25 July 2013

This Week in Hydraulic Fracturing

Volume 2, No. 29

Federal

XTO settles alleged Clean Water Act violations. XTO, Exxon Mobil’s shale development subsidiary, settled the Environmental Protection Agency (“EPA”) claims of Clean Water Act violations related to discharges of wastewater into a tributary of the Susquehanna River in Pennsylvania. Under the consent decree, XTO will pay a $100,000 civil penalty and spend approximately $20 million on wastewater management improvements at its operations in Pennsylvania and West Virginia such as increased wastewater recycling, storage tank alarms, secondary containment, and other new equipment and operating practices.

U.S. Fish & Wildlife postpones sage grouse decision. The U.S. Fish & Wildlife Service (“FWS”) has delayed until March 2014 its decision whether to list the Gunnison sage grouse as an endangered species. Listing the bird as endangered would restrict businesses, ranching, and residential development in Colorado and Utah. In a proposed rulemaking, FWS has stated that residential and infrastructure development is destroying the bird’s habitat and outlined plans to designate 1.7 million acres as critical sage grouse habitat. Environmental groups blame shale development for degrading the bird’s habitat. In delaying its decision, FWS cited “substantial disagreement” regarding population data, residential growth projections, the success of existing conservation measures, and other relevant considerations.

NGOs may challenge BLM oil and gas leases. Several environmental groups have filed a protest claiming the U.S. Bureau of Land Management (“BLM”) recent oil and gas lease sales in New Mexico’s Otero County were performed under a deficient resource management plan. BLM has acknowledged that the White Sands plan, prepared in 1986 before the common use of horizontal drilling with hydraulic fracturing, is “insufficient for the management of the resource.” A challenge to BLM’s previous attempt to update the plan was sustained by the Tenth Circuit; however BLM said that it carefully examined the parcels in this sale to make sure there would be no significant impacts to wildlife or drinking water resources.

States

Hess, Newfields cancel leases in Northeast Pennsylvania. A joint venture between Hess Corp. and Newfield Exploration Company cancelled leases on parcels within the jurisdiction of the Delaware River Basin Commission. The companies stated there were business reasons for the cancelation, although the Commission’s continuing moratorium on the use of hydraulic fracturing while it considers draft regulations governing development in the area presumably contributed to the action. The Northern Wayne Property Owners Alliance had negotiated a master lease on behalf of approximately 1,300 landowners who had received approximately $150 million in front payments. The cancelation cost the landowners approximately $187 million in anticipated future royalty payments.

Oregon moves to challenge FERC’s LNG terminal siting authority. The Oregon Department of Energy and other state agencies moved to intervene in proceedings regarding Oregon LNG’s application to build a $6.3 billion LNG export terminal on the Columbia River in Warrenton, Oregon. Oregon opposes FERC’s use of its conditional order authority to make siting determinations, arguing the orders are contrary to state law, as well as the Clean Air Act and Clean Water Act. Oregon previously petitioned for review of a 2009 FERC conditional order authorizing a different LNG terminal. The Ninth Circuit found the applicant’s bankruptcy mooted the challenge and declined to reach the merits.

NGOs prepare to sue Pennsylvania treatment company. Clean Water Action issued a notice of intent to sue Waste Treatment Corporation for alleged violations of the Clean Water Act, Endangered Species Act, and Pennsylvania’s Clean Streams. The group claims sampling of the Allegheny River by Pennsylvania DEP proves unlawful discharges of drilling wastewater, as shown by allegedly elevated levels of salts, metals, and naturally occurring radioactive materials. The company denied the allegations and stated it was operating in compliance with its permit.

Research

DOE study finds no evidence that fracturing fluid impacts aquifers. Researchers that recently concluded a year long study by the U.S. Department of Energy (“DOE”) have preliminarily determined that there is no evidence that chemicals in hydraulic fracturing fluid migrated into aquifers. Instead, the chemicals stayed trapped in the well bore 8,000 feet below ground. DOE researchers tagged fracturing fluid chemicals with a marker before injection at a western Pennsylvania drill site. After a year, the chemicals had not been detected at a monitoring zone 5,000 below ground, or about a mile beneath shallow aquifers used for drinking water supplies. The results will be officially published within a few months.

International

Chevron signs on to develop Argentina shale play. Chevron has agreed to a joint venture with Argentina’s state-owned oil company Yacimientos Petroliferos Fiscales (“YPF”) to develop the country’s Vaca Muerta shale formation. Under the agreement, Chevron will spend $1.24 billion to drill approximately 100 wells with each company receiving 50% of the proceeds. This is Argentina’s first deal with a foreign company since the government took over YPF from Spain’s Repsol S.A. last year. Repsol is suing Argentina for $10.5 billion and has promised to sue any companies that do business with YPF, including Chevron. The U.S. Energy Information Administration estimates that Argentina has the third largest shale gas reserves in the world.

U.K. considering incentives for shale development. To incentivize development, the U.K. government is considering reducing the tax on income from shale gas, as well as a plan to offer municipalities £100,000 per well site plus up to 1% of production revenues. Environmental groups criticized the plan, arguing that hydraulic fracturing carries environmental risks and should not be encouraged. The British Geological Survey has estimated the U.K. may have 1,300 trillion cubic feet of shale gas, with most of it concentrated in Lancashire’s Bowland Basin. Although some in industry have estimated that only 10% of the reserves are technically and economically recoverable, that would still boost energy security in a country that consumes approximately three trillion cubic feet of gas per year.

Hollande: no hydraulic fracturing in France. In a television interview, French President François Hollande declared that there will never be hydraulic fracturing in France so long as he is president and that debate over its future is over. France banned hydraulic fracturing in 2011, but there has been a recent industry push to allow for development bolstered by a parliamentary commission recommending a reassessment of the policy. The push had gained enough momentum that commentators speculated that former Environmental Minister Delphine Batho was fired for her criticisms of hydraulic fracturing. President Hollande denied the speculation, appointing Phillippe Martin as the new Environmental Minister who is equally as critical of hydraulic fracturing as his predecessor.

OECD begins examination of fracturing fluid chemicals. The Organization for Economic Cooperation and Development (“OECD”), an influential international economic organization, approved a study of data availability regarding potential hazards of chemicals commonly used in hydraulic fracturing fluids. OECD will also survey member countries, including the United States, to determine how they assess fracturing fluid chemicals. Future projects may include developing methodologies for estimating environmental exposure to the chemicals.

Business

Developers exploring Devonian shale. A number of companies—Consol Energy, Rex Energy, and Range Resources—are now exploring the Upper Devonian shale and sandstone layer lying a few hundred feet above the Marcellus Shale play. Consol recently drilled a 12,490 foot exploration well into the Upper Devonian in Western Pennsylvania, an area where the Marcellus shale, Utica Shale, and Upper Devonian are stacked on top of each other. Although the exploratory well produced about a third of the gas found in a typical Marcellus well, the companies stated that the Upper Devonian is seen as a potential long-term shale play.

Natural gas liquids supply pushing down prices. Natural gas liquids (“NGLs”), such as propane, butane, and ethane, have become as abundant as methane, but customer demand has not yet absorbed the new supply. Wells Fargo Securities estimates NGL production will jump to 950 million barrels per day, compared to 210 million barrels per day in 2012. NGLs are used to manufacture plastics and specialty chemicals and companies are building plants or export terminals to take advantage of the supply. These new demand sources, however, will not begin operating until at least 2016. Until then, abundant supply has pushed down ethane prices from $15.88 per MMBtu in 2011 to $9.50 per MMBtu in March 2013.

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