01 October 2013

This Week in Hydraulic Fracturing

Volume 2, No. 39

Federal

Third Circuit affirms lower court ruling overturning drilling ban in National Forest. The U.S. Court of Appeals for the Third Circuit affirmed a lower court ruling that the U.S. Forest Service lacked the authority to enter into a settlement agreement with environmental groups in which the agency imposed a drilling moratorium in the Allegheny National Forest pending a multi-year environmental impact study. The court held that the Forest Service lacked control over private mineral rights owners’ access to surface lands and that the moratorium was a “sea change” in agency policy that could not be accomplished by a settlement agreement but required notice and comment rulemaking. Further, the court held, requesting approval for developing private mineral rights does not require environmental review for the entire forest, as environmental groups argued.

GAO: Incomplete data frustrates estimates of BLM permit processing times. Congress asked the Government Accountability Office (“GAO”) to study how long it takes the U.S. Bureau of Land Management (“BLM”) to process oil and gas drilling permit applications. According to GAO, an internal BLM memorandum acknowledged that the agency does not process completed applications within 30 days, as required by the Energy Policy Act of 2005. However, GAO found that because BLM’s data was often incomplete, the agency does not know how long it typically takes to process applications. GAO also questioned the accuracy of the data as some permits were listed as being issued on the same day BLM deemed the applications complete. The difficulty in tracking applications comes at a time when applications are actually down; BLM received twice as many applications in 2007 as it did in 2012. GAO also learned that, for oil and gas wells that are already operating on federal lands, BLM does not keep a history of environmental inspections or prioritize inspections based on compliance history. Over a third of wells have no record of ever being inspected. BLM responded that it will implement a new application processing procedure and database.

EPA guidance on use of diesel fuel in hydraulic fracturing goes to White House. The U.S. Environmental Protection Agency (“EPA”) sent its draft guidance for hydraulic fracturing that uses diesel fuels to the White House Office of Management and Budget (“OMB”) for review, over a year after the public comment period closed. EPA issued the draft guidance after it agreed in a settlement to take down from its website language stating that companies were required to obtain injection permits under the Safe Drinking Water Act before using hydraulic fracturing fluid containing diesel fuels. Environmental groups largely welcomed the guidance but wanted a formal rulemaking with more restrictive measures. Industry groups have stated that service companies no longer use diesel fuels in hydraulic fracturing fluid, but are concerned that EPA may pursue enforcement actions against companies that used diesel fuels in the past.

Manufacturers demand clear LNG approval criteria. America’s Energy Advantage, an association of companies that use natural gas as fuel or feedstock, filed comments on the liquefied natural gas (“LNG”) export application for Freeport LNG asking the U.S. Department of Energy (“DOE”) to outline clear, objective standards for approving applications. DOE must determine whether LNG exports to countries without a free trade agreement is in the national interest, but the group argues that DOE has not provided a clear explanation of how it applies the “national interest” standard. The association submits that the absence of clear standards creates uncertainty for companies interested in investing in natural gas-intensive manufacturing projects which may face higher prices if domestic supplies of natural gas are reduced because of increased LNG exports.

States

California passes hydraulic fracturing bill. Governor Jerry Brown signed S.B.4 establishing new requirements for hydraulic fracturing in California. The law requires companies to disclose chemicals used in hydraulic fracturing fluid even if claimed as trade secrets, test nearby groundwater before stimulating wells, and notify surrounding landowners, among other requirements. The bill exempts permits for hydraulic fracturing from the California Environmental Quality Act, which often subjects projects to lengthy environmental reviews. Gov. Brown also added a signing statement directing the California Department of Conservation to “develop an efficient permitting program for well stimulation activities that group permits together based on factors such as known geologic conditions and environmental impacts, while providing for more particularized review in other situations where necessary.” This is not in SB. 4 and Gov. Brown’s office declined to elaborate on what the direction will mean. Environmental groups denounced the signing statement, while industry group Western States Petroleum Association issued no comment except to state that companies are looking forward to developing California’s shale potential.

International

Japan looks to Canada for LNG supply. In a joint press conference with Prime Minister Stephen Harper, Japan’s Prime Minister Shinzo Abe announced that the countries will work closely to ensure that Japan receives a steady supply of liquefied natural gas. Prime Minister Abe previously portrayed Japan as teetering on the verge of massive blackouts now that its once robust nuclear power supply has been reduced to a single plant in the wake of a 2011 tsunami that resulted in the Fukushima nuclear incident. Japan, the world’s largest LNG customer, paid an average of $15.74/ MMBtu in July 2013, making cheap natural gas from Canada especially attractive. Prime Ministers Harper and Abe are negotiating a free trade agreement governing LNG supply. Canada previously awarded export licenses to three LNG export terminals that are expected to be on-line by 2020.

French court to rule on hydraulic fracturing ban. Dallas-based Schuepbach Energy LLC appealed France’s ban on hydraulic fracturing to the country’s Constitutional Council, the highest court that rules on the legality of legislation. Schuepbach argued that France instituted the ban without any study establishing that hydraulic fracturing was a risk to public health or the environment. The company held two exploration permits when the legislature prohibited hydraulic fracturing in 2011. A ruling is expected next month.

Business

Valero subsidiary enters logistics business with IPO. Valero Energy Corporation’s new subsidiary, Valero Energy Partners LP, will use an initial public offering to begin its acquisition of logistics assets, such as pipelines and terminals. A spokesman for the master limited partnership stated that the company is hoping to raise $345 million from the IPO.

New LNG plant would supply U.S. trucking. Applied Natural Gas Fuels Inc. announced plans to construct an LNG liquefaction facility in Midlothian, Texas, near the Barnett Shale play, to provide fuel for trucking companies that currently use heavy duty diesel engines. The company is also targeting railroad companies and manufacturers of heavy industrial equipment. The plant would be able to produce 86,000 gallons of LNG per day and is expected to come on-line by 2015. Other companies are similarly looking to develop LNG plants and distribution infrastructure for transportation, including Honeywell UOP in a joint venture with engineering company Black & Veatch, and Eagle LNG Partners.

Research

Mixed views on the future of gas-fired electricity generation. At a recent conference, a panelist from NERA Economic Consulting was optimistic about the future of gas-fired generation, stating that even if prices rise by a few dollars per MMBtu, natural gas will remain the most affordable option for the power industry as large numbers of coal-fired power plants retire. PJM Interconnection, the Mid-Atlantic grid operator, expects gas-fired generation to surpass coal-fired generation by 2015, rising from 50,000 megawatts of generation today to 65,000 megawatts. Despite the optimism, the U.S. Energy Information Administration reported that gas generation is down 14% in 2013, compared to 2012 which saw the lowest spot prices in a decade. Slight increases in natural gas prices have closed the gap with the cost of coal-fired generation.

Study: Barnett Shale play holds more gas than previously believed. Modeling by the University of Texas Bureau of Economic Geology predicted that the Barnett Shale play, a nearly 4,000 square mile formation in Texas, could produce an additional 45 trillion cubic feet of gas by 2050. As the oldest shale play of the new oil and gas boom, the Barnett has been drilled extensively already, which provided researchers with extensive data for their modeling. The results should allay concerns that shale gas development will not be able to keep up with rising demand over the long-term as a large portion of the economy begins to center around natural gas as a fuel and feedstock.

<lt;P>Study: Lesser prairie chicken population declined. Western Eco Systems Technology’s study, performed at the behest of several western state wildlife agencies and energy companies, found that the lesser prairie chicken population was cut in half in 2012, primarily from drought and reductions in breeding ground acreage. Several states with shale development, including Texas, New Mexico, Oklahoma, Kansas, and Colorado, are trying to keep the bird off of the endangered species list to avoid stringent regulation of critical habitat under the Endangered Species Act. The Western Association of Fish and Wildlife Agencies are releasing a conservation plan in hopes of persuading the U.S. Fish & Wildlife Service that states can protect the species without federal intervention. Environmental groups urged that the study means the lesser prairie chicken must be listed as endangered and that its critical habitat must be protected from development. The dispute over listing the species dates back almost 20 years.

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