19 September 2013

This Week in Hydraulic Fracturing

Volume 2, No. 37, September 9, 2013 to September 15, 2013

Federal

Dep’t of Energy approves Cove Point LNG export terminal. Dominion Cove Point LNG’s application to export liquefied natural gas (“LNG”) was the fourth approved by the U.S. Department of Energy’s (“DOE”) Office of Fossil Energy. The company proposed to convert its Lusby, Maryland LNG import terminal into an export terminal at a cost of $3.8 billion. Cove Point could begin construction as early as 2017, provided the company obtains FERC approval and several state permits over expected opposition from the Sierra Club and other environmental groups. Sen. Ron Wyden (D-Or.), Chair of the Senate Energy & Natural Resources Committee, noted that 6.37 billion cubic feet of gas per day has been approved for export and suggested additional approvals may face resistance from Congress unless applicants establish that further export terminals are in the public interest. Sen. Wyden and others have expressed concerns that gas prices could increase for domestic manufacturers unless exports are limited.

EPA withdraws rule that would have disclosed trade secrets. EPA withdrew a proposed rule under the Toxic Substances Control Act which would have disclosed the identity of all chemicals in health and safety studies, even if they were protected as confidential trade secrets. Currently, all new chemicals must be registered with EPA, along with related health and safety studies, but when a company designates a chemical as a trade secret, its identity is redacted from studies released to the public. This protection is important to the oil and gas service industry, which frequently creates new chemicals for use in their processes to improve hydraulic fracturing fluid. Environmental groups criticized EPA’s decision, arguing that redactions make the health and safety studies less valuable to the public.

House Members comment on proposed hydraulic fracturing rule. Over a dozen House Members urged the Department of Interior to adopt components of the prior draft U.S. Bureau of Land Management (“BLM”) rule on hydraulic fracturing on federal lands. Claiming that the prior proposed rule struck a better balance between development and protecting public health, the Members urged BLM to prohibit the use of lined pits to contain wastewater, require chemical disclosure before wells are stimulated, impose more stringent well cement logging requirements, and ban hydraulic fracturing in “sensitive areas.” By contrast, Rep. Rob Bishop (D-Utah) wrote the National Park Service (“NPS”) arguing that NPS comments on methane leakage at hydraulically fractured wells were not based on the best available science and presented opinions as facts, contrary to federal policy. NPS had cited in its comments an op-ed for the New York Times by Cornell professor Anthony Ingraffea claiming that methane leakage was as high as 17%. Claims of high methane leakage have been disputed in other academic studies and by DOE.

Water providers resist development in George Washington Nat’l Forest. The U.S. Forest Service is considering whether to ban hydraulic fracturing in the George Washington National Forest, which spans portions of Virginia and West Virginia. Local water providers support a ban, arguing that too little is known about the potential for hydraulic fracturing to contaminate groundwater to allow development in the National Forest and that the Forest’s proximity to the Potomac and James River headwaters is a further reason to support a ban. The oil and gas industry has opposed the ban, contending that it would set a bad precedent and needlessly prevent the development of a valuable resource.

States

California passes bill regulating hydraulic fracturing. The California legislature passed a bill regulating hydraulic fracturing in the State, and Governor Jerry Brown is expected to sign the bill. Among other requirements, companies using hydraulic fracturing would have to notify nearby landowners, test groundwater before starting a fracturing job and disclose chemicals used in fracturing fluids that are not confidential trade secrets. Four large environmental groups pulled their support from the bill, however, after an amendment (sought by Gov. Brown) was adopted that would streamline review of individual well permits under the California Environmental Quality Act. An Environmental Impact Report (“EIR”) will not be required for every well permit; rather, the California Department of Conservation’s Division of Oil, Gas and Geothermal Resources will do a state-wide EIR that examines the potential effects of hydraulic fracturing. The Western States Petroleum Association has also publicly opposed the bill.

XTO Energy indicted for wastewater disposal. The Pennsylvania Attorney General obtained an indictment charging that XTO Energy illegally discharged wastewater containing chlorides, barium, strontium, and aluminum. XTO allegedly stored wastewater at a well site in mobile storage tanks without the proper equipment to safely store or process it in violation of the state’s Clean Streams Law and Solid Waste Management Act. A Pennsylvania Department of Environmental Protection inspector allegedly found that wastewater had discharged from an open storage tank valve onto the ground. The indictment also claims XTO allegedly failed to properly secure the site from unauthorized access, implement a spill containment system, and discharged wastewater without a permit. XTO has responded the spill was a minor accidental release resulting in no environmental harm. XTO had already entered into a federal consent decree arising out of the incident, agreeing to pay a $100,000 civil fine and spend $20 million to upgrade its wastewater handling practices.

Ohio town reconsidering ordinance banning hydraulic fracturing. Three weeks after passing an ordinance prohibiting hydraulic fracturing within city limits, the Niles, Ohio City Council may rescind the ban. During a town meeting, council members opined that the ordinance might violate state and federal law and lead to unintended consequences, such as prohibiting the city from selling water. The council will consider whether the ordinance should be rescinded or amended to avoid legal action.

No timetable for hydraulic fracturing decision in New York. Testifying before the New York Assembly’s Environmental Conservation Committee, the New York Department of Environmental Conservation (“DEC”) deputy commissioner, Anne Reynolds, stated that the DEC is still reviewing comments from its 2011 draft Supplemental Generic Environmental Impact Statement (“SGEIS”) for hydraulic fracturing. The draft SGEIS attracted over 100,000 public comments and DEC does not know when it will complete its review of those comments. Even when that review is completed, the state Department of Health (“DOH”) is still conducting its own study on hydraulic fracturing. DOH announced in February 2013 that its study would be completed within a few weeks but it has yet to issue a draft. New York has now effectively had a moratorium on hydraulic fracturing for six years.

International

British Minister: shale gas is vital to energy mix. British Secretary of State for Energy and Climate Change, Ed Davey, stated that shale gas development is vital to energy diversity in Britain and could bring a major economic boost as well. Although he warned that shale gas is not a “silver bullet,” it could ease the country’s heavy reliance on imported natural gas. The UK’s Department of Energy and Climate Change recently released a report finding that overall carbon emissions from UK shale gas would be lower than importing LNG from Qatar, and Davey stated the findings should “reassure environmentalists” that domestic shale gas development would reduce overall GHG emissions. The UK has not yet moved beyond preliminary exploration despite recent tax cuts for developers and the promise of abundant gas. Because there are no privately-owned mineral rights local planners must approve development, making protests against hydraulic fracturing a more effective way to influence municipal decision makers.

Environmental groups move to block shale development in Argentina. Despite facing an energy crisis, activists are seeking a 10-year ban on shale development in Argentina, claiming hydraulic fracturing will pollute groundwater and cause earthquakes. The Argentine Association of Environmentalist Attorneys, one of the groups seeking the moratorium, also cited the $19 billion judgment against Chevron in Ecuador for environmental contamination as a reason to ban shale exploration. The group claims hydraulic fracturing cannot be done safely and is rallying municipal lawmakers to block drilling and lead protests, including one that led to a significant clash with police. The U.S. Energy Information Administration (“EIA”) estimates that Argentina has the world’s second largest shale gas reserve, enticing Chevron to sign a $1.24 billion development deal with the country despite Argentina’s recent re-nationalization of YPF S.A., seizing the company from Spain’s Repsol S.A. Chevron and YPF will jointly drill over 100 exploratory wells in the Vaca Muerta field over the next year. Argentina is currently importing up to $15 billion in oil and gas per year.

Business

LNG exporters targeting small shipments. Argent Marine Management is the next company up for DOE review for exporting LNG. Unlike other applicants, however, it will not use a multi-billion dollar LNG export terminal to move product. Argent Marine, working with shipping company A.P. Moller Maersk, will export up to a billion cubic feet of LNG per year in truck-sized cargo containers. Pivotal LNG will compress the gas from its existing Trussville, Alabama plant and the containers will be hauled to ports in Houston, Jacksonville, and Norfolk. The containers would be destined for smaller LNG markets, such as the Dominican Republic, instead of Asia or Europe. Further, Argent Marine is only seeking to do business in countries that have a free-trade agreement with the U.S., bypassing the controversial review required for non-free trade countries. Similar approaches were submitted by Advanced Energy Systems (which pulled and then re-submitted its export application) and Venture Global LNG.

Shale gas prompted $84 billion in U.S. investment. The American Chemistry Council, which keeps a database of new chemical plants and expansions, touted shale gas development as leading to 126 new projects and $84.4 billion in U.S. investments. According to the trade association’s Weekly Chemistry and Economic Report, over half of that investment came from foreign companies.

Research

Fed: Permian Basin driving regional economy. The Federal Reserve Bank of Dallas issued a report on the economies of Texas and New Mexico, concluding that Permian Basin shale development has led to two of the best performing economies in the nation. Eddy and Lea Counties in New Mexico, underlying the Permian Shale play, outperformed the rest of the state. Unemployment in those counties was 3.7%, compared to the New Mexico state average of 6.7% (national unemployment is at 7.4%). Both showed job growth more than double the national average of 1.6%. Texas also experienced job growth well above the national average with state-wide unemployment at 6.5%. The lowest unemployment rates in the state were near the Permian Basin.

Academic predicts downturn in shale development. University of California-Davis professor, Amy Myers Jaffe, has published a paper predicting a steady decline in oil prices within three to five years. She predicts that continued unrest in the Middle East will prevent large oil producers like Saudi Arabia from cutting production because they will need revenue for military preparation and deployment. Combined with declining international demand due to a rising dollar, increasing fuel economy standards, and reduced driving in the U.S., Jaffe predicts that oil prices could fall below the threshold which makes shale development profitable. Jaffe is best known for correctly predicting oil prices would fall dramatically in the 1980’s, contributing to large losses and a number of mergers between large North American oil companies.

EIA: U.S. crude production highest since 1989. In its latest Short-Term Energy Outlook, EIA reported that August crude oil production hit an average of 7.6 million barrels per day, the highest output since 1989. EIA analysts predict that average daily production should rise to 8.4 million barrels per day by the end of 2014. Increasing U.S. crude oil production was welcomed by the International Energy Agency, which has reported not only more demand for oil than it had previously anticipated, but 2.7 million barrel per day decrease in crude oil output in August from Libya and other OPEC countries.

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