15 July 2014

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 28

Federal

DOT considering stabilizers for rail shipments of tight oil. Officials from the U.S. Department of Transportation are meeting with energy companies to consider the use of fuel stabilizers in shipments of tight oil by rail. The agency has been evaluating a range of safety measures and other steps in response to fires from derailed trains carrying crude oil from shale plays. A spokesman from American Fuel & Petrochemical Manufacturers, an industry trade association, stated that requiring stabilizers would reduce the volume of tight oil that could be shipped in each tanker car, making transport by rail more expensive. Government officials believe that lighter, sweeter oil is more combustible, but energy companies have disputed that claim, stating that analyses of the crude shows little difference from other forms of crude oil.

States

Ohio’s Utica Shale play surging. The Ohio Department of Natural Resources (Ohio DNR) reports that gas production from the state’s Utica Shale play doubled in 2013 over 2012 numbers, with oil production rising by 62%. The Department announced that it issued approximately 350 drilling permits in 2014, compared to 85 in 2012, and it anticipates issuing about 800 next year. Drilling opponents have objected to the rapid growth in drilling, citing two recent incidents involving oil and gas wells in eastern Ohio. In response, Ohio DNR has hired more inspectors – the agency more than doubled the number of well inspections in 2013 – and is considering additional regulations regarding disposal of hydraulic fracturing wastes.

Pennsylvania legislature passes new oil and gas provisions. As part of a state budget measure, the Pennsylvania legislature passed new provisions to allow natural gas drilling on state lands and require separate regulation for conventional and unconventional oil and gas operations. The bill will go to Governor Tom Corbett, who is expected to sign the bill. Opponents of the bill have threatened litigation, claiming the oil and gas provisions violate the Pennsylvania Constitution’s single-subject requirement. Previously, bills that sought to establish separate regulatory schemes for conventional and unconventional drilling failed to get legislative support. The Pennsylvania Independent Oil & Gas Association, which actively supported these provisions, has argued that new regulations aimed at hydraulic fracturing should not be applied to conventional oil and gas operators and unnecessarily increase production costs. Leasing the mineral rights on public lands could bring in $95 million in additional state revenue.

International

EU pressing for crude oil exports. A confidential document leaked to the public shows that European Union trade representatives are urging the United States to lift its longstanding restrictions on the export of crude oil. Prepared for the Transatlantic Trade and Investment Partnership negotiations, the document explained the EU’s concerns over its dependence on foreign oil supplies. These concerns were exacerbated when Russia recently shut off supplies of oil and gas to Ukraine. Subject to certain exceptions, the U.S. largely banned crude oil exports in 1975, citing domestic energy security concerns after the oil embargo of 1973 caused crude prices to quadruple. The leaked document, however, criticizes the U.S. policy as “resource nationalism” and urges a “legally binding commitment” to end the export ban. Energy companies and some members of Congress have generally supported lifting export restrictions, and recently the Commerce Department authorized limited exports of certain liquids associated with light crudes. Environmental groups have criticized the EU’s position, claiming, among other things, exports would incentivize more hydraulic fracturing in the U.S.

Greenpeace protests Romanian shale project. Activists from Greenpeace chained themselves to the gates of a shale gas exploration well site in Pungesti, Romania, blocking access and demanding that the government ban the use of hydraulic fracturing. The exploratory site, owned by Chevron, has faced years of delays due to protests even though Chevron will not use hydraulic fracturing during its five-year exploratory program. The U.S. Energy Information Administration estimates that Romania could hold as much as 51 trillion cubic feet of gas, which would be enough to meet the country’s demand for natural gas for roughly 100 years.

Litigation

Chesapeake’s win in shareholder suit affirmed but will head to trial on collusion charges. The U.S. Court of Appeals for the Tenth Circuit affirmed a district court ruling in a shareholder suit against Chesapeake Energy. Plaintiffs claimed that financial arrangements with co-founder and former CEO Aubrey McClendon that allowed McClendon to buy a stake in every well the company drilled, and finance his stake through the same banks that loaned funds to Chesapeake, created a conflict of interest leading the company to over-borrow to the detriment of shareholders. The Tenth Circuit affirmed the district court’s ruling that there was inadequate evidence to show the company acted recklessly or had intended to defraud shareholders. In Michigan, however, a trial court judge declined to dismiss criminal charges that Chesapeake colluded with Encana to drive down prices to lease land in the Antrim shale field. Two related antitrust charges were dismissed. Encana previously pled no contest to a misdemeanor and paid a $5 million fine.

Business

Permian Basin outgrows pipelines, turns to rails. As oil production in the Permian Basin continues to increase – up 79% since December 2009 – drilling companies are increasingly looking to ship crude by rail due to constraints on pipeline capacity. With the temporary closure of a Phillips 66 refinery in Borger, Texas, production now exceeds takeaway capacity by approximately 300,000 barrels per day. Producers are trying to make up the difference by shipping the crude out by rail to avoid steeper discounts in oil prices. West Texas Sour crude has already fallen by $11.50 per barrel when compared to West Texas Intermediate. Resorting to the rails, however, is expected to be a temporary measure. The Phillips 66 refinery is expected to return to service within a month and new pipeline projects by Occidental, Plains All America and others are expected to add another 700,000 barrels per day in takeaway capacity by 2015.

API introduces guidelines for community relations. Industry group American Petroleum Institute has published community engagement guidelines to serve as best practices for companies working in shale plays. The guidelines will help companies address community concerns responsibly and enhance the long-term benefits of development to local communities. The guidelines call for drillers to communicate with local residents and municipalities regarding environmental, health and safety practices throughout the drilling and production process. The guidelines provide a framework for addressing issues that arise during active shale development, such as from increased truck traffic and resulting impacts on local roads, as well as to better ensure residents that wells are safe even after the drilling rigs are gone. The guidelines have taken on more importance with the growing movement for local governments to exert more power over limiting, or even outright banning, hydraulic fracturing.

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