27 January 2015

Sidley Shale Gas and Hydraulic Fracturing Report

Vol. 4. No. 4

Federal

Environmental Groups Challenge Gunnison Sage Grouse Decision. Two environmental groups filed suit in federal district court claiming the Gunnison sage grouse should have been listed by the U.S. Fish & Wildlife Service (FWS) as “endangered” under the Endangered Species Act, not “threatened.” By listing the species as threatened, FWS designated 1.4 million acres in western Colorado and southeastern Utah as critical habitat, requiring all other federal agencies to consult with FWS before authorizing any activity that could destroy or adversely modify that habitat, including oil and gas drilling. In their complaint, the groups allege FWS ignored evidence of dramatic decreases in the bird’s critical habitat warranting an “endangered” designation that would require even further land use restrictions. The State of Colorado issued a notice of intent to sue as well, arguing that the Gunnison sage grouse should not have been listed at all given extensive state and local conservation efforts.

Forest Service Reconsiders Drilling in the Gunnison National Forest. To settle a lawsuit filed by environmental groups, the U.S. Forest Service has agreed to conduct a further environmental analysis for five natural gas wells that the Forest Service had previously approved for drilling in the Gunnison National Forest. The lawsuit alleged the Forest Service improperly used a categorical exclusion under the National Environmental Policy Act (NEPA) to approve the wells without analyzing the potential environmental impacts of drilling near Little Henderson Creek, which flows to the Gunnison River. The national forest is in Colorado’s North Fork Valley, a primarily agricultural area where drilling opponents have campaigned against oil and gas development on federal lands.

NGO Challenges Pawnee Grasslands Plan. Environmental group WildEarth Guardians filed a formal objection with the U.S. Forest Service challenging the government’s Resource Management Plan for the Pawnee National Grasslands even though it would prohibit oil and gas drilling on federal lands. The objection asserts the Forest Service violated the Minerals Leasing Act by allowing leasing of 100,000 subsurface acres of underlying shale to companies that use directional drilling from private lands outside of the Grasslands’ boundaries. WildEarth Guardians claims that the drilling on private property will degrade air and water quality, noting that the Pawnee National grasslands are in an area that is not in attainment with the national ambient air quality standard for ozone. The Service has defended the plan as striking the right balance – allowing for taxpayer-owned minerals to be developed, while limiting the potential environmental impact of drilling. The Forest Service has 45 days to respond to the objection.

States

New Mexico Hydraulic Fracturing Ban Ruled Unconstitutional. In the first federal court decision to consider the legality of a local ordinance banning the use of hydraulic fracturing, a federal judge invalidated Mora County, New Mexico’s ban on hydraulic fracturing, holding that the ban is preempted by state and federal law. Voters in rural Mora County, approximately 100 miles northeast of Santa Fe, approved the ban in April 2013. Shell Western E&P filed a legal challenge to the ballot measure which, among other things, declared that corporations were stripped of their First Amendment and due process rights. The District Court found that Supreme Court precedent entitled corporations to those rights under the U.S. Constitution and that the ban itself conflicted with state law governing the development of mineral rights. The judge did, however, opine that some aspects of oil and gas operations could be regulated without running afoul of state law, such as related truck traffic, noise and operational effects that could create a nuisance to neighboring properties.

Colorado Proposes New Regulations for Oil and Gas Operations. After a September 2013 flood caused the release of 43,000 gallons of oil from well fields in the South Platte River Basin, the Colorado Oil & Gas Conservation Commission is proposing new regulations in an effort to limit or prevent similar spills. The new regulations would require remote shutoff capabilities for new wells and anchors for oil and gas well equipment located within 100-year floodplains. The rules would also impose new precautionary measures for production pits and containment berms.

Business

Kinder Morgan Acquires New Pipeline Network. Kinder Morgan agreed to purchase Hiland Partners’ 3,500 mile pipeline network, located primarily in the Bakken Shale play, for $3 billion. Hiland’s assets include 1,225 miles of oil gathering pipelines and 1,800 miles of gas gathering pipelines as well as 240 million cubic feet per day of gas processing capacity. For Kinder Morgan, the acquisition would establish not only the company’s first pipeline network in the Bakken, but would include Hiland’s long-term oil transportation contracts with Continental Resources. The deal will close in March 2015.

Novel Well Service Firm Seeks Bankruptcy Protection. GasFrac Energy Services, a Canadian firm with operations in the Eagle Ford Shale, filed for bankruptcy reorganization under Canada’s Companies’ Creditors Arrangement Act. An ancillary filing was made in U.S. Bankruptcy Court in Texas. In 2012, the company gained attention for its waterless hydraulic fracturing technique. GasFrac has utilized a propane gel and liquid petroleum gases, saving the approximately five million gallons per well stimulation. By the spring of 2013 the company had completed its 100th well in Texas. Rising debt and reduced demand for drilling services, however, saw the company unsuccessfully seek a buyer in November 2014.

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