30 March 2015

Sidley Shale Gas and Hydraulic Fracturing Report

Vol. 4. No. 13

Federal

Congress Pursues Bills to Block BLM Rule While Industry and States File Suit. Arguing that recent Bureau of Land Management (BLM) rules for hydraulic fracturing on federal lands would stifle economic development, Senator James Inhofe (R-OK) and 26 co-sponsors introduced a bill to block the new rule. House Majority Leader Kevin McCarthy (R-CA) stated that similar legislation is being formulated in the House. In 2013, the House passed a bill that would prohibit federal rules where hydraulic fracturing was already regulated under state law. Two industry groups and the state of Wyoming have already filed suit to vacate and remand the BLM rulemaking. Filed in Wyoming federal district court, the complaints argue that BLM lacks the statutory authority to enact the rules, and that the rules violate the Safe Drinking Water Act and are otherwise arbitrary and capricious. According to congressional testimony by BLM Director Neil Kornze, Wyoming’s lawsuit has prompted negotiations with the state regarding whether BLM would grant a variance from the federal rules for drilling within the state. Other states, industry associations, Indian tribes and environmental groups may also file suit challenging the rule.

BLM Works to Issue Variances. BLM Director Kornze told the House Natural Resources subcommittee that BLM hopes to have identified states that will receive variances from Bureau regulations governing hydraulic fracturing on federal lands by late June 2015, when those regulations go into effect. Under the new rule, BLM will waive federal regulations when state rules are equivalent or more protective of public health and the environment. He hopes that quick determinations will provide certainty for the oil and gas industry, which has voiced skepticism over the variance process. Oil and gas trade associations that have sued to block the rule have expressed concern that the variance process could be used to pressure states into conforming their own regulations to the BLM rule.

PHMSA Presses Criminal Enforcement for Gas Pipelines. The Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA) announced that it would begin a criminal enforcement initiative for violations related to gas pipeline construction. PHMSA’s regulations govern pipeline safety during pre-construction and construction activities. PHMSA stated that it would begin working with EPA and the U.S. Department of Justice to identify the “highest-risk operators” and file criminal cases against “willful violations” of PHMSA standards.

Department of Energy: Relationship Between Bakken Oil and Rail Explosions not Established. A report by the U.S. Department of Energy (DOE) found that a relationship between light, sweet Bakken crude oil and combustion after a rail car derailment has “not been established.” Although the U.S. Department of Transportation continues to work on crude oil rail safety regulations, DOE found that there were not enough data to show that Bakken crude has a significantly higher vapor pressure compared to other U.S. crudes. Despite conducting the most comprehensive survey of Bakken crude to date, DOE reports that more research is still required to compare samples with conventional crude oil. The DOE finding contrasts with a July 2014 PHMSA study concluding that Bakken crude has a higher gas content, higher vapor pressure and lower flash point than other crudes. Based on the PHMSA study, some members of Congress have called for regulations to require “stabilization” of Bakken crude before shipping it by rail.

States

Hydraulic Fracturing Bills Advance in Maryland. Two bills on hydraulic fracturing have advanced in the Maryland General Assembly. A House of Delegates bill would prohibit the state from issuing any permits to authorize hydraulic fracturing for three years. A Senate bill would allow hydraulic fracturing to proceed, however, drilling companies would be subject to strict liability for environmental injuries and would be required to carry at least $1 million in general liability insurance. Maryland has been subject to a de facto moratorium since 2011. The Maryland Department of Environment issued proposed regulations for hydraulic fracturing 12 days before former Governor Martin O’Malley left office. The proposed rules would require at least two years of baseline environmental data to be collected before drilling could begin. The current Governor, Larry Hogan, has generally supported hydraulic fracturing but has not taken a position on either bill, nor moved to withdraw or change the proposed regulations.

New Mexico Allows Produced Water Recycling. The New Mexico Oil Conservation Commission issued a new rule that allows oil and gas companies to reuse produced water from drilling activities. The Commission cited the need to reduce fresh water use by industry and found that new technologies can allow companies to recycle byproducts found in the produced water. Although the Commission touted recycling as reducing environmental impacts, Earthworks, a group opposed to hydraulic fracturing, criticized the rule as a way to reduce costs for drilling companies. Earthworks has been lobbying to ban fresh water withdrawals by the oil and gas industry.

Business

Linn Energy to Pursue Master Limited Partnership. Linn Energy will create a master limited partnership to fund the acquisition of new oil and gas assets with $1 billion in capital provided by Quantum Energy Partners. The partnership will target companies stressed by low oil prices and looking to unload assets, including tight oil assets that have seen decreases in drilling. Under the agreement, described in press reports as a non-binding letter of intent, Linn would have interests ranging from 15 percent to 50 percent in the deals funded by Quantum. The announcement comes on the heels of previous deals by Linn in which other partners provided up to another $500 million in capital over a five-year period to pursue oil and gas acquisitions.

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