10 September 2013

This Week in Hydraulic Fracturing

Volume 2, No. 36

Federal

Comments sought on new crude oil tank car regulations. The Pipeline and Hazardous Materials Safety Administration (“PHMSA”) announced that it would take public comments on petitions seeking new crude oil rail car integrity standards, citing a July explosion in Quebec when an unattended train derailed. The train was hauling several DOT-111 crude oil tank cars from the Bakken Shale play. Among the options PHMSA is considering will be to make the American Association of Railroads’ new industry standards for DOT-111 cars mandatory. Companies have been building DOT-111 cars to that standard since October 2011. It will also take comment on requiring modifications to older DOT-111 cars. The American Association of Railroads has publicly opposed requiring the modifications, calling them technically infeasible and costing over $1 billion. The comment period will close in 60 days.

Employee pleads guilty to illegally pouring hydraulic fracturing wastewater down storm drains. Michael Guesman, an employee of Youngstown, Ohio’s Hardrock Excavating LLC, pleaded guilty in federal court to illegally pouring thousands of gallons of hydraulic fracturing wastewater down a storm drain which flowed to the Mahoning River. Charges are still pending against Hardrock Excavating and its owner, Benedict Lupo. According to the indictment, Lupo ordered employees to pour wastewater from the company’s storage facility down the storm drains after dark. The practice lasted for at least three months until the Ohio Department of Natural Resources received an anonymous tip. Inspectors found puddles of oil in a tributary to the Mahoning River and traced it to Hardrock Excavating’s storage facility.

Suit challenges BLM leases in Michigan under NEPA. Two Michigan residents filed suit in federal court asking a judge to prohibit the U.S. Bureau of Land Management (“BLM”) from leasing blocks of federal land for oil and gas development, arguing BLM failed to review alleged environmental issues related to hydraulic fracturing under the National Environmental Policy Act (“NEPA”). Specifically, the suit argues that BLM failed to examine the impacts of water usage by hydraulic fracturing and the management of wastewater. According to the suit, BLM also violated NEPA by not examining the potential impacts of oil and gas development on the endangered Indiana bat and Karner blue butterfly. The Center for Biological Diversity has also sent BLM a 60-day notice letter stating it likewise intends to filed suit in an attempt to stop the lease sale.

States

Antero Resources appeals decision prohibiting Lone Pine orders. Antero Resources petitioned the Colorado Supreme Court to review a lower court decision striking down the use of Lone Pine orders, arguing that the decision stops trial courts from exercising discretion to tailor discovery proceedings in toxic tort cases. Lone Pine orders can require plaintiffs to provide basic evidence supporting their allegations before discovery commences. In this case, the trial court ordered plaintiff William Strudley to provide preliminary medical testimony establishing that his alleged injuries exist and that they could be attributed to drilling by defendants Antero Resources, Frontier Drilling, and Calfrac Well Services Corporation. When Strudley failed to provide sufficient evidence, the trial court dismissed the case. The Court of Appeals reversed, finding Colorado law did not provide for Lone Pine orders and that trial courts do not have the discretion to modify basic discovery procedures.

Loveland Colorado rejects challenge to hydraulic fracturing ballot initiative. The Loveland, Colorado city clerk issued an order upholding the city’s approval of a ballot initiative that seeks to impose a two year moratorium on hydraulic fracturing within Loveland. A resident had challenged the approval, arguing it violated the city’s single-subject rule. Unless the resident appeals the ruling, the ballot initiative will go forward in November 2013.

California hydraulic fracturing bill passes out of committee. California Senate Bill 4, which would regulate hydraulic fracturing, passed out of the Assembly Appropriations Committee by a 12-5 vote. Among other things, the bill would require companies to disclose the chemicals used in hydraulic fracturing fluid, require notification of nearby residents before drilling begins, and mandate groundwater testing. Acid stimulation, a well stimulation method used in California, would also be covered by the bill. Environmental groups generally support the bill, but are still lobbying to exclude confidentiality protections for hydraulic fracturing fluids that are company trade secrets. The Western States Petroleum Association opposes this bill. The current legislative session ends on September 13, 2013.

International

Dutch ministry study supports hydraulic fracturing. The Dutch Ministry of Economic Affairs released a study finding that environmental concerns from hydraulic fracturing can be “easily controlled” and that the government should consider allowing exploratory drilling to gauge the country’s potential for shale development. The Netherlands is heavily dependent on natural gas but hydraulic fracturing is opposed by environmental groups, a group of university professors, and Netherlands’ largest water supplier. Dutch bank Rabobank previously stated that it would not provide any financing for gas development using hydraulic fracturing due to claims of environmental harm, but the bank announced that it is now re-assessing its position. The Netherlands Commission for Environmental Assessment will evaluate the study and make recommendations on exploratory drilling to Parliament. The country imposed a moratorium on hydraulic fracturing in 2011.

Business

Fourth Circuit sides with Chesapeake in waste disposal suit. The Fourth Circuit held landowners failed to provide sufficient evidence that Chesapeake Appalachia’s waste disposal pits imposed a substantial burden on their property. Chesapeake owned the mineral rights for the land owned by Martin and Lisa Whiteman. Under a permit issued by the West Virginia DEP, Chesapeake disposed of drilling wastes in pits on ten acres of the Whitemans’ 101 acre property without paying for the use of that property. The Whitemans alleged the pits constituted a trespass, but the court ruled that, as the mineral rights owner, Chesapeake was entitled to use a portion of the surface land for its operations unless it caused a “substantial burden.” Chesapeake presented expert testimony that the disposal pits would not endanger the Whitemans or the sheep raised on their ranch, and both the trial and appellate court found the Whitemans’ testimony that they feared future contamination insufficient to establish the necessary showing of burden.

Chesapeake settles class action over royalty deductions. A class of Pennsylvania landowners won $7.5 million in a settlement with Chesapeake Appalachia LLC for what they claimed were excessive deductions from their royalty payments. Chesapeake had charged landowners for post-production costs, such as gathering, processing, and transporting the gas for sale. Under the settlement, reached after a two month mediation, landowners will pay reduced processing and transportation costs. Chesapeake is facing similar suits in Kansas, Texas, and Ohio.

Chesapeake settles leasing dispute with New York landowners. New York landowners and Chesapeake Energy Corporation have settled a dispute over the company’s attempt to extend leases providing development rights. Plaintiffs had claimed that Chesapeake sought to extend the lease terms, citing the state-wide moratorium on the use of hydraulic fracturing as a force majeure event that allowed for an extension without re-negotiating lease terms. The landowners filed suit disputing Chesapeake’s claim and prevailed in federal district court. Chesapeake appealed to the Second Circuit before the negotiations led to the settlement. The terms have not been disclosed, but the landowners had argued Chesapeake had gained rights to 12,000 acres at low prices because the leases were signed before the Marcellus Shale boom and that they could negotiate much better terms with other companies, despite the moratorium.

Carrizo sells off dry gas assets. Houston’s Carrizo Oil & Gas, Inc. agreed to sell its dry gas assets to unnamed buyers for $268 million. The sale was part of the company’s strategy to liquidate its dry gas holdings and invest more in oil-rich shale plays such as Texas’ Eagle Ford play and Colorado’s Niobrara Formation. Carrizo previously sold off its Barnett and Marcellus assets to raise money for its new investments.

Company to experiment with using natural gas to stimulate wells. New York’s Expansion Energy LLC is working toward field testing the use of hydraulic fracturing with a foam made primarily of natural gas instead of hydraulic fracturing fluid. The company stated that its experimental method would not require large amounts of water, which is scarce in the American Southwest, and would eliminate wastewater that must be treated or injected underground for disposal.

Institute may set training and assessment standards for well workers. The International Association of Drilling Contractors announced the formation of The Well Control Institute which will develop training and assessment standards for well service company employees. The Institute would begin training next year, covering safety and environmental practices for workers at both onshore wells and offshore rigs. Training would be provided for all positions in a well service crew, ranging from floor hands to supervising engineers.

Research

Natural gas development provides significant benefits to low income families. Natural gas brokerage firm Mercator Energy has prepared an analysis showing that the decline in natural gas prices, dropping from an average of $7.20/MMBtu during 2003-2008 to $2.80/MMBtu in 2012, produced $32.5 billion in savings in 2012 on the roughly 7.4 billion MMBtus used for home heating and electricity. Mercator also found the savings disproportionately benefitted lower low-income households who spend a higher portion of their family income on heating and electricity, estimating that low income families in the U.S. saved approximately $10 billion in 2012 as a result of lower energy costs. When industrial users are included, the analysis found the savings to all natural gas consumers was approximately $110 billion.

Sustainability Institute study: hydraulic fracturing will provide little economic boost. The University of Michigan’s Graham Sustainability Institute released a study concluding that the potential environmental impacts of hydraulic fracturing make whatever economic benefits to the state inconsequential. Hydraulic fracturing has been used in Michigan for years in about 12,000 vertical wells but the state’s Antrim Shale play brings the prospect of widespread horizontal drilling. Despite Michigan’s 8.8% unemployment rate, the fifth highest in the country, the study asserts the potential for environmental harms from the practice “significant,” citing potential for surface water contamination, habitat fragmentation, groundwater depletion, air pollution, increased traffic accidents, and stress to surrounding residents. By contrast, it estimated that any new employment from the oil and gas industry would be modest, citing low natural gas prices as the reason why there is unlikely to be substantial investment in the state.

Barclays: oil prices to stay high in 2014. Barclay’s Capital released its Global Energy Outlook which anticipates that oil prices are likely to stay between $100 and $120 per barrel in 2014, citing volatility in the Middle East and Nigeria. It predicts a turnaround for struggling energy companies despite predicting that U.S. natural gas prices will remain below $4 per MMBtu. It recommended investing in North American oil companies, well service companies and pipeline developers as it estimated that U.S. oil production will increase by 1 million barrels per day in 2014.

Wood Mackenzie: Bone Spring and Wolfcamp plays could be major oil producers. According to a new report by research and consulting firm Wood Mackenzie, the Permian Basin’s Bone Spring and Wolfcamp shale plays could boost the area’s oil production by 38%. The two plays are seeing increased investment by Apache Corporation and ConocoPhillips, believing the plays could produce up to one million barrels of oil per day with stacked horizontal wells. Wood Mackenzie warned, however, that the shale plays are complex and there is still uncertainty surrounding the method of stacking horizontal wells.

If you have any questions regarding this Report, please contact us.

SHARE
EmailShare