17 December 2013

Sidley Shale and Hydraulic Fracturing Report

Volume 2, No. 50

Federal

SEC files suit alleging oil and gas investment partnership was Ponzi scheme. The U.S. Securities and Exchange Commission (“SEC”) sued Texas-based Vendetta Royalty Partners, Ltd., along with related employees and companies, claiming that Vendetta defrauded 80 investors through a Ponzi scheme. According to the SEC, Vendetta offered investors private placements for partnerships investing in oil and gas royalties, but allegedly transferred the investors’ funds to Vendetta executives and other investors. Vendetta allegedly defrauded investors of $17.9 million since 2011. This is the fourth SEC enforcement action against allegedly fraudulent oil and gas investment companies within the past nine months and the agency issued an investor alert to help protect potential investors.

States

Wyoming proposes ambitious well-plugging plan. Wyoming Governor Matt Mead outlined a proposal to increase efforts of the Wyoming Oil & Gas Conservation Commission (“WOGCC”) to plug abandoned oil and gas wells. Under Gov. Mead’s proposal, WOGCC would hire a contractor to plug close to 300 wells on private and public lands per year at a cost between $7.7 million and $18 million. The funds for the program would come from a conservation tax presently paid by oil and gas operators, but total costs would vary based on whether currently idle wells resume operations or are abandoned in the future. WOGCC could also seek to impose higher bonds on well operators or increases in the conservation tax, if necessary.

Dallas approves tight regulations for urban drilling. Dallas passed a new ordinance for Barnett Shale development within the city limits. The ordinance requires at least a 1,500 foot setback from a long list of protected properties, such as homes, schools, and churches, as well as chemical disclosure, baseline air and water testing, and restrictions on compressor station siting. After five years of debate, some council members lauded the regulations as a compromise. Opponents, however, argue the ordinance’s set back requirements amount to a de facto development ban. Council members opposed to the new ordinance stated the city is depriving itself of revenue from drilling royalties and will have to defend against lawsuits from companies that signed leases with the city and paid $33 million in advance for the right to drill, as well as other mineral rights owners.

Chicago considering ban on older railroad oil tank cars. The City of Chicago is considering a proposal to deem older versions of the commonly used Department of Transportation (“DOT”)-111 oil tank cars a public nuisance, prohibiting them from entering the city’s jurisdiction. The proposal was raised in response to July’s explosion in Lac-Mégantic, Quebec after a train hauling crude oil in DOT-111 cars derailed. The Association of American Railroads stated that, if passed, the ordinance would be overturned by a court as preempted by federal law. The Pipeline and Hazardous Materials Safety Administration is considering new rules that could require existing DOT-111 cars to be replaced or retrofitted.

NGOs oppose LNG fueling stations. Environmental groups such as the Sierra Club, Food & Water Watch, and New Yorkers Against Fracking stated that they collected approximately 50,000 comments opposing a proposed New York rule that would allow liquefied natural gas (“LNG”) storage units to accommodate heavy duty trucks that run on LNG. The NGOs contend the fueling stations should be banned because they would open a new market for natural gas produced through the use of hydraulic fracturing. In response, the New York State Department of Environmental Conservation stated that allowing LNG fueling stations would facilitate the use of trucks with substantially lower air emissions and that the proposed rule had no relation to hydraulic fracturing.

Cold spell sends New England gas prices surging. According to the Energy Information Administration, the recent cold weather saw the price of gas at Boston’s Algonquin Citygate spike from $4.13/ MMBtu to over $20/MMBtu. The gas is used primarily for electricity generation, resulting in wholesale power prices exceeding more than $100 per megawatt hour at the Massachusetts hub and over $350 per megawatt hour in southeastern Massachusetts. Both were well above typical on-peak power prices of $30 to $40 per megawatt hour. Gas and electricity price spikes are now common in New England during wintertime. Each episode rekindles debates over the area’s heavy reliance on natural gas and undersized pipeline infrastructure.

International

Canada to list crude oil as “highly dangerous.” Citing the Lac-Mégantic explosion in July, Canada’s Transport Minister announced that crude oil would be listed as a “highly dangerous” substance, triggering additional regulatory obligations for railroads. Companies will now have to create emergency plans to handle both spills and explosions. The details of an Emergency Response Assistance Plan for crude oil are still being developed by a working group, but the Transport Minister expects the group to issue a draft at the end of January 2014.

Business

QEP strikes $950 million deal in Permian Basin. Denver’s QEP Resources announced that it will acquire 26,500 acres in the Permian Basin from EnerVest for $950 million. For EnerVest, the sale is part of a divestment strategy to finance $1.4 billion in new acquisitions. For QEP, the purchase is part of a strategy to continue to transition from primarily gas holdings to acreage richer in crude oil and natural gas liquids. QEP announced the new acreage will allow it to drill 775 new horizontal wells and over 200 vertical wells – roughly equivalent to ten years of drilling inventory. The deal is expected to close by the end of January.

Canadian LNG terminals facing labor shortages. Analysts at Deloitte Canada raised concerns that a lack of skilled labor could jeopardize nine LNG export terminals planned for western Canada. Existing labor shortages have already increased wages for Canadian oil and gas workers by up to 60% over U.S. wages. Adding several LNG construction projects would push those wages even higher, potentially putting the projects over-budget and behind schedule. Financial advisory firm Grant Thornton estimates that, if only five of the nine projects are built, developers would still require over 21,000 workers. Most of those workers must be lured away from other oil and gas projects with higher wages and better amenities. A series of Australian LNG projects under construction have suffered from labor shortages, putting many of the projects significantly over-budget and behind schedule. Woodside Petroleum cited increasing labor costs in cancelling its $50 billion Western Australia LNG terminal.

Marathon Oil paring assets to focus on shale. Marathon Oil announced that it was selling off its North Sea assets in order to devote more resources to North American shale development. The company will plow $3.6 billion into more drilling in the Eagle Ford, Bakken, and Woodford shale plays over the next few years. Nearly 60% of the company’s capital, investment, and exploration budget will be devoted to liquids-rich shale acreage. By contrast, less than $2 billion will be devoted towards conventional oil and gas assets. Marathon’s announcement is similar to those of competitors Apache and Occidental Petroleum which also shed international and conventional assets in favor of greater shale development.

Research

Monterey Shale jobs projections are allegedly unreliable. Next Generation, an environmental group created by billionaire Tom Steyer to oppose the Keystone XL pipeline, has critiqued a University of Southern California study that projected development of California’s Monterey Shale could lead to 2.8 million new jobs by 2020. Next Generation claims that USC used an unreliable methodology. Similarly, the Post Carbon Institute has recently released a report claiming that estimates of the Monterey Shale’s technically recoverable oil are misleading and that there is relatively little oil to be recovered. These reports are expected to be part of the ongoing debate over natural resource development in California, as the State develops new regulations to govern the use of hydraulic fracturing and horizontal drilling techniques.

Master limited partnerships lead to IPO boom. Research firm SNL Energy issued an analysis showing that 2013 initial public offerings for the midstream market raised approximately $6 billion, up from $1.7 billion in 2012. Master limited partnerships (“MLPs”) for projects related to shale gas have become the preferred method to raise capital for pipeline and other midstream projects due to tax advantages and cash payouts to investors. According to SNL Energy’s report, six of the eight MLPs that went public outperformed expectations. SNL Energy also predicts that other energy companies outside of the midstream market, such as AES Corp. and NextEra Energy, may spin off MPLs to raise capital in 2014.

Barclays forecasts E&P budgets will grow in 2014. Investment bank Barclays issued its annual global exploration and production (“E&P”) spending forecast and predicts that it will be a big year for well service companies. Based on surveys of oil and gas executives, the company predicts that E&P will grow by about 6% over 2013 spending to reach approximately $723 billion. Exploration and production at North American shale plays are predicted to grow by 7.5% next year with more than $156 billion in new U.S. investments. Although spending in the Middle East and Latin America is still higher, both major international oil companies and independent companies are cutting back on foreign E&P to focus on North American projects.

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