05 October 2015

Sidley Shale and Hydraulic Fracturing Report

Vol. 4, No. 40

Topics discussed in this week’s Report include: 

  • Court blocks Bureau of Land Management (BLM) hydraulic fracturing regulations.
  • Environmental Protection Agency (EPA) issues new ozone standards.
  • BLM rule would alter royalty calculations from oil development.
  • Non-governmental organizations threaten suit to stop Virginia crude rail terminal.
  • Virginia: Court holds landowner permission not required for pipeline surveys.
  • North Carolina: County imposes moratorium on hydraulic fracturing.
  • Pennsylvania: State expands seismic monitoring network.
  • Colorado: Commission proposes local “home rule” regulations.
  • State regulators issue report on seismic activity.
  • U.S. oil production drops, but prices stay firm.

Federal

Court blocks Bureau of Land Management (BLM) hydraulic fracturing regulations. A U.S. District Court judge in Wyoming issued a preliminary injunction against the Department of the Interior’s Bureau of Land Management regulations governing the use of hydraulic fracturing on federal and tribal lands. BLM issued the rules in March 2015, prompting lawsuits by states, Native American tribes and industry associations. In issuing a preliminary injunction, the court found the challengers were likely to prevail on the merits because Congress had not expressly authorized BLM to regulate hydraulic fracturing, and actively exempted hydraulic fracturing without diesel fuels from regulation through the Energy Policy Act of 2005. The decision also suggested the record did not support the need for federal regulation. BLM stated that it would continue to process applications for permits to drill under its existing regulations.

Environmental Protection Agency (EPA) issues new ozone standards. EPA announced that it is lowering the ozone National Ambient Air Quality Standard from 75 parts per billion (ppb) to 70 ppb. Environmental groups responded that the standard should be lower, while industry argued that compliance with the reduced standard will cost billions of dollars annually. Rural areas of Colorado, Utah and Wyoming have struggled to meet the 75 ppb level, with state regulators attributing ozone emissions to increased oil and gas operations. EPA now will embark on a process of determining whether areas throughout the country are in, or out of, attainment with the lower 70 ppb standard. A nonattainment designation may lead to mandatory restrictions on oil and gas activities.

BLM rule would alter royalty calculations from oil development. A new proposed BLM rulemaking would change how royalties are calculated for oil development on federal lands. Royalties are one of the largest non-tax revenue streams available to the federal government and oil and gas development on federal lands generated over $3 billion in revenues in 2014. The way BLM has calculated royalty payments was sharply criticized by the Government Accountability Office in 2010, which found there are no assurances that the payments are accurate or properly consider current extraction technologies. BLM has proposed a new measurement system, along with a production measurement team to review and approve new measurement technology and “meter-proving” requirements for large volume oil producers. BLM’s royalty regulations have not been updated since 1989. A similar proposed rule for natural gas production is currently being reviewed by the White House Office of Management and Budget.

Non-governmental organizations threaten suit to stop Virginia crude rail terminal. The Center for Biological Diversity and the Sierra Club filed a notice letter saying that they would sue the U.S. Army Corps of Engineers (Corps) for issuing a permit to a crude oil train terminal in Yorktown, Virginia, claiming that it would violate the Endangered Species Act. They argue that the Corps failed to consider the terminal’s impact on the Atlantic sturgeon and two species of sea turtles, citing the potential for crude oil spills, derailments and fires. Two trains bound for the terminal, previously used as an oil refinery, recently derailed in Virginia and West Virginia.

States

Virginia: Court holds landowner permission not required for pipeline surveys. A federal judge dismissed a claim challenging a Virginia law requiring landowners to allow pipeline surveyors to access their properties. Dominion Resources is constructing the Atlantic Coast Pipeline, which is planned to transport gas from West Virginia’s Marcellus Shale play through Virginia to North Carolina. To gain federal approval, Dominion contractors must survey the route, often requiring entry onto private property. Virginia law allows some private companies, including pipeline operators, to enter private property with advance notice but without landowner permission. The plaintiffs argued the law is unconstitutional, but the court held the state interest in the pipeline outweighed private property rights and there was no right to exclude trespassers under either the federal or state constitution given a long history of common law exemptions. The ruling is at odds with a similar suit in West Virginia, where the court found the surveyors could only enter private property with permission.

North Carolina: County imposes moratorium on hydraulic fracturing. Stokes County commissioners unanimously voted to impose a three-year moratorium on hydraulic fracturing. Although no company has demonstrated interest in the Deep River shale basin underlying portions of middle North Carolina, the county commissioners stated that fears of water contamination and seismic activity from injection wells prompted a preemptive ban while they study public safety issues. This is the third North Carolina county to impose a moratorium. Even without the moratorium, lawsuits regarding the structure of the regulatory commission created to oversee development have kept hydraulic fracturing at bay in North Carolina.

Pennsylvania: State expands seismic monitoring network. Pennsylvania’s Department of Conservation and Natural Resources and Department of Environmental Protection announced that they plan to invest in new seismic monitoring equipment throughout the state to gauge whether oil and gas disposal operations contribute to seismic activity. Even though Pennsylvania has not experienced tremors like other oil and gas producing states, the state has planned for 30 new monitoring stations, including five mobile units. An agency spokesman stated the monitoring stations will improve the state’s understanding of baseline geology.

Colorado: Commission proposes local “home rule” regulations. Governor John Hickenlooper and the Colorado Oil & Gas Conservation Commission have consistently supported state regulation of oil and gas development, but new proposed rules contain options that would enhance the authority of local governments. Among other proposals, cities and counties may be able to veto large proposed oil and gas drill sites, with disputes being mediated. Another option would direct energy companies to map out where they plan to drill over the next five years with a good-faith estimate of the number of wells they would develop. The regulations would be part of a compromise with environmental activists to avoid a statewide ballot initiative for the 2016 election on the question of municipal regulation of hydraulic fracturing.

Studies

State regulators issue report on seismic activity. The Interstate Oil and Gas Compact Commission and the Groundwater Protection Council, two groups of state regulatory agencies, issued a report documenting seismic activity associated with oil and gas wastewater disposal activities. The report compiles available studies and suggests risk management, mitigation and response options for states, as well as how state and local regulators can regulate hydraulic fracturing and related wastewater without additional federal regulation. It is generally understood that an individual injection well could induce seismic activity, but regulators have not proven a link between a specific injection well to a particular seismic event.

Business

U.S. oil production drops, but prices stay firm. The U.S. Energy Information Agency reported that U.S. oil production in June 2015 was 9.3 million barrels per day, down from the peak of 9.6 million barrels per day in April 2015. Prices, however, have stayed between $40 and $50 per barrel largely due to increased output in Brazil, Russia and Saudi Arabia and oil from Iran ready to enter the market. The extended downturn in crude oil prices has taken a toll on oil- and gas-related jobs. Swift Worldwide Resources, a recruitment firm for the energy industry, has estimated the drop in crude oil prices led to 200,000 layoffs in the oil and gas industry. The information tracking site RigData issued a five-year forecast predicting U.S. onshore rig counts will not return to 2014 levels for another five years. Over 1,800 rigs were deployed in 2014, compared to 800 rigs today.

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