17 October 2013

This Week in Hydraulic Fracturing

 

Volume 2, No. 41

Federal

Environmental groups challenge U.S. investment in liquefied natural gas (“LNG”) projects. The Center for Biological Diversity and other environmental groups filed suit in the U.S. to block the Export-Import Bank from funding two LNG export terminals in Australia. The Ex-Im Bank invested $2.9 billion in the Australia Pacific LNG export terminal and $1.8 billion in the Curtis LNG export terminal. The groups argue that, even though the projects are outside of the United States, Ex-Im Bank must perform an environmental impact analysis under the National Environmental Policy Act, as well as evaluate the projects’ impact on the Great Barrier Reef under the National Historic Preservation Act, before funding the projects. The groups claim various alleged environmental impacts should cause Ex-Im to withdraw its funding.

Non-governmental organizations (“NGOs”) push for ban in George Washington National Forest. Environment Virginia, Potomac Riverkeeper, and the American Hiking Society jointly urged the U.S. Forest Service to prohibit hydraulic fracturing in the George Washington National Forest. The NGOs claim that hydraulic fracturing would diminish natural views in the Virginia forest, reduce recreational opportunities, and threaten drinking water supplies for area municipalities. The Forest Service is expected to decide later this year whether it will allow hydraulic fracturing in parts of the forest which overlay the Marcellus Shale play. Approximately 12,000 acres have already been leased to oil and gas companies, but only a handful of exploratory wells have been drilled.

States

Zoning laws blocking compressor station preempted. A federal district court judge ruled that Myersville, Maryland zoning laws, used by the town council to block the construction of a compressor station, are preempted by the Natural Gas Act because the project already received a certificate of public convenience and necessity from the Federal Energy Regulatory Commission. Dominion Resources, the project developer, sued the town, seeking an injunction blocking enforcement of the zoning laws. Myersville argued that the compressor station was inconsistent with local development plans and a threat to public health, but the court held that these reasons were not within preemption exemptions found in federal environmental laws. Dominion recently won a separate suit where the D.C. Circuit compelled the Maryland Department of Environment (“MDE”) to process Dominion’s application for an air quality permit by June 2014. Because Dominion cannot begin construction until MDE issues an air quality permit, the district court judge denied Dominion’s request for a permanent injunction against the town of Myersville because the company suffered no irreparable harm.

Group sues to force vote on hydraulic fracturing moratorium. A group called Protect Our Loveland filed suit in state district court to compel the Loveland, Colorado city council to put the question of whether the city should institute a two-year hydraulic fracturing moratorium on the November 5th ballot. The city council rejected the ballot measure 5-4 in September. Protect Our Loveland claims that the city council could not reject the ballot initiative because the group collected the required signatures under state law.

No oil found in Colorado rivers after flooding receded. Despite reports that over 1,000 barrels of oil were released from flooded wellsites, sampling by the Colorado Department of Public Health and Environment (“CDPHE”) in eight rivers found no signs of oil contamination. Earlier reports of oil and produced water flowing into the South Platte River sparked demands by environmental groups for tougher regulations and calls for congressional hearings. Environmental groups criticized the state’s sampling work, claiming that it waited a week after rains ended to conduct the testing. Local group Clean Water Action argued that the pollutants likely flowed into Nebraska by the time the state began its investigation. A CDPHE spokesman stated that its inspectors had to wait until high water receded to avoid safety concerns. The agency stated that high e. coli concentrations from releases of raw sewage continue to be the most serious public health concern and that oil and gas operators were well prepared for flooding.

Plans for Alaska LNG export plant coming into focus. A consortium of Exxon Mobil, BP, ConocoPhillips, and TransCanada announced the selection of the town of Nikiski on Alaska’s Kenai Peninsula as the site of a future LNG export terminal. ConocoPhillips already owns a mothballed LNG export terminal at the town. The LNG export terminal would handle gas produced at the North Slope and shipped by an 800-mile pipeline. The companies previously delayed plans to construct the pipeline, estimated to cost between $45 and $65 billion, after the continental shale gas boom made the project unprofitable. Alaska, however, has been pressing the companies to revive the project as it would lower natural gas prices for state residents. Governor Sean Parnell hailed the export terminal site selection as “real progress.”

Environmental group seeks tighter air regulations for Colorado oil and gas development. Citing increasing ground level ozone concentrations, WildEarth Guardians urged the Colorado Air Pollution Control Division to adopt unidentified measures to reduce air emissions from oil and gas operations. Portions of Colorado have ground level ozone levels in excess of federal ambient air quality standards, and the Environmental Protection Agency (“EPA”) is requiring the state to reduce emissions to bring the areas into attainment by 2015. The Colorado Department of Public Health and Environment previously estimated that nearly half of all ozone precursor emissions are tied to oil and gas development in the Niobrara shale play. The state is looking to propose new emission limitations in November, but WildEarth Guardians charged the state with delay and questioned the need to work with industry. In response, a spokesman for the Colorado Petroleum Association pointed out that WildEarth Guardians, unlike the Environmental Defense Fund, has refused to participate in joint working groups to explore emission reduction strategies.

International

French high court upholds ban on hydraulic fracturing. The Constitutional Council of France, the highest court that reviews legislative actions, rejected a challenge to the country’s ban on hydraulic fracturing. Schuepbach Energy argued that the ban, passed by Parliament in 2011, was illegal as it effectively revoked drilling permits issued before the ban in violation of its property and enterprise rights. President François Hollande supported the decision and stated that it should end the debate on whether hydraulic fracturing should be permitted in France.

New rules for hydraulic fracturing in Europe make headway. The European Parliament passed new regulations that would require extensive “environmental audits” on the direct and indirect effects of hydraulic fracturing before drilling. The proposed revisions to the EU Environmental Impact Assessment Directive would impose stringent study requirements before hydraulic fracturing could commence. European business groups bemoaned the ruling as adding even more bureaucratic obstacles to shale development that was already facing significant legal hurdles in Europe. BusinessEurope, a business advocacy group, stated that the EU should be seeking to minimize regulations at a time of stagnant economic growth and high energy prices. As a result of the vote, Italian MEP Andrea Zanoni was authorized to develop final regulatory language with the European Union Council before the regulations become law. A spokesman for the European Commission stated that a final version should be promulgated before the end of the year.

Diplomats urge U.S. to export LNG. At a House committee hearing, representatives from Japan, India, Haiti, Singapore, and Hungary asked Congress to speed up the current process for reviewing LNG export applications to countries without a free trade agreement with the United States. The representatives argued that LNG exports would lower global carbon emissions, increase international security, and raise the United States’ standing among other countries. Witnesses also warned that the U.S. is competing with other countries to supply LNG and the long, uncertain process of reviewing export terminals could leave U.S. exporters without buyers. The Industrial Energy Consumers of America criticized the hearing and argued that easing the LNG approval process would lead to higher costs for domestic manufacturers and undermine the country’s ability to negotiate free trade agreements in the future.

Shale gas providing U.S. industry with significant competitive advantage. CEOs for European energy companies Total and Eni recently cited the impacts of shale development on European industry while speaking at the Council on Foreign Relations. They stated that European gas prices are three times those in the United States and that electricity is twice as expensive, giving U.S. manufacturers a competitive advantage from which it will take several years to recover. They pointed to the U.S. legal structure that assigns mineral rights to property owners, a structure which does not exist in Europe, as a key driver behind shale gas development. Because European governments would have to turn over mineral rights to land owners, the CEOs were pessimistic about shale development in Europe.

South Africa issues hydraulic fracturing regulations. The South African Ministry of Mineral Resources proposed regulations for hydraulic fracturing in order to promote shale gas development. The country’s Karoo region, once the subject of a moratorium, may hold one of the world’s largest shale gas reserves. Minister Susan Shabangu stated that shale gas development could trigger South Africa’s re-industrialization and relieve dependence on coal. Environmental groups in South Africa are wary of water consumption and the potential for drinking water contamination, given that Karoo is semi-arid. Minister Shabangu stated that proposed regulations would protect water quality, regional wildlife, and area fossil deposits.

China exceeds U.S. energy consumption. The International Energy Agency (“IEA”) issued a report finding that China is now the world’s largest consumer of energy, reflecting its rapid growth as an industrial nation as China’s consumption is largely driven by heavy industry and infrastructure projects. The U.S. has consumed more energy than any other country since the early twentieth century, and as of ten years ago, China consumed half as much energy as the U.S. According to the IEA, the change has implications for U.S. foreign policy, energy prices, and U.S. energy security, as well as Chinese policy on greenhouse gas emissions. Organization of the Petroleum Exporting Countries member states, expecting that future U.S. oil imports will be flat, are constructing refineries and storage facilities in China, which is now Saudi Arabia’s largest oil customer.

U.K. shale developer abandons exploratory drill site. Citing concerns that drilling could harm migrating birds, Cuadrilla Resources agreed to abandon its Lancashire exploratory well site. Cuadrilla had been exploring the Bowland Hodder shale formation, estimated to hold 1,300 trillion cubic feet of natural gas. Cuadrilla previously conducted an environmental assessment that examined the potential impact on migrating birds, making local environmental groups skeptical of Cuadrilla’s stated rationale. Those groups claim that local opposition drove Cuadrilla’s decision.

Business

OriginOil announces first contract water recycling technology. OriginOil signed its first contract to provide a new technology to recycle hydraulic fracturing wastewater. The system uses a process called electro-coagulation, where electric current separates contaminants from wastewater, allowing hydrocarbons to be captured and treated water to be reused. Colorado-based Industrial Systems, a well field service company, will pay a fee to OriginOil for each barrel of wastewater treated with the technology. If the technology performs as advertised, Industrial Systems will begin using it in the Permian Basin, where water is scarce, as well as in the Bakken Shale play. OriginOil believes that its new technology can dramatically reduce the volume of freshwater used and wastewater disposed of, while also improving overall oil recovery.

Icahn targets Talisman Energy. Calgary’s Talisman Energy is likely due for a shakeup after investor Carl Icahn disclosed holding a major stake in the company. Icahn announced he would hold discussions with company management, likely centering on the company’s heavy reliance on natural gas, which makes up 70% of the company’s assets. Analysts depict Talisman as overspending on large projects with little near term return and possibly needing to divest assets in Algeria, Columbia, Sierra Leone, and Kurdistan in order to take a more focused approach on North American shale production. Both Fitch and S&P recently revised their outlook for Talisman to “negative.” Icahn has a reputation for forcing major management changes at the companies in which he invests, and he was part of an investor group that ousted CEO Aubrey McClendon from Chesapeake Energy. Analysts are now wondering whether Icahn will push management to sell the company off or commit to restructuring the company for higher profitability.

Jordan Cove LNG signing contracts with buyers. Veresen, Inc.’s proposed Jordan Cove LNG export facility announced supply agreements with India, Indonesia, and other Asian buyers. The deals are a sign of confidence that the facility, along with its Pacific Connector Gas Pipeline, will be constructed despite opposition from environmental groups who are challenging construction permits issued by Oregon’s state government. Veresen’s applications to construct are still pending with the Department of Energy’s Office of Fossil Energy, which must approve LNG gas exportation to countries without a free trade agreement with the U.S., and the Federal Energy Regulatory Committee. The company touts that, unlike other proposed U.S. export facilities, Jordan Cove will receive nearly all of its natural gas supply from Canada.

American Energy raises $1.7 billion for Utica shale. American Energy, the new company created by Chesapeake Energy founder Aubrey McClendon, raised $1.7 billion from several private equity firms. The money will finance the acquisition of approximately 110,000 acres in the southern Utica shale play with the company’s subsidiary, American Energy Utica, starting to drill with twelve rigs over the next few years. Energy & Minerals Group was American Energy Utica’s lead equity investor, along with First Reserve Corporation. Debt investors included GSO Capital Partners, Magnetar Capital and BlackRock.

Research

Study: Modeling the economic or climate benefits of the natural gas boom. A group called the Energy Modeling Forum, consisting of representatives from Stanford University, EPA, and the U.S. Department of Energy, claims that modeling shows that low gas prices will not necessarily improve the economy or provide climate benefits. The group ran 14 different models simulating future energy supply and demand to estimate economic impacts and emissions. According to the models, natural gas would rise to between $4.03 and $6.24/ MMBtu by 2020, adjusting for inflation, as demand catches up to supply. According to the models, shale gas development would contribute $1.1 trillion (in 2010 dollars) to the economy by 2020. The study also claimed that, while switching from coal- to gas-fired generation would reduce carbon dioxide emissions, it would also limit the adoption of new nuclear or renewable energy generation.

First Energy: Gas exports to Mexico will rise sharply. An analyst for Ohio-based First Energy, speaking at a Petroleum Club panel in Calgary, predicted that U.S. natural gas exports to Mexico will rise from less than a billion cubic feet per day to over four billion cubic feet per day by 2018. New pipelines connecting the U.S. to Mexico will allow for the increased exports, contributing to new demand for gas. First Energy also predicts increased use of natural gas for electricity generation and that LNG terminals will export up to 100 billion cubic feet per day by 2017. To accommodate the new demand, natural gas supply may need to grow aggressively over the next year or two, but current natural gas prices are keeping capital investment down.

Studies duel over environmental risks from shale development. Two studies, released nearly simultaneously, paint opposing pictures of air quality in Texas’ Barnett Shale play. Industry group Barnett Shale Energy Education Council, published its study in the Science of the Total Environment, finding that natural gas production in the Barnett Shale play has not caused significant increases in air pollution. Using eleven years’ of air quality monitoring data, consultant ToxStrategies found only one incident where shale gas development was linked to volatile organic compound (“VOC”) emissions exceeding federal and state air quality standards. Overall, however, VOC emissions did not rise with shale gas development, and benzene emissions actually decreased over time. Activist group Environment Texas countered with its own report, compiling various journal and newspaper articles and concluding that hydraulic fracturing wastewater poses extreme risks to rivers and sources of drinking water. It also questioned shale developers for consuming approximately 250 billion gallons of fresh water despite a long-standing drought. The group seeks an immediate statewide moratorium on hydraulic fracturing, citing these potential environmental risks.

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