25 September 2013

This Week in Hydraulic Fracturing

Volume 2, No. 38

Federal

Environmental groups move to block Utah oil and gas leasing, sue over air quality. Several environmental groups filed an administrative protest with the U.S. Bureau of Land Management (“BLM”) to block the Bureau’s proposal to lease blocks within Utah’s 2,000 square mile San Rafael Swell for oil and gas development. They argued that BLM failed to sufficiently consider the environmental consequences of oil and gas leasing. The lease auction is currently set for November 2013. Separately, environmental groups filed suit against Environmental Protection Agency (“EPA”), claiming that it must classify Utah’s Uinta Basin as a non-attainment area for ozone. They argue that oil and gas development is responsible for the area exceeding the national ambient air quality standard for ozone of 0.075 parts per million.

Japan has been seeking more U.S. LNG exports. U.S. Department of Energy (“DOE”) documents show that Japan has been lobbying for more U.S. liquefied natural gas (“LNG”) exports since March 2011, fearing that blackouts could cripple the world’s third-largest economy. The country recently took its last operating nuclear plant off-line for repairs, and government officials stated Japan only has a two to three week supply of LNG with most of its exports coming from an unstable Middle East. Japanese officials warned that supply disruptions could send approximately 1/3 of the country into darkness. The danger of a blackout is becoming acute as Japan faces increasing power demands during winter.

New projects press for preferred LNG export approval. EOS LNG and Barca LNG filed petitions for approval to export LNG to non-free trade countries from floating liquefaction facilities that would be constructed offshore of Brownsville, Texas. The project owners, which include African-Americans and disabled veterans, are urging DOE’s Office of Fossil Energy to consider the project applications before nearly two dozen others that have waited longer, some for two years. Los Angeles businessman, Andrew Kunian, who owns a 49% stake in each project, stated that the federal government must give preference to minority and veteran owned businesses. Recent comments by Senator Ron Wyden, Chairman of the Senate Committee on Energy and Natural Resources, that LNG exports are reaching a maximum limit may spur applicants to pursue novel strategies to gain accelerated consideration of their applications.

States

Texas re-investigating Weatherford homes for possible well contamination.&llt;/STRONG> Although EPA dropped its controversial enforcement action against Range Resources, the Texas Railroad Commission is now conducting a new investigation into well contamination at the same residences near Weatherford, Texas. Homeowners stated the methane in their well water has gotten worse since the initial investigation three years ago even though the Commission attributed the methane to natural sources. Range, which continues to monitor the area, stated that some of the residents’ wells were drilled through a shallow gas-producing formation unrelated to the company’s oil and gas development. Range has since sold the two wells that were the source of the controversy to Legend Natural Gas.

State, industry survey Colorado flood aftermath. Now that floodwaters have receded in Colorado, the oil and gas industry and the Colorado Oil & Gas Conservation Commission (“COGCC”) are scrambling to examine potential damage to wells and compressors that were either submerged or cut off by washed out roads. A spokeswoman from the Colorado Oil & Gas Association informed COGCC that all wells and compressors were shut off before the flood and that a “majority of operators” reported no significant impacts from the flooding. COGCC is currently investigating ten oil releases from the Denver-Julesburg Basin, including the Wattenberg Field, which is the site of extensive oil drilling. COGCC only characterized two releases as “notable,” releases of a combined 18,000 gallons of crude condensate into the South Platte and St. Vrain rivers from two Anadarko storage tanks. The company is currently working to clean up the spills. Clean Water Action, an environmental group, criticized the response and demanded civil and criminal action against Anadarko. The group also wants COGCC to inspect every one of the 1,900 wells potentially impacted by the flooding and to report the types of chemicals used in hydraulic fracturing fluid that could have been released during the flood. Industry groups have stated there were no releases of either fracturing fluid or wastewater.

Colorado expands wildlife habitat areas. COGCC added 2.2 million acres to state wildlife habitat areas, including areas for protected winter elk, bighorn sheep, Gunnison sage grouse, and lesser prairie chickens. Environmental groups often cite the potential for harm to these species when opposing development. Companies proposing to drill in wildlife habitats must consult with Colorado Parks and Wildlife on how to minimize their impact. The new rules also added 40,000 acres of restricted surface occupancy areas where development is all but prohibited. Additional protected acreage may be added after Colorado Parks and Wildlife completes its analysis of sage grouse habitat. The U.S. Fish & Wildlife Service (“F&WS”) is considering whether the lesser prairie chicken and greater sage grouse should be listed as endangered species, and part of F&WS’ evaluation is whether state measures are preserving critical habitat sufficiently.

Environmental groups rally state opposition to LNG export terminal. Environmental NGOs are pressing Maryland Governor Martin O’Malley (Dem.) to block the Dominion Cove Point LNG export terminal project. The groups argue that the LNG export terminal would pollute the Chesapeake Bay, increase energy costs, and worsen climate change, asserting that the terminal’s lifecycle GHG emissions would be greater than all of the state’s seven coal-fired power plants combined. Dominion stated that most of the infrastructure is already in place, greatly reducing the environmental impacts that would be involved with constructing a green field terminal. The project is still undergoing an environmental review before Federal Energy Regulatory Commission (“FERC”), and the environmental groups want the state of Maryland to oppose the project before FERC.

Proposed North Carolina regulations would preclude local bans. A North Carolina Mining and Energy Commission study group proposed rules for hydraulic fracturing that would prevent municipal governments from imposing bans on hydraulic fracturing. Local governments would still be able to regulate light, noise, odors, and setbacks at well sites but would be prevented from using zoning or other measures to block drilling. The North Carolina League of Municipalities immediately protested the proposal, stating that the draft rules would prevent local governments from keeping heavy industrial operations out of residential areas. North Carolina, which holds a portion of the Deep River shale formation, has no history of hydrocarbon development and is writing wholly new oil and gas regulations. A state-wide moratorium is in place until the Commission issues rules for drilling and hydraulic fracturing.

New Jersey borough bans hydraulic fracturing. Highland Park became the first New Jersey municipality to ban hydraulic fracturing. The ordinance is mostly symbolic. Although the U.S. Geological Survey identified the potential for shale gas development in the South Newark Basin, which partly underlies the state, no companies have considered exploring the basin. A state-wide moratorium on hydraulic fracturing expired at the beginning of 2013.

International

Canada releases new hydraulic fracturing filing rules. The National Energy Board proposed new filing requirements for hydraulic fracturing operations in Canada’s Northwest and Nunavut Territories. The proposed rules would address financial responsibility obligations, pre-drilling environmental assessments, safety and environmental management plans, and well construction requirements. The Board will take comments on the new proposals.

Chevron: China shale exploration disappointing so far. Trade press reports state that, at a recent conference, a Chevron official asserted that exploratory drilling shows that U.S. government estimates of shale reserves in China are overstated. Chevron is reportedly now more pessimistic about the quantity of shale gas available in potentially accessible Chinese reserves. Chevron is both drilling in China and building LNG export terminals in Australia to supply Chinese demand.

Repsol looking for North American shale investments. Spanish oil company, Repsol S.A., is reportedly seeking to invest between $5 and $10 billion on shale assets in the United States or Canada. The press reports that the company is discussing the matter with investment banks, hoping to gain more stable oil production assets. The company currently produces oil in high risk areas, such as North Africa, and Argentina’s government recently seized its subsidiary, YPF S.A. Repsol has been buying up stakes in the Gulf of Mexico, Oklahoma, Kansas, and Alaska.

Study: biggest shale fields are outside U.S. Industry research firm IHS released a study finding that many of the biggest tight oil fields are in countries like Argentina, Russia, and Algeria. Major oil companies have shown interest in Argentina’s Vaca Muerta shale play, with some estimating that it could produce more oil than the Eagle Ford or Bakken shale plays. According to IHS, the top 23 shale plays outside of the United States could hold up to 175 billion barrels of oil. The company warns that geological data is only preliminary and that oil development in other countries is often much more expensive than within the U.S. Yet, IHS estimates that these shale plays could realistically produce 5 million barrels per day within a decade.

Business

Companies plan increase in gas gathering from Bakken. Calgary-based Aux Sable Midstream LLC and Dallas’ Summit Midstream Partners announced that they will upgrade capacity on their pipeline systems to ship 30 million cubic feet of gas per day from the Bakken Shale play. The increased capacity may allow for a reduction in flaring, which has drawn increasing scrutiny from North Dakota regulators. Oil companies operating in the Bakken Shale play frequently flare off gas as a waste, citing the lack of infrastructure available to capture the gas. The companies anticipate that the upgrades will be completed by mid-2014.

BNSF pledges investments for Bakken oil shipments. BNSF Railway Co. CEO Matt Rose stated BNSF would spend $4.3 billion to upgrade tracks and follow more stringent safety standards in order to increase the amount of crude oil it ships out of the Bakken Shale play. At 600,000 barrels per day, BNSF ships more crude oil out of the Bakken than any other railroad but is facing increased scrutiny after the Montreal, Maine & Atlantic Railway train derailment in Quebec. In addition to the infrastructure improvements, BNSF is reviewing how it handles, labels, and ships hazardous materials.

Research

Study: fugitive methane from well sites is minimal. A University of Texas study, performed in conjunction with the Environmental Defense Fund, determined that natural gas wells were releasing approximately 0.42% of the methane they produced, equivalent to 48 million metric tons of carbon dioxide. The finding is somewhat lower than EPA’s estimate of 0.47% but far less than what many environmental groups feared to be released to the atmosphere. The study, published in Proceedings of the National Academy of Sciences, rebuts a recent National Oceanic and Atmospheric Administration (“NOAA”) study where scans of methane leakage from an airplane estimated fugitive emission rates as high as 9%. The Texas study authors stated that NOAA measured all methane emissions in Utah’s Uinta Basin, regardless of whether they were coming from wells, processing equipment, pipelines, or sources unrelated to oil and gas production, whereas the Texas study was restricted to on-the-ground measurements of 529 hydraulically fractured wells in several different producing areas. It also included 27 wells subject to green completions and pneumatic controllers and pumps at 489 producing wells. NOAA researcher Colm Sweeney criticized the Texas study’s sample size as being too small and averaging out what he calls “super emitters,” wells that can emit methane 100% above background levels or more. Environmental groups criticized the study for being funded by industry and allowing participating companies to identify the wells for sampling.

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