26 December 2013

Sidley Shale and Hydraulic Fracturing Report

Volume 2, No. 51

Federal

BLM contemplating royalty reforms. The U.S. Bureau of Land Management (“BLM”) will issue regulations that will give the Secretary of the Interior more flexibility to raise or lower royalty rates for oil and gas production on federal lands. Among the options that would be considered is whether royalty rates should be uniform across all federal lands or whether they should differ by region, state, geologic formation, or resource type or be pegged to commodity prices. The regulation would implement a recommendation by a recent Government Accountability Office (“GAO”) report opining that more flexibility would ensure a fairer return to taxpayers. Although the new regulations would not actually set new rates, the GAO report recommended increasing the current onshore oil and gas royalty from 12% to 18.75%, which would be closer to state onshore and federal off-shore royalty rates. Industry trade associations submit that the current royalty rates do not consider the high costs of federal regulations and lengthy permitting times associated with drilling on public lands.

Bill to speed Bakken permitting passes. Before leaving for recess, the Senate passed S. 244, implementing a streamlined BLM permitting system. The bill’s sponsors, John Hoeven (R-N.D.) and Rep. Kevin Cramer (R-N.D.), argued that current BLM permitting times are too long and discourage drilling on federal lands. As a result, most oil drilling in the Bakken Shale play has been on private land. Many companies, however, are looking to expand drilling on the Fort Berthold Indian Reservation, which falls under BLM’s jurisdiction. The streamlined process will be used at seven BLM offices through 2015. The bill will now head to the President, who is expected to sign it.

OMB considering oil and gas rules for wildlife refuges. The U.S. Fish & Wildlife Service sent draft rules to the White House Office of Management & Budget that would impose controls on oil and gas operations on federal wildlife refuge land. Although oil and gas activities are already subject to Fish & Wildlife regulations, officials stated the rules needed updating. Fish & Wildlife officials did not comment on what would be changed in any proposed regulations. There are approximately 2,000 active oil and gas wells on wildlife refuges, including federal lands in Louisiana, North Dakota, and Texas.

Chesapeake settles Clean Water Act claims. Chesapeake Appalachia agreed to pay a $3.2 million civil penalty and implement $6.5 million worth of stream and wetland projects to resolve allegations that the company violated the Clean Water Act. The suit, brought by the U.S. Department of Justice and West Virginia Department of Environmental Protection, alleged the company improperly placed sand, dirt, and rocks into wetlands and streams to construct well pads, impoundments, and roads at 27 different sites. The company agreed to restore the areas and implement a new Clean Water Act compliance protocol.

States

Pennsylvania Supreme Court strikes down portions of Act 13. The Pennsylvania Supreme Court handed down a long-anticipated decision affirming a lower court ruling striking down a portion of Pennsylvania’s Act 13. In Act 13, the legislature established a statewide regulatory system under which the Pennsylvania Department of Environmental Protection would permit and oversee oil and gas operations, but to provide for a single statewide approach, sought to preempt municipal ordinances and other local laws (including zoning laws) that would impact such operations. A plurality of three justices concluded the Environmental Rights Amendment (ERA) of the Commonwealth’s constitution imposes a duty on the state to administer natural resources for the “public trust” and that the ERA provided citizens with a cause of action to compel the state to honor those obligations. The plurality then found that Act 13 violated the Commonwealth’s duty insofar as it prohibited localities from acting to protect the local environment through zoning and other local regulation of oil and gas operations. (A fourth justice affirmed on other grounds.) The decision also reversed a lower court ruling finding that a Pennsylvania doctor lacked standing to challenge regulations prohibiting physicians from sharing information on trade secret chemicals used in drilling. Environmental groups announced that they would institute a wide push for the implementation of local bans on hydraulic fracturing. Pennsylvania Governor Tom Corbett issued a statement that the decision could discourage continued investment in Marcellus Shale development by allowing a patchwork of different municipal regulations.

Bankruptcy trustee sues to end New York moratorium. The bankruptcy trustee for Norse Energy sued the State of New York claiming that its roughly five year de facto moratorium on hydraulic fracturing is illegal. The trustee is asking the court to order the state to finalize a supplemental generic environmental impact statement, which is still on hold pending a study by the New York State Department of Health. Norse alleges that the lengthy review period violates a statutory requirement to complete the review with “minimal procedural and administrative delay” and that Governor Andrew Cuomo has illegally prevented the New York State Department of Environmental Conservation from carrying out its duties. As a result, the complaint alleges, Norse lost more than $100 million because its 27 pending applications to drill will never be processed until the state completes its review. The company’s New York shale gas assets were put up for auction under the bankruptcy proceedings but received no bidders.

Colorado finalizes new oil spill reporting rules. TheColorado Oil & Gas Conservation Commission (“COGCC”) issued a final rule that shortens the time that operators have to report oil spills from 10 days to within 24 hours. The new rule applies to any release of one or more barrels of wastewater or produced fluids outside of secondary containment areas. Previously, only spills of more than 20 barrels or more had to be reported within 24 hours. Spills must now be reported, not just to COGCC, but to the municipality or county where the well is located and to the surface owner.

Minnesota issues draft frac sand mining guidance. The Minnesota Environmental Quality Board issued draft standards for mining silica sand, an important additive to hydraulic fracturing fluid. The standards are described as a proposed “toolbox” of options for municipal governments to adopt. In Minnesota, municipalities regulate sand mines less than 160 acres and a number have restricted mining due to potential health and environmental concerns. The mining industry has questioned why 165 pages of new standards were necessary for a 70-year old industry, as the standards cover everything from the model year of diesel trucks that should be permitted to operate to mine operating hours to mitigating light pollution. The Environmental Quality Board will take comments on the draft standards until January 13, 2014.

Pennsylvania considering new severance tax on shale gas. A proposed bill would impose a 4.9% tax on gas drilling to replace the existing impact fees. The bill’s proponents argue that a severance tax would bring in more money from Marcellus Shale development. Under the bill, 40% of the tax would go to communities where the drilling occurs with the rest funding a slew of unrelated programs, such as drug rehabilitation and veterans programs. Although previous bills to impose a severance tax failed, proponents assert the new bill has bipartisan support.

Groups announce intent to challenge Maryland LNG export terminal. Several environmental groups held a press conference announcing their intent to file lawsuits to block Dominion Resources’ Cove Point liquefied natural gas (“LNG”) export terminal on the Chesapeake Bay. The U.S. Department of Energy approved the company’s request to convert the import terminal into an export terminal, but Dominion is still waiting on approval from Federal Energy Regulatory Commission (“FERC”). The groups argue hydraulic fracturing, which will be used to extract gas from the Marcellus Shale play, will harm the environment and the LNG export terminal will use large amounts of electricity to cool the gas for shipment. The groups are asking the Maryland state government to help block the project and are also threatening to take action against the project’s investors in the form of lawsuits and public protests.

International

U.K. readies new shale licenses for 2014. The British government stated it intends to promote shale gas development in the UK by issuing new shale drilling licenses early next year for exploring nearly 40,000 square miles of potential drilling sites. The announcement accompanied the release of an environmental assessment finding that drilling could create tens of thousands of jobs and see the UK producing twice the amount of gas it currently consumes each year. It also found that water usage and truck traffic could be managed through proper regulation. The government hopes the new licenses will authorize sufficient exploratory drilling to define better the country’s recoverable shale gas resources. The British Geological Survey estimated the country holds 36.8 trillion cubic meters of gas but much of those data are preliminary. Opponents of hydraulic fracturing have promised a showdown between municipal authorities, which have threatened to ban the practice, and the national government. Energy Minister Michael Fallon stated that municipalities would receive £100,000 pounds for each well drilled within their jurisdictions and 1% of the revenue for each producing well. The UK Department of Energy & Climate Change will take comments on the environmental assessment before issuing new licenses.

Business

Companies pursuing compressed natural gas to reduce Bakken flaring. Natural gas flaring is currently a byproduct of Bakken Shale play oil drilling, although new pipelines and processing plants are being built to establish a long term way to make use of the supply. In the interim, Statoil is seeking ways to convert the waste gas to a form of usable compressed natural gas (“CNG”). To do so, Statoil is teaming with General Electric to pilot a process to compress and store the gas using what GE refers to as “CNG in a box,” a process that would take the waste gas, strip it of natural gas liquids, and use a mobile process to compress it into smaller storage tanks for CNG-fueled cars, trucks, and buses, drilling rigs, and locomotives. Statoil and GE hopes to have eight mobile compressors running by the end of next year. BNSF, the railroad which now ships the majority of Bakken crude, is already testing CNG-fueled locomotives to replace diesel fuel.

Wastewater treatment company to start up process to extract compounds from drilling wastewater. Eureka Resources, a company that treats hydraulic fracturing wastewater, announced that it will attempt to distill valuable resources from the waste. The company’s two Pennsylvania plants, scheduled to start-up next month, will extract salts and methanol from the wastewater. The process could potentially be modified to extract barium, which can be used in rubber and glass products, and radium. If profitable, the process could reduce costs to drillers who would otherwise have to truck wastewater to Ohio for injection into underground wells.

Research

EIA: Gas will become primary electric generating fuel by 2040. The U.S. Energy Information Administration (“EIA”) issued its Annual Energy Outlook. Among its predictions is that natural gas will surpass coal as the country’s predominant fuel for generating electricity by 2040. By that time, the EIA predicts natural gas will fuel 35% of power plants with coal falling to 32%. EIA revised downward its estimate of gas-fired generation over the next few years, stating that higher gas prices has slowed the shift away from coal-fired generation. The Annual Energy Outlook also predicted that there would be ample natural gas for export, which EIA predicts will grow by 3% per year through 2023. Exports of bulk chemicals produced from natural gas liquids are projected to grow by 3.4% through 2025, an increase over EIA’s prior estimate of 1.9% growth last year. EIA’s Outlook assumes that no new regulations will slow natural gas production from hydraulic fracturing and that there will be no changes in how the U.S. Department of Energy processes applications to export liquefied natural gas.

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