagle Ford shale assets. Shell is putting its Eagle Ford Shale play assets up for sale, as the company has failed to profit consistently from these assets. Its relatively late entry left it with areas that were more challenging to develop and produced more natural gas than oil at a time of low gas prices. The sale comes after the company wrote down $2 billion in value for its shale assets and prompted an earlier sell-off of its Mississippi Lime formation assets. The assets include 106,000 acres across three Texas counties and 192 wells that also produce approximately 32,000 barrels of oil and natural gas liquids per day.

Devon Energy takes pipeline spinoff public. Devon Midstream Partners LP, a new master limited partnership, will soon go public, hoping to raise $400 million. The new MLP will own approximately 20% of Devon Energy’s existing pipeline assets and will acquire more of Devon’s assets over time. Devon Energy currently transports 2.9 billion cubic feet of gas per day through its 3,600 miles of pipeline and owns gas processing plants throughout Texas and Oklahoma.

Some private equity groups still bullish on U.S. shale. Private equity deals for shale assets reportedly reached $30 billion in 2012. Yet, while some private investors have cooled to new shale investments in 2013 due to low gas prices, industry consolidation, and the maturing of shale plays, others reportedly see significant additional investment opportunities, particularly as hydraulic fracturing provides access to new deposits through new and evolving technologies. Some suggest hydraulic fracturing could revitalize conventional reservoirs, such as Prudhoe Bay. Others predict that shale plays could attract large upstream and midstream investments in the next 20 years, including significant private equity investors. Private equity managers typically seek out investments in smaller drilling, service, or equipment manufacturing companies, but some analysts believe there will be larger private deals in coming years.

Research

Natural Gas Supply Association forecasts a mild winter will depress gas prices through 2014. A forecast of natural gas demand over the winter of 2013 to 2014 predicts that gas prices will stay relatively low. The Natural Gas Supply Association (“NGSA”) estimates that gas demand will be comparable to last winter, where gas prices averaged $3.47/ MMBtu. This would likely result in a continued reduction in rig counts for dry gas shale plays as companies shift to more profitable crude oil and gas liquids plays. The forecast also sees electricity production slightly shifting back to coal-fired generation which becomes more competitive when gas prices hit approximately $3.50/ MMBtu. Coal-fired generation has already increased by 14% in the first half of 2013. NGSA’s long-term forecast predicts a major spike in natural gas demand by 2020 due to increased pipeline shipments to Mexico, LNG exports, and new industrial facilities coming on-line. Under this demand “super cycle,” gas prices could increase to as high as $7/MMBtu in the short term until companies can ramp up dry gas production.

Study: Radioactive isotopes found near Pennsylvania treatment plant. A Duke University study published in Environmental Science & Technology found Radium-226 and Radium-228 in creek sediment downstream of the Josephine Brine Treatment Facility. The authors conclude that hydraulic fracturing wastewater, which was previously treated at the Josephine facility, was responsible for the isotopes’ presence based on chemical fingerprinting. The Pennsylvania DEP discovered the isotope in the sediments in July 2011. Fluid Recovery Services, which owns and operates the Josephine facility, is currently remediating the creek under a consent order with DEP. Fluid Recovery also agreed to spend up to $30 million in plant upgrades, and settled Clean Water Act claims brought by U.S. EPA for $83,000. Pennsylvania has prohibited treatment plants from accepting hydraulic fracturing wastewater since September 2011.

Study: Hydraulic fracturing improvements could yield big gains. A preliminary report by Higgs-Palmer Technologies shows that companies are leaving a substantial quantity of natural gas in shale formations due to inefficient hydraulic fracturing techniques. Microseismic data show a significant decrease in permeability occurs between well stimulation and gas production. Its analysis postulates that more proppant should be used during the well completion stage, and that the proppants used should be smaller, as data in some instances suggest up to 90% of available gas is being left in the rock. Higgs-Palmer is developing software that could better measure shale permeability during various phases of well stimulation and completion.

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This Week in Hydraulic Fracturing

Volume 2, No. 39

Federal

Third Circuit affirms lower court ruling overturning drilling ban in National Forest. The U.S. Court of Appeals for the Third Circuit affirmed a lower court ruling that the U.S. Forest Service lacked the authority to enter into a settlement agreement with environmental groups in which the agency imposed a drilling moratorium in the Allegheny National Forest pending a multi-year environmental impact study. The court held that the Forest Service lacked control over private mineral rights owners’ access to surface lands and that the moratorium was a “sea change” in agency policy that could not be accomplished by a settlement agreement but required notice and comment rulemaking. Further, the court held, requesting approval for developing private mineral rights does not require environmental review for the entire forest, as environmental groups argued.

GAO: Incomplete data frustrates estimates of BLM permit processing times. Congress asked the Government Accountability Office (“GAO”) to study how long it takes the U.S. Bureau of Land Management (“BLM”) to process oil and gas drilling permit applications. According to GAO, an internal BLM memorandum acknowledged that the agency does not process completed applications within 30 days, as required by the Energy Policy Act of 2005. However, GAO found that because BLM’s data was often incomplete, the agency does not know how long it typically takes to process applications. GAO also questioned the accuracy of the data as some permits were listed as being issued on the same day BLM deemed the applications complete. The difficulty in tracking applications comes at a time when applications are actually down; BLM received twice as many applications in 2007 as it did in 2012. GAO also learned that, for oil and gas wells that are already operating on federal lands, BLM does not keep a history of environmental inspections or prioritize inspections based on compliance history. Over a third of wells have no record of ever being inspected. BLM responded that it will implement a new application processing procedure and database.

EPA guidance on use of diesel fuel in hydraulic fracturing goes to White House. The U.S. Environmental Protection Agency (“EPA”) sent its draft guidance for hydraulic fracturing that uses diesel fuels to the White House Office of Management and Budget (“OMB”) for review, over a year after the public comment period closed. EPA issued the draft guidance after it agreed in a settlement to take down from its website language stating that companies were required to obtain injection permits under the Safe Drinking Water Act before using hydraulic fracturing fluid containing diesel fuels. Environmental groups largely welcomed the guidance but wanted a formal rulemaking with more restrictive measures. Industry groups have stated that service companies no longer use diesel fuels in hydraulic fracturing fluid, but are concerned that EPA may pursue enforcement actions against companies that used diesel fuels in the past.

Manufacturers demand clear LNG approval criteria. America’s Energy Advantage, an association of companies that use natural gas as fuel or feedstock, filed comments on the liquefied natural gas (“LNG”) export application for Freeport LNG asking the U.S. Department of Energy (“DOE”) to outline clear, objective standards for approving applications. DOE must determine whether LNG exports to countries without a free trade agreement is in the national interest, but the group argues that DOE has not provided a clear explanation of how it applies the “national interest” standard. The association submits that the absence of clear standards creates uncertainty for companies interested in investing in natural gas-intensive manufacturing projects which may face higher prices if domestic supplies of natural gas are reduced because of increased LNG exports.

States

California passes hydraulic fracturing bill. Governor Jerry Brown signed S.B.4 establishing new requirements for hydraulic fracturing in California. The law requires companies to disclose chemicals used in hydraulic fracturing fluid even if claimed as trade secrets, test nearby groundwater before stimulating wells, and notify surrounding landowners, among other requirements. The bill exempts permits for hydraulic fracturing from the California Environmental Quality Act, which often subjects projects to lengthy environmental reviews. Gov. Brown also added a signing statement directing the California Department of Conservation to “develop an efficient permitting program for well stimulation activities that group permits together based on factors such as known geologic conditions and environmental impacts, while providing for more particularized review in other situations where necessary.” This is not in SB. 4 and Gov. Brown’s office declined to elaborate on what the direction will mean. Environmental groups denounced the signing statement, while industry group Western States Petroleum Association issued no comment except to state that companies are looking forward to developing California’s shale potential.

International

Japan looks to Canada for LNG supply. In a joint press conference with Prime Minister Stephen Harper, Japan’s Prime Minister Shinzo Abe announced that the countries will work closely to ensure that Japan receives a steady supply of liquefied natural gas. Prime Minister Abe previously portrayed Japan as teetering on the verge of massive blackouts now that its once robust nuclear power supply has been reduced to a single plant in the wake of a 2011 tsunami that resulted in the Fukushima nuclear incident. Japan, the world’s largest LNG customer, paid an average of $15.74/ MMBtu in July 2013, making cheap natural gas from Canada especially attractive. Prime Ministers Harper and Abe are negotiating a free trade agreement governing LNG supply. Canada previously awarded export licenses to three LNG export terminals that are expected to be on-line by 2020.

French court to rule on hydraulic fracturing ban. Dallas-based Schuepbach Energy LLC appealed France’s ban on hydraulic fracturing to the country’s Constitutional Council, the highest court that rules on the legality of legislation. Schuepbach argued that France instituted the ban without any study establishing that hydraulic fracturing was a risk to public health or the environment. The company held two exploration permits when the legislature prohibited hydraulic fracturing in 2011. A ruling is expected next month.

Business

Valero subsidiary enters logistics business with IPO. Valero Energy Corporation’s new subsidiary, Valero Energy Partners LP, will use an initial public offering to begin its acquisition of logistics assets, such as pipelines and terminals. A spokesman for the master limited partnership stated that the company is hoping to raise $345 million from the IPO.

New LNG plant would supply U.S. trucking. Applied Natural Gas Fuels Inc. announced plans to construct an LNG liquefaction facility in Midlothian, Texas, near the Barnett Shale play, to provide fuel for trucking companies that currently use heavy duty diesel engines. The company is also targeting railroad companies and manufacturers of heavy industrial equipment. The plant would be able to produce 86,000 gallons of LNG per day and is expected to come on-line by 2015. Other companies are similarly looking to develop LNG plants and distribution infrastructure for transportation, including Honeywell UOP in a joint venture with engineering company Black & Veatch, and Eagle LNG Partners.

Research

Mixed views on the future of gas-fired electricity generation. At a recent conference, a panelist from NERA Economic Consulting was optimistic about the future of gas-fired generation, stating that even if prices rise by a few dollars per MMBtu, natural gas will remain the most affordable option for the power industry as large numbers of coal-fired power plants retire. PJM Interconnection, the Mid-Atlantic grid operator, expects gas-fired generation to surpass coal-fired generation by 2015, rising from 50,000 megawatts of generation today to 65,000 megawatts. Despite the optimism, the U.S. Energy Information Administration reported that gas generation is down 14% in 2013, compared to 2012 which saw the lowest spot prices in a decade. Slight increases in natural gas prices have closed the gap with the cost of coal-fired generation.

Study: Barnett Shale play holds more gas than previously believed. Modeling by the University of Texas Bureau of Economic Geology predicted that the Barnett Shale play, a nearly 4,000 square mile formation in Texas, could produce an additional 45 trillion cubic feet of gas by 2050. As the oldest shale play of the new oil and gas boom, the Barnett has been drilled extensively already, which provided researchers with extensive data for their modeling. The results should allay concerns that shale gas development will not be able to keep up with rising demand over the long-term as a large portion of the economy begins to center around natural gas as a fuel and feedstock.

<lt;P>Study: Lesser prairie chicken population declined. Western Eco Systems Technology’s study, performed at the behest of several western state wildlife agencies and energy companies, found that the lesser prairie chicken population was cut in half in 2012, primarily from drought and reductions in breeding ground acreage. Several states with shale development, including Texas, New Mexico, Oklahoma, Kansas, and Colorado, are trying to keep the bird off of the endangered species list to avoid stringent regulation of critical habitat under the Endangered Species Act. The Western Association of Fish and Wildlife Agencies are releasing a conservation plan in hopes of persuading the U.S. Fish & Wildlife Service that states can protect the species without federal intervention. Environmental groups urged that the study means the lesser prairie chicken must be listed as endangered and that its critical habitat must be protected from development. The dispute over listing the species dates back almost 20 years.

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This Week in Hydraulic Fracturing

Volume 2, No. 38

Federal

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

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

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

States

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

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

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

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

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

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

International

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

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

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

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

Business

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

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

Research

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

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This Week in Hydraulic Fracturing

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

Federal

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

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

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

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

States

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

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

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

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

International

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

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

Business

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

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

Research

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

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

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

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