10 May 2016

Sidley Shale and Hydraulic Fracturing Report

Vol. 5, No. 19

Topics discussed in this week’s Report include:

  • Nongovernmental organization suit seeks EPA rulemaking for oil and gas wastes.
  • PHMSA begins work on regulations for underground natural gas storage.
  • Colorado Supreme Court quashes hydraulic fracturing ordinances.
  • Pennsylvania state House committee votes to block new oil and gas rules.
  • Halliburton and Baker Hughes drop merger plans.
  • Sabine Pass starts full operations.
  • Report: Proposed Pennsylvania shale gas tax highest in producing states.
  • Staff report recommends changes at the Texas Railroad Commission.

Federal

Nongovernmental organization suit seeks EPA rulemaking for oil and gas wastes. Several environmental groups filed suit in federal district court in Washington, D.C. seeking an order compelling the U.S. Environmental Protection Agency (EPA) to issue new rules regulating oil and gas waste wastes under the Resource Conservation and Recovery Act (RCRA). The suit contends EPA has not performed an alleged mandatory duty to review its current subtitle D RCRA regulations for oil and gas wastes since 1988, purportedly in violation of a requirement to conduct a regulatory review every three years. The groups claim that the growth in oil and gas development using hydraulic fracturing has resulted in a significant increase in wastes that contain constituents of concern — and, according to the complaint, that waste is not being managed safely using existing disposal methods.

PHMSA begins work on regulations for underground natural gas storage. The Pipeline and Hazardous Materials Safety Administration (PHMSA) is working on new regulations governing underground natural gas storage facilities. The move is widely seen as a response to a gas leak from an underground storage facility in Southern California, prompting the governor to declare a state of emergency and the evacuation of thousands of homes. According to PHMSA, the number of leaks from storage facilities has increased since 2001, and rules creating minimum safety and operating standards need to be put in place. The agency contends it has the authority to regulate storage facilities, although it has never before set standards or conducted inspections. Instead, only state agencies have regulated natural gas storage facilities.

States

Colorado Supreme Court quashes hydraulic fracturing ordinances. In closely watched cases, the Colorado Supreme Court found that state law preempted ordinances by both Fort Collins, Colorado (imposing a five-year moratorium on hydraulic fracturing) and Longmont, Colorado (banning it outright). The state’s highest court ruled that the ordinances materially impeded implementation of Colorado’s Oil and Gas Conservation Act which prioritized oil and gas development subject to uniform safety, environmental and health regulations established by the Colorado Oil & Gas Conservation Commission. The court found that there was still room for local regulation of land use that affects oil and gas regulations, but that outright bans or moratoria directly conflicted with the state legislature’s intent for how oil and gas development should be regulated. Both ordinances were adopted by ballot initiatives. Environmental groups that organized the ballot initiatives and helped defend the ordinances criticized the decision as an affront to self-government and are organizing statewide ballot measures to allow direct municipal regulation of hydraulic fracturing.

Pennsylvania state House committee votes to block new oil and gas rules. The House Environmental Resources and Energy Committee approved a resolution that would block new Pennsylvania Department of Environmental Protection (DEP) rules for hydraulically fractured and conventionally developed oil and gas wells. Opponents of the new Chapter 78 and Chapter 78a rules have criticized the rules, arguing DEP exceeded its authority under state statutes and a State Supreme Court decision. Among the new requirements imposed on oil and gas drillers are a ban (with some exceptions) on the use of waste impoundments, new reporting obligations and a new requirement for drillers to survey several types of public resources near well sites. Critics allege that Pennsylvania DEP also violated several procedural requirements in issuing the new rules. To stop the regulations, the resolution must be passed by both the full House and State Senate.

Business

Halliburton and Baker Hughes drop merger plans. After opposition by the federal government, Halliburton dropped its pursuit of a merger with Baker Hughes. The $34.5 billion merger would have created the world’s second-largest oil field service company. The companies believed the deal — originally proposed in November 2014 — was necessary to increase efficiency as falling crude prices reduced the need for oil field services. But the U.S. Department of Justice sued the companies in April 2016 arguing that the merger would create a near monopoly for some services and raise prices. Halliburton offered to divest $7 billion in businesses, but that did not satisfy the federal government. Abandoning the merger will cost Halliburton $3.5 billion in a breakup fee. Baker Hughes announced that it will use the proceeds to buy back stock and pay down debt, while both companies continue to reduce their workforces and other costs.

Sabine Pass starts full operations. Cheniere Energy filed a notice with the Federal Energy Regulatory Commission that Train 1 of its Sabine Pass liquefied natural gas (LNG) export terminal has started full operations. It is the first U.S. export terminal to export LNG. Sabine Pass was originally designed as an import terminal, but company management decided to reconfigure the facility for export in 2010, as hydraulic fracturing and horizontal drilling were creating an abundance of low-priced natural gas in the U.S. The move forced the Department of Energy to develop a process for reviewing applications to export LNG to countries without a free-trade agreement with the U.S., as well as for conducting National Environmental Policy Act reviews of the potential environmental effects of LNG export terminals. Sabine Pass is constructing five more liquefaction trains that are scheduled to be completed in 2018. Cheniere Energy reported that approximately 87 percent of that future capacity is already under long-term contract for supply.

Studies

Report: Proposed Pennsylvania shale gas tax highest in producing states. Pennsylvania’s Independent Fiscal Office released its analysis of Governor Tom Wolf’s proposal to increase the severance tax on shale gas wells, concluding that the tax would be the highest among states with significant gas production. The proposed 8.5 percent tax rate on the lifetime production of a typical Marcellus Shale gas well would eclipse Oklahoma’s 5.4 percent tax rate as the highest in major gas-producing states. The Independent Fiscal Office estimates that Pennsylvania gas production would decrease by approximately 8 percent if the tax increase is enacted. Under its current shale gas well impact fee system, Pennsylvania and Ohio have the lowest effective tax rate at 1.1 percent. Governor Wolf responded that the analysis overestimates the proposed Pennsylvania tax rate by omitting other taxes required in competing gas-producing states and that additional revenues are required to fund education programs. Industry groups criticized the proposal, arguing that it would make Pennsylvania less competitive with lower-cost gas-producing states.

Staff report recommends changes at the Texas Railroad Commission. The Texas Sunset Advisory Commission published a staff review proposing a number of changes at the Texas Railroad Commission (RRC). Among other proposals, the report urges that the name of 125-year-old RRC be changed to the Texas Energy Resources Commission to better reflect the agency’s current role. Further, the staff recommend that to improve confidence in the impartiality of the process, the RRC should transfer administrative hearings on permitting and enforcement to the State’s Office of Administrative Hearings instead of maintaining RRC’s own group of administrative law judges and technical staff. The report also urged changes to the RRC’s enforcement approach, where companies are typically not fined if violations are corrected, arguing there was little data showing that this deterred violators. Further, the staff recommend amending statutory requirements for oil and gas well operators to provide financial assurance to cover the cost to plug and remediate abandoned wells, finding the existing bonding levels were insufficient and contributing to a large backlog of abandoned wells. A staff report is only a first step in the process, as the full advisory commission must still conduct hearings and deliberate on the proposals, which may then submit an updated report to the state legislature for its consideration.

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