This Week in Hydraulic Fracturing

Energy and Environmental Update

Federal

EPA reduces estimates of methane leakage at hydraulically fractured well sites. In a significant step, the Environmental Protection Agency (“EPA”) lowered its estimate of fugitive methane emitted at hydraulically fractured well sites. As a result, the agency has reduced its estimate of greenhouse gas emissions from the oil and gas sector by 20% in its 1990-2010 greenhouse gas inventory relying on emission controls which EPA previously had assumed were not installed and by revising estimates for liquids unloading, a maintenance practice for producing wells. The inventory’s trend shows methane emissions dropping, even as production has been increasing. Industry had previously criticized EPA’s estimates as based on poor quality data and unrealistic assumptions that were contrary to actual survey data. Environmental NGOs, who filed challenges to the oil and gas new source performance standards demanding direct regulation of methane emissions, criticized the revisions and stated that methane regulation must still be a priority for EPA.

States

FracFocus.org criticized and defended. A Harvard study asserts that FracFocus.org, the site used by eleven states for hydraulic fracturing fluid chemical disclosure, has “serious flaws” and that states should not rely on the site. The report points to the ability of companies to withhold information as trade secrets, and asserts that reporting deadlines have not been enforced, that the uniform approach does not reflect differences among state requirements, and that search capabilities are allegedly inadequate. The Ground Water Protection Council (“GWPC”), a non-profit staffed by representatives from state regulatory agencies, operates FracFocus.org with funding from industry trade associations. GWPC defended the site’s capabilities and said the study’s authors misrepresented the relationship among industry, the states, and GWPC. Among other things, according to GWPC, states are notified when companies post required data but it is up to regulators to enforce violations of state law on disclosure deadlines. It also explained that state regulators determine whether claims of trade secret claims meet the requirements of a particular state’s law, not FracFocus.

Industry eyeing suit against California air district reporting rule. Oil and gas companies may file suit over California’s South Coast Air Quality Management District’s new rule, adopted on April 5, 2013, requiring operators using hydraulic fracturing to report the chemicals they use in hydraulic fracturing fluid as well as emissions data. Industry sources say the rule violates California laws protecting trade secrets as the District plans to post all chemicals used on its website. Under this system, companies would report to the District all chemicals used, identify which ones are confidential, and then the District would determine whether it agrees with the designation. If a company disputes a confidentiality determination by the District, it would then have to file suit to block disclosure.

Mississippi reduces oil and gas severance tax. Mississippi reduced its severance tax on hydraulically fractured wells from 6% to 1.25% for the first 2 ½ years of production. The move is meant to encourage development in the state’s Tuscaloosa Marine Shale formation.

New York Senate bill would prohibit non-disclosure agreements in settlements. Under a new bill, New York would prohibit the use of non-disclosure agreements in settlements involving tort claims related to hydraulic fracturing. Inspired by a recent court case in Pennsylvania, where a judge ruled that an agreement settling claims that hydraulic fracturing had allegedly contaminated well water could not be protected from public disclosure, the bill would prohibit non-disclosure agreements in cases alleging threats to public health or safety.

Bill would incentivize reductions in Bakken flaring. A bill in the North Dakota legislature would provide tax breaks for companies that capture natural gas, released as a byproduct of crude oil production, instead of flaring it. Given the lack of natural gas pipeline infrastructure, the gas would likely be used to generate electricity at the well site or processed into natural gas liquids. Companies that do so, however, would get a two-year tax break. Environmental NGOs have criticized the gas flaring as contributing to air quality problems, which state officials have denied. Industry representatives have generally supported the legislation, although the tax breaks would not equal the high capital costs to install a gas-to-liquids plant that would process the captured gas. A longer term answer would be to construct the necessary pipeline infrastructure to carry the gas.

Illinois regulations for hydraulic fracturing stalled. A compromise bill, worked out between industry, environmentalists, labor unions, and key Illinois legislators in March was hailed as an example of a regulatory package that could let hydraulic fracturing move forward. Now, the bill is stalled in the Illinois House Revenue and Finance Committee. Labor unions surprised some by seeking an amendment requiring all well service contractors to hire a union-certified well engineer to oversee the work, and despite industry’s confidence that a compromise could be worked out, the bill is being held by House Speaker Michael Madigan. Despite his initial support for the bill, Rep. Madigan has stated he supports a moratorium on hydraulic fracturing in Illinois.

Groups support California hydraulic fracturing moratorium. Environmental, community, and professional groups publicly endorsed A.B. 1301, a California bill under consideration that would impose a moratorium on hydraulic fracturing until legislation is passed regulating the practice. They called hydraulic fracturing a danger to the climate, air, water, wildlife, public health, and private property. The proposed legislation is one of ten bills under consideration, with two others calling for a moratorium. The bills are viewed by some as a response to the Division of Oil, Gas, and Geothermal Resources’ (“DOGGR”) discussion draft rules for hydraulic fracturing, which environmental NGOs and some state legislators criticized as too weak. Among other provisions, the bills propose to prohibit hydraulic fracturing near aquifers, require public disclosure of chemicals used in hydraulic fracturing fluid, require operators to hold large bonds, and classify wastewater as a hazardous substance. The Western States Petroleum Association has advocated that DOGGR be allowed to complete its work before the legislature takes action on new legislation.

International

U.K. advertising regulator directing company to revise claims regarding hydraulic fracturing. The Advertising Standards Authority is directing Cuadrilla Resources Ltd. to stop claiming it uses “proven, safe technologies” when referencing hydraulic fracturing in promotional materials. The Authority is requiring the company to weaken other claims about how the company protects against the potential for groundwater contamination, changes that Cuadrilla characterized as “absurd and pedantic.” For example, while the company cannot claim that hydraulic fracturing is “safe,” it can advertise that the practice “can be done safely.” A group opposed to hydraulic fracturing reported the material to the Authority, prompting the investigation.

Panelists don’t see shale boom happening overseas. Industry representatives speaking at a recent Bloomberg New Energy Finance Summit were skeptical that a foreign shale resources boom would resemble the one in the United States. Panelists noted that the U.S. already had a significant number of oil and gas developers and service companies when the technology for hydraulic fracturing with horizontal drilling became commercially viable. This contributed to lower costs and innovation through competition, but also meant there was a mature pipeline and midstream infrastructure, significant pre-existing geological information, and a mineral rights system that created incentives for private landowners to consent to drilling. Even where there is favorable geology, if a country lacks experienced personnel, infrastructure, and similar legal rights, the scope and pace of shale development will be impacted.

Business

Trucking industry expands use of natural gas engines. Engine maker Cummings began shipments of its heavy duty liquefied natural gas (“LNG”) engines, with UPS announcing that it will purchase nearly 700 of the new engines by the end of next year. Navistar and Volvo also have announced plans to roll-out heavy duty LNG engines in the next few years. Several federal and state tax credits and grants are helping to subsidize the cost of switching from diesel to LNG. Companies including, Walmar, Proctor & Gamble and Nike are looking at contracting with shipping companies using LNG engines as a way of saving fuel and endorsing a more environmentally-friendly transportation fuel. Currently, LNG sells for approximately $1.50 less per gallon equivalent of diesel fuel, but finding LNG is still difficult. Clean Energy Fuels has installed about 70 LNG stations at Pilot Flying J truck stops with 30 to 50 more stations planned by the end of the year. Shell is also planning to install fueling stations at truck stops. Although there may be 100 LNG stations by the end of 2013, and there are more than 1,000 compressed natural gas stations, by comparison, 157,000 stations sell diesel.

Tesoro to build rail terminal for crude shipments. Oil refiner Tesoro Corporation will construct a 120,000 barrel per day railroad terminal in Washington to unload crude oil shipments from the Bakken shale play. Tesoro believes that the terminal, which would handle shipments from both railroad cars and barges, is worth the estimated $13 per barrel cost. The lack of pipeline capacity has created bottlenecks that prevent adequate supplies of crude oil flowing to refineries and putting a steep discount on Midwestern crude. Tesoro has five refineries in California.

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