This Week in Hydraulic Fracturing

Energy and Environmental Update

Federal

U.S. EPA inquiry into oil and gas toxics reporting in Ohio. The U.S. Environmental Protection Agency (“EPA”) Region 5 is investigating whether an Ohio law requiring oil and gas companies to file reports with the Ohio Department of Natural Resources (“DNR”) also satisfies federal Emergency Planning and Community Right-to-Know Act (“EPCRA”) reporting requirements. The Ohio law does not require companies to report certain information about the chemicals used by oil and gas companies, and these reports do not go to first responders. An Ohio EPA representative said the agency is reviewing U.S. EPA’s letter, although all reports submitted to Ohio DNR are available to first responders through the agency’s website. The Ohio Oil and Gas Association stated that the inquiry is a non-issue, as companies using hydraulic fracturing techniques do not use enough chemicals to fall under EPCRA.

Environmental groups seek EIS for Williams Partners’ Pipeline Expansion. Environmental non-governmental organizations (“NGOs”) filed comments with the Federal Energy Regulatory Commission (“FERC”) demanding the commission perform an Environmental Impact Statement (“EIS”) for Williams Partners’ planned expansion of a gas pipeline running from Pennsylvania to New Jersey. The groups called the Leidy Southeast Expansion Link project unnecessary and argued that the expansion would increase the use of hydraulic fracturing in the Marcellus Shale play. The groups argue that hydraulic fracturing threatens the environment and natural resources, that there is no customer demand in New Jersey for additional gas, and that the project was conceived “by drilling companies desiring higher prices for their natural gas supplies.” Williams stated that it would submit its environmental reports to FERC this summer and that it intends to begin construction on the pipeline expansion in fall 2014.

Moniz: DOE criteria for LNG exports need a “tune up.” Energy Secretary Ernest Moniz stated the U.S. Department of Energy (“DOE”)’s criteria to review liquified natural gas (“LNG”) export applications need a “tune up” to match modern market conditions. The criteria were devised in the 1980s, when domestic natural gas production was declining and the country was importing LNG. Moniz did not provide further details, such as how or when the revisions would be developed. Moniz did repeat his assurance that DOE will review pending export applications “expeditiously” and issue several decisions before the end of the year.

Bill would give FERC authority over LNG exports. Frustrated with the slow progress in reviewing LNG export applications, a new bill would strip the U.S. Department of Energy of authority over exports. H.R. 2471 would transfer that authority to the Federal Energy Regulatory Commission. The bill’s sponsors cited conflicting and unsatisfactory responses by DOE on how long the review process would take, what criteria the department would use in approving export applications, and its recent decision to give priority to projects that have pre-filed with FERC.

States

California hydraulic fracturing bill advances. California S.B. 4, which would create regulations for the use of hydraulic fracturing, passed out of the Assembly’s Natural Resources Committee. The bill would provide for, among other things, public disclosure of chemicals used in hydraulic fracturing fluids (with protections for trade secrets), prior notice to residents before drilling, groundwater monitoring and disposal plans. The bill would also require a study of hydraulic fracturing. Both the Western States Petroleum Association (“WSPA”) and Sierra Club oppose the bill. Among other things, WSPA argued the bill would enable nearby landowners to block drilling by refusing to grant access to companies for sampling groundwater, while Sierra Club opposes any limits on public disclosure. The Appropriations Committee still must approve the bill before it goes to a floor vote. During this legislative term, six other bills to regulate hydraulic fracturing died in committees or lost floor votes.

Environmental group seeking another Colorado hydraulic fracturing moratorium. Members of Protect Our Loveland are gathering signatures to put a two-year hydraulic fracturing moratorium on the ballot for Loveland, Colorado voters. The City of Longmont, City of Boulder, and Boulder County have all enacted local bans or moratoria on hydraulic fracturing, with Longmont’s measure being challenged in court.

Colorado promises doctors access to confidential chemicals. Colorado Oil & Gas Conservation Commission Chairman, Thomas Compton, issued a letter to state doctors guaranteeing health professionals the ability to share information about confidential chemicals used in hydraulic fracturing fluids in the event of a medical emergency. Medical professionals will still have to sign a confidentiality agreement before disclosing information about the chemicals to colleagues or patients. The Colorado Medical Society voiced concerns about signing the agreement, known as Form 35, which prohibits disclosure of chemical information “for purposes other than medical diagnosis, treatment or other health needs.”

Maryland developing hydraulic fracturing standards. The Maryland Department of Environment released a draft set of “best practices” for developing the portion of the Marcellus Shale in western Maryland. The proposal would require a detailed permit application, including a “comprehensive gas development plan” outlining measures to be taken to avoid or mitigate potential environmental impacts. Applications would provide plans for all land “on or under” projects, including well pads, roads, pipelines, storage facilities, and any other equipment. Other provisions would require wastewater tanks, baseline groundwater monitoring, monitoring during production, and the identification of “sensitive areas” that would be off-limits. Environmental NGOs, claiming the risks of hydraulic fracturing are unknown, want the state to continue its de facto moratorium on drilling until a State risk assessment is completed in August 2014. The groups are also demanding a “zero percent leakage rate” for methane from drill sites. The draft is open for comments.

New Jersey Assembly won’t override wastewater ban veto. New Jersey Gov. Christie’s September 2012 veto of a bill prohibiting the disposal of out-of-state wastewater from hydraulic fracturing will not be considered by the state Assembly. Environmental NGOs pushed for an override vote, but the bill was held because proponents did not have the votes. Proponents argued that wastewater injected underground could contaminate drinking water supplies, but Governor Christie vetoed the bill, believing a ban was an unconstitutional restriction on commerce as all wastewater would come from out-of-state.

Appointment of seventh PA justice could mean re-hearing for hydraulic fracturing law. Pennsylvania Gov. Tom Corbett appointed a new justice to the Pennsylvania Supreme Court, which has been missing its seventh justice for nearly a year. The appointment means that the court could choose to rehear cases already argued but would otherwise deadlock with a 3-3 vote. According to a speech by Justice J. Michael Eakin, the appeal of Pennsylvania’s Act 13 law is one of two cases irreconcilably deadlocked. A provision of Act 13 preempts local governments from enacting local rules for oil and gas operations, including bans on the use of hydraulic fracturing. A Pennsylvania intermediate court found that provision unconstitutional.

Pennsylvania passes royalty reform bill. The Pennsylvania General Assembly passed a bill standardizing how deductions are itemized on royalty payment checks. The bill is intended to make deductions more transparent as companies will have to disclose the net value of total sales after deductions, the owner’s interest in sales from the lease, taxes, and deductions permitted under the lease agreement. During hearings landowners complained that gas companies are taking significant post-production cost deductions from royalty payments and that complex royalty statements are difficult to understand. Governor Tom Corbett is expected to sign the bill.

Pennsylvania approves new water quality standards. Pennsylvania’s Independent Regulatory Review Commission approved new proposed water quality standards over objections by environmental NGOs. The groups argued the standards lack limits for chlorides, which are often found in wastewater from hydraulically fractured wells. The Pennsylvania Department of Environmental Protection (“DEP”), which proposed the rules for the commission’s review, stated that chloride standards were dropped from the original draft because the understanding of chloride effects on aquatic life is still evolving.

Hydraulic fracturing in DRBC an issue in Pennsylvania Governor’s race. John Hanger, a former secretary of the Pennsylvania DEP and now a challenger to incumbent Gov. Corbett, urged the Delaware River Basin Commission (“DRBC”) to keep hydraulic fracturing out of the area. DRBC imposed a moratorium on drilling in the river basin three years ago while it develops rules for hydraulic fracturing, and Hanger urged DRBC to keep the moratorium. Hanger wrote that no drilling should take place until DEP increases its enforcement staff by at least 100 people and improves its oversight of gas drilling. Governor Corbett has criticized DRBC for its long delay in implementing regulations and asked that the moratorium be lifted. Meanwhile, a group of 1,300 landowners known as the Northern Wayne Property Owners Alliance, is threatening to sue the Commission if it does not rescind the moratorium. The landowners signed contracts with gas companies who have not been able to develop their land during the moratorium.

Wyoming strategy to save the sage grouse supported by study. A recent study published in the online PLOS ONE journal endorsed Wyoming’s strategy for preserving sage grouse habitat, as modeling showed the strategy could reduce the animal’s projected population decline if additional conservation easements were purchased. The strategy designates 15 million acres as critical habitat, and the U.S. Bureau of Land Management has agreed to restrict oil and gas leasing in those areas. Wyoming took these measures in an effort to avoid the sage grouse from being listed under the Endangered Species Act, as a listing could mean significant restrictions on economic development. The sage grouse is currently a “candidate” species that is expected to receive ESA review in 2015. About half of the world’s sage grouse population resides in Wyoming, with 2/3 of those species residing on federal lands designated for oil and gas leasing.

Colorado proposes increased wildlife habitat protections. The Colorado Oil & Gas Conservation Commission (“COGCC”) is proposing to add 2.2 million acres to its sensitive wildlife habitat areas. Oil and gas developers looking to do business in such areas require consultation with state wildlife officials to avoid impacts to species or their habitats before development begins. The proposed designation would protect winter concentration areas for elk and bighorn sheep, as well as add 400,000 acres to the Gunnison sage grouse wildlife habitat and 290,000 acres for the lesser prairie chicken. COGCC stated that its maps of critical habitat are outdated as they do not reflect better data gathered on the species themselves or the effects of shale development or population expansion. Both environmental and industry groups declined to comment as they were still reviewing the proposal.

International

U.K. issues shale gas development guidelines and new estimates. The U.K. Ministry of State for Energy issued new guidelines to encourage shale gas development. These guidelines establish a comparatively streamlined permitting process, although companies would be required to provide £100,000 (approximately $152,000) per well in local benefits. The move appeared to give something to both drilling companies and the municipalities located in the country’s main shale deposit, the Bowland Shale play. At the same time, the British Geological Survey issued a new estimate for the Bowland Shale play finding 1,300 trillion cubic feet of natural gas. Although not all was characterized as technically or economically recoverable, the number was nearly double that of prior estimates.

Canada moves to block LNG import terminal in Maine. Private equity group Kestral Energy Partners, LLC is planning to build a new LNG import terminal in Robbinston, Maine. New England often sees the demand for gas exceed supply in wintertime due to a lack of pipeline infrastructure north of Boston. The proposed terminal would be located across the Passamaquoddy Bay from Canada and would import 500 million cuic feet of gas per day. FERC issued a draft supplemental EIS (“SEIS”) in March 2013 finding that the terminal could meet safety and security concerns, however, Canada announced its intent to block the project. Canada wrote in comments that the terminal raises environmental, navigational, and safety concerns that are not addressed by the SEIS and that tankers could result in economic harm to the scenic Passamaquoddy Bay. The comments asserted that Canada would not allow tankers to pass through Head Harbour Passage or the New Brunswick side of the Bay in order to reach the terminal. The comment period on the SEIS is now closed. FERC is working on a final EIS and a decision on the permit.

European and Asian gas suppliers fighting back against lower gas prices. Thirteen of the world’s top natural gas suppliers met in Moscow seeking to develop a plan to preserve the practice of linking natural gas prices to crude oil prices, the predominant approach in Europe and Asia. The Gas Exporting Countries (“GEC”) Forum is seeking to fight back against recent rulings and arbitration decisions allowing customers to re-negotiate long-term gas supply contracts in light of decreasing spot gas prices due to new supplies from the U.S., Canada, and Australia. The GEC Forum has never wielded power like the Organization of the Petroleum Exporting Countries (“OPEC”), but it is now exploring new strategies in order to maintain revenues. Whether they succeed could turn on whether the many LNG export terminals on the drawing board ever come on-line.

Lithuania sees LNG imports as key to greater economic independence. Despite establishing its independence from the Soviet Union over two decades ago, Lithuania is still dependent on Russia’s OAO Gazprom for its gas supply. Gazprom holds a near monopoly in Lithuania, which has no energy resources of its own and shut down its nuclear plants as a condition to admission to the European Union. As a result, the costs of gas import are 15% above the European average. Lithuanian President Dalia Grybauskaite announced that it will lease a floating LNG import terminal that could handle 60% of the country’s gas demand. The vessel is expected to arrive in November 2014. Lithuania does not yet have a supplier, but a state official said that it looks forward to negotiating a supply agreement for the first time in its history and is sure that it can secure prices that are at least 20% below those of Gazprom.

French Environmental Minister claims she was fired for opposing shale development. Delphine Batho, now France’s former Environmental Minister, was critical of proposals to regulate hydraulic fracturing in France, believing the practice has impacted the environment in the United States. She wants France to continue its ban on hydraulic fracturing. President Hollande’s office cited her public criticism of his proposed 2014 budget, which would cut the Environmental Ministry’s funding by 7%. Her successor, Socialist representative Philippe Martin is also critical of shale development and wants the country to continue its ban on the practice.

Business

Study: U.S. will be world’s largest oil producer by 2017. A study from Harvard estimates crude oil production from shale will grow from 1.5 million barrels per day in 2012 to 5 million in 2017. At that rate, the country’s overall oil production will rise to 10.9 million barrels per day, surpassing Saudi Arabia and Russia. According to the model used by the study, to reach these levels, oil would have to stay above $85 per barrel in 2013 and at least $75 per barrel in 2015. The study also assumes drilling companies will reduce production costs and that new wells will be as productive as those already drilled. Some question that assumption, citing flattening production in the Bakken Shale play, as the Permian Basin just recently surpassed it to became the country’s most productive oil play.

Crude pricing gap could be shrinking. Brent crude oil futures have traded anywhere from $10 to $30 above West Texas Intermediate for years. Most people in the industry attributed the difference to a glut of crude being stored at the Cushing, Oklahoma storage terminal, which lacks sufficient infrastructure to move oil out to refineries. Much of the crude produced from the Bakken Shale goes to Cushing while awaiting shipment to coastal refineries. Recent price increases for West Texas Intermediate, however, is closing the gap between the two benchmark prices and suggesting that the Cushing oil glut may be easing. Analysts are currently divided as to whether the rise in West Texas Intermediate is due to supply problems in Canada from flooding and other factors, or whether new pipelines and rail transport are getting crude out of Cushing faster.

Research

Study: Methane in Pennsylvania water wells. Recent findings in Proceedings of the National Academy of Sciences state that methane in some Pennsylvania wells came from deep gas pockets well below surface formations, but above the Marcellus shale. The authors believe this middle-layer gas moves up through gas wells due to faults in well casings and cement jobs. They assert the presence of ethane and propane rule out contamination from shallow gas pockets that are common in the area. The study also found that methane concentrations were higher in drinking water wells within one mile of a drill site. A recent U.S. Geological Survey, however, found similar results in some Pennsylvania water wells before any drilling in the area. Industry groups criticized the researchers’ study, claiming that they sought out wells that homeowners already alleged to be contaminated and found methane in wells even where no drilling occurred.

NOAA data: Uinta Basin has high methane leakage, but conclusions elusive. Emissions of fugitive methane from shale development are a controversial topic. The National Oceanic and Atmospheric Administration (“NOAA”) had previously logged a leakage rate of 4% at the Denver-Julesburg Basin in Colorado, but NOAA data from Utah’s Uintah basin showed higher rates. The study was based on a 3-hour flyover at the Uintah basin with methane monitoring equipment. The authors cautioned that a 3-hour observation cannot necessarily be assumed as representative for other days or even other hours in the same day, or of other basins. NOAA abandoned subsequent attempts to confirm its initial data due to high winds that interfere with the monitoring equipment, but plans further studies of equipment suspected to leak the most, such as valves, pumps, and connectors.

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