11 February 2014

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 6

Federal

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

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

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

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

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

States

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

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

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

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

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

International

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

Business

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

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

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

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