06 January 2015

Sidley Shale Gas and Hydraulic Fracturing Report

Vol. 4. No. 1

Federal

EPA Rulemaking Could Expand Clean Air Act Obligations. The Environmental Protection Agency (EPA) is planning to propose a change to its Prevention of Significant Deterioration (PSD) regulations that would “aggregate” the emissions of oil and gas wells, processing units, and related equipment into a single “major source” even where these individual sources are several miles apart. The revision would overrule a Sixth Circuit decision finding that EPA cannot aggregate geographically distant sources that must be “contiguous or adjacent” under EPA rules and rejected an informal agency interpretation that any two or more points can be aggregated if they are “functionally interrelated.” The D.C. Circuit subsequently held that the decision must apply nationwide. According to EPA, it intends to change its regulations to aggregate geographically distant emission sources in order to resolve confusion for industry and permitting authorities. Environmental groups have argued for the need to aggregate oil and gas facilities to reduce GHG emissions in light of the Supreme Court’s Utility Air Regulatory Group ruling which requires a facility to meet PSD permit thresholds for conventional pollutants as a prerequisite to limiting GHG emissions. According to EPA’s recently issued Unified Agenda, it anticipates issuing the proposed rulemaking in May 2015.

Natural Gas Association Requests Hearing on GHG Reporting Rule. The Interstate Natural Gas Association of America (INGAA) requested a public hearing on EPA’s proposed expansion of GHG reporting requirements. Under the proposal, companies would have to report GHG emissions from hydraulically fractured oil wells and blowdowns of transmission pipelines between compressor stations. In response to INGAA’s request, EPA will be holding a public hearing this week on January 8, 2015. INGAA, and other industry representatives, have raised questions on new definitions that could make entire pipeline and property systems subject to the Subpart W reporting provisions. They are seeking clarification as to where reporting systems begin and end under the definitions. The comment period on the proposed rule closes on February 9, 2015.

States

Colorado Approves Increased Penalties for Permit Violations. On January 5, the Colorado Oil & Gas Conservation Commission approved increased penalties for oil and gas permitting violations. Under the new rules, oil and gas companies could face civil penalties of $15,000 per day for permitting and environmental violations. The Commission removed a $10,000 maximum cap that had been in place for many years, but also lowered the maximum daily fines for the least serious violations, such as late filed paperwork. While the Commission limited the state director’s discretion to waive all penalties in serious cases, fines may still be reduced for operators who self-report a violation and quickly correct it.

California Issues Hydraulic Fracturing Regulations. The California Department of Oil, Gas and Geothermal Resources (DOGGR) released its much anticipated final regulations for hydraulic fracturing and well acidization, allowing DOGGR to issue drilling permits. The rules were required by SB 4, passed by the California legislature in 2013 amid a push by environmental groups to ban hydraulic fracturing within the state. Among the key provisions are those requiring well developers to notify neighboring property owners 30 days before well stimulation, test and analyze groundwater before, during, and after well stimulation, seismic testing during well stimulation, rules for the handling and storage of drilling wastes and produced water, and the reporting of both the types and volumes of chemicals used in hydraulic fracturing fluids. Under the chemical disclosure provisions, while the constituents of fracturing fluids must be reported to DOGGR, information claimed as a trade secret will not be made public. Despite objections by environmental groups, the final rules also provide for “single-project authorization,” which will allow DOGGR to authorize the drilling of multiple wells under a single permit. The regulations take effect July 1, 2015.

Business

Florida Power & Light Cleared for Hydraulic Fracturing Investments. Citing the potential to reduce future energy costs, the Florida Public Service Commission approved a request by Florida Power & Light (FP&L) to invest in an Oklahoma hydraulic fracturing operation. Under the terms of the approval, FP&L can recover the cost of a $191 million joint venture with PetroQuest Energy plus a 10.5 percent return. The Florida Office of Public Counsel opposed the request, arguing that there is no guarantee that the investment will reduce consumers’ energy prices in the future and that the rate base may be left to bear the costs of the investment, but the Public Service Commission found that a utility producing its own fuel supply could be an effective hedge against price volatility. FP&L defended the investment as being less costly than constructing a new supply pipeline from the Gulf Coast and that producing its own natural gas would eliminate markups by other companies throughout the supply chain. The decision could become important as other southeastern utilities have explored the idea of directly investing in the production of shale gas as they transition away from coal due to EPA regulations.

Oil and Gas Price Slides Impacting Shale Operations and Investments. With declining oil and gas prices, shale developers appear to be pulling back on drilling as financing becomes more challenging. Brent International finished the year at just above $55 with West Texas Intermediate closing at $53, about half of their respective 2014 highs of $115 and $105 per barrel, and the lowest since 2009. Natural gas prices are falling as well. NYMEX prices for January delivery was down nearly 30%, when compared to December 2014 trading, to $3.144 per million Btu. Drilling companies and their investors are finding that hedges, locking in a conditional floor for the sale of crude, were not designed with such low prices in mind and are providing minimal protection from price drops. Data compiled by Bloomberg claims that over a dozen private equity firms have lost a combined $11.7 billion in oil and gas company investments since June 2014’s crude oil peak. Many smaller, independent companies are highly leveraged from the past few years of easy credit and may face cash shortages in 2015. These companies are now faced with a combination of cutting capital budgets, reducing operations costs, and selling off assets, and even large independents have announced significant reductions in 2015 capital budgets when compared to 2014. Weekly surveys report reductions in the number of active oil rigs in the U.S., and the Texas Railroad Commission reported a significant decrease in permit applications to drill new wells. The Federal Reserve Bank of Dallas has predicted that drilling slowdowns could cost the industry nearly 250,000 jobs in eight oil producing states by the middle of 2015.

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