EPA quits controversial groundwater contamination investigation. The Environmental Protection Agency (“EPA”) stated that it will not finalize its 2011 draft report claiming that hydraulic fracturing contaminated groundwater in Pavillion, Wyoming, ending its investigation. The draft report had blamed Encana Oil & Gas for contaminating residential drinking water wells. Environmental and local groups claimed the report showed hydraulic fracturing is dangerous and should be banned or strictly regulated, while Encana, industry groups, and the Wyoming Department of Environmental Quality contended that EPA’s data were flawed, undermining EPA’s draft conclusions. The U.S. Geological Survey tried to replicate the report’s results but concluded that one of EPA’s monitoring wells was poorly constructed and that all data from it were invalid. Environmental NGOs criticized EPA’s decision, but industry groups see the decision as EPA acknowledging its data were flawed and could not be salvaged. The Wyoming Oil & Gas Conservation Commission is separately studying the claims through a grant from Encana.
EPA study of potential effects of hydraulic fracturing on water delayed. An official with EPA’s Office of Research and Development acknowledged that its Congressionally authorized study of the potential effects of hydraulic fracturing on water would likely not be completed until 2016. EPA will release a preliminary report in 2014, with a peer review process to follow. As part of the study, EPA is conducting groundwater sampling in counties within Colorado, North Dakota, Pennsylvania, and Texas. A number of energy companies are cooperating with the agency, helping it to collect information on nearly 1,000 chemicals used in hydraulic fracturing.
Climate change challenge to oil and gas leases rejected. A federal judge declined to require the U.S. Bureau of Land Management (“BLM”) to impose methane emission reduction requirements on oil and gas development on federal lands. The court rejected the argument that the lack of controls would lead to global climate change, holding that if drilling on federal lands could be deemed culpable for global climate change, then “anyone could be liable” for undertaking everyday activities, such as driving to work. The plaintiffs had argued that global climate change resulted from the aggregate emissions of many small sources and that, collectively, oil and gas wells were responsible for 2% of U.S. greenhouse gas emissions. BLM and industry groups, however, successfully countered that the plaintiffs lacked standing because they failed to show how the emissions from these oil and gas wells actually impacted their interests.
Shale boom has U.S. considering oil exports. Congress may reconsider laws that have largely prohibited crude oil exports from the U.S. since the 1970s. Some analysts have estimated that domestic crude production may exceed refining capacity by 2015. Thus, although the U.S. still imports 40% of its crude oil (reduced from 60% in 2005) producers are concerned that once production surpasses refinery capacity, oil prices will drop and the incentive for domestic drilling will subside. Supporters of exports point out the U.S. will soon produce more oil than Saudi Arabia and exporting the excess production could serve U.S. foreign policy interests. The light, sweet crude produced from shale formations is also well-suited for export, as many U.S. refineries are geared towards processing heavy, high sulfur crude. As a result, the U.S. could export higher priced light crude while processing lower cost heavy crude domestically.
DOE will act “expeditiously” on LNG applications, but order of review changed. In a recent speech, Energy Secretary Ernest Moniz stated that the U.S. Department of Energy (“DOE”) will review the pending applications to export liquefied natural gas (“LNG”) “expeditiously,” but declined to elaborate further. Christopher Smith, head of DOE’s Office of Fossil Energy, which reviews the applications, testified before Congress but refused to answer questions on the review process. Smith explained the application review is an adjudicatory process, precluding any comments. He did say DOE would start prioritizing applications that have sought FERC approval, upsetting the prior first-come, first-serve basis for review. A representative for the Center for Liquefied Natural Gas argued that changing the review order was illegal given the lack of notice and public comment. An application for FERC approval can cost as much as $100 million, making it a risky gamble when many see DOE’s review process as uncertain. The Center has suggested that the group may be considering a suit over the change.
Judge rejects Tribe’s suit to block Kinder Morgan pipeline. A federal judge denied the New Jersey Sand Hill Band of Lenape and Cherokee Indians’ request to enjoin Kinder Morgan’s planned $400 million natural gas pipeline that would run from Pennsylvania to Sussex County, New Jersey. The Tribe argued the pipeline would destroy tribal land and desecrate a burial ground, violating the Native American Graves Protection and Repatriation Act and a 1778 treaty with the United States. The judge’s brief order characterized the suit as speculative, lacking any specific facts supporting claims that Kinder Morgan will imminently start construction of the pipeline, and failing to describe key criteria required for a court to issue a preliminary injunction. The Tribe may still prevail after Kinder Morgan is provided an opportunity to respond and the judge stated that he is open to putting the case on an expedited schedule.
Report calls for raising federal royalty rates. The Center for Western Priorities found western states such as Colorado, Montana, and New Mexico would receive between $400 and $600 million in additional revenue if the federal government increased its royalty rates for oil and gas development on federal lands to the same rates charged by state governments. States receive a share of the royalties for oil and gas developed on federal lands within their borders. The report criticized the lower federal rates as “antiquated” and argued the additional funding would help western states struggling with their budgets. It urged the U.S. Department of the Interior (“DOI”) to use its authority to set the royalty rates to rise as the price of oil and gas increases. The report also urged higher baseline royalty rates where companies took longer to develop leased land. The Western Energy Alliance disagreed, arguing that longer permitting times, more burdensome rules, and regulatory uncertainty make developing federal land more expensive than state and private-owned land. Development on federal land accounts for 5% of the country’s crude oil production and 11% of natural gas production.
Boulder City Council wants moratorium ballot initiative. The Boulder City Council ordered its staff to draw up a ballot initiative that would impose a three-year moratorium on hydraulic fracturing within the city’s jurisdiction. Council members said that approval of such an initiative would send a strong message to Governor Hickenlooper that voters are concerned about allegations that hydraulic fracturing contaminates air and groundwater and encourage other Colorado municipalities to enact similar bans. No drilling has ever been proposed in Boulder, so the ban would only be symbolic. Governor Hickenlooper has criticized municipal efforts to regulate or ban hydraulic fracturing, asserting that such regulations are the exclusive responsibility of the Colorado Oil & Gas Conservation commission. Voters in the city of Longmont previously approved a moratorium on hydraulic fracturing which is now being challenged in court by the Colorado Oil & Gas Association. The Boulder County Board of Commissioners also recently voted to extend a moratorium on hydraulic fracturing by 18 months even though it let a previous moratorium expire.
Pennsylvania Republican caucus moves to intervene in parks suit. The Republican caucus in the Pennsylvania General Assembly moved to intervene in an environmental group’s suit to block hydraulic fracturing in state parks. The Pennsylvania chapter of the Environmental Defense Fund filed suit in 2012 claiming that the Fiscal Code Amendments and Appropriations Act of 2009 unconstitutionally diverted $143 million from Pennsylvania’s Oil and Gas Lease Fund to the general revenue fund while allowing 65,000 acres of forest land to be leased for shale gas development. The group argues that allowing resource development in the state forest violates the government’s obligation to hold those forests in the public trust under the direction of the state’s Department of Conservation and Natural Resources. The legislators, however, argue that a ruling in the plaintiff’s favor would violate a Pennsylvania constitution provision assigning policy and budgetary decisions to the legislature.
New Texas law provides relief for shale play roads. Residents near active shale plays often complain that heavy trucks traveling to and from well sites have battered local roadways. With the passage of S.B. 1747, roads in and around the Permian Basin and Eagle Ford shale plays will get new funding for repairs. The bill creates a County Energy Transportation Reinvestment Zone with $225 million to improve highways and rural roads that were not built with a constant stream of heavy duty trucks in mind. Road damage is frequently cited by local residents wary of new and expanded shale development in their area. Oil production in both Texas shale plays is expected to increase next year.
Draft Polish hydraulic fracturing regulations under review. The Council of Ministers’ Economic Committee is now reviewing draft regulations that would authorize the use of hydraulic fracturing in Poland. The proposed rules include a 40% tax on gross profits and a requirement that all foreign companies partner with the National Operator of Energy Fossil Fuels (“NOKE”). NOKE will serve as both a shareholder, providing a maximum of 5% of the capital cost and taking a maximum of 5% of the profit, as well as acting as a regulator for each shale gas development project. This arrangement was modeled after those in Denmark, Norway, and the Netherlands. An environmental assessment report will be required before actual drilling, with the regulations proposing to shorten the environmental assessment process to 200 days. To date, Poland’s Environment Ministry has issued 113 prospecting licenses.
TEPCO is opposing Canadian LNG export tax. Tokyo Electric Power Company (“TEPCO”), Japan’s largest natural gas importer, is raising concerns with Canadian LNG export policy proposals. First among them is a proposal to tax LNG exports with the goal of raising $30 billion over the next 30 years. When the tax is added to the current opposition to LNG exports by First Nation and environmental groups, TEPCO worries the scope of planned Canadian export terminals will be reduced, despite the fact that Royal Dutch Shell, Petronas, and others have invested billions in British Columbia export terminal projects. TEPCO believes that it will take several export terminals competing for Japanese contracts to bring down the high price of natural gas.
French commission urges easing of hydraulic fracturing ban. A parliamentary commission recommended that France allow drilling to assess its shale gas reserves, noting that current estimates are outdated. France banned hydraulic fracturing in 2011, citing threats to groundwater. Prime Minister Francois Hollande, who took office after the ban, supports it despite recently lobbying for modification. The commission released its report the day after Energy Minister Delphine Batho rejected calls for easing the ban, claiming that hydraulic fracturing has caused “considerable” harm in the United States, such as earthquakes, groundwater pollution, heavy metal contamination, and increased truck traffic.
IEA: global market for natural gas still faces difficulties. The International Energy Agency (“IEA”) in its recent Medium-Term Gas Market Report, found that difficulties in establishing a true global market for natural gas are leaving some countries with over-supply and others with shortages. The five-year outlook estimated natural gas demand will increase by nearly 16%, characterizing this decade as the “golden age of gas.” The report suggests the United States, with half of the anticipated new gas production, may not become a significant exporter of LNG due to policy uncertainties, meaning much of the new U.S. gas could remain trapped in the country while Asian demand continues to rise. As a result, U.S. Henry Hub prices for natural gas are about $16 per MMBtu less than imported gas in Japan. Global LNG trade actually decreased by 2% last year, despite the price difference. The report predicts that LNG exports from Australia, expected to come online in 2015, will be the only significant relief for Asian buyers this decade.
Frac sand is suffering from railway bottlenecks. Sand suitable for use as proppant in hydraulic fracturing is a hot commodity in Minnesota and Wisconsin, but the lack of adequate railroad infrastructure is creating a bottleneck for suppliers. The backup led Union Pacific to institute a “Sand 2 Shale” program, attempting to rush supplies of frac sand to Texas shale plays while Canadian National Railway Company is investing $33 million on new and upgraded lines to ship frac sand faster. Of the two states, expansion in Wisconsin is seen as more likely. The Minnesota frac sand industry is facing significant uncertainty, as the legislature recently allowed local governments to impose local bans while requiring larger mining operations to undergo extensive environmental reviews. As a result, Minnesota has only a few operating frac sand mines, compared to over 100 in Wisconsin, leaving railroads less willing to invest in Minnesota.
Chevron sends off first LNG export shipment. The first tanker of LNG left Chevron’s Angola LNG Marketing terminal bound for Brazil. The terminal cost over $10 billion and endured a year and a half in delays from fires, labor shortages, and pipeline difficulties. Nevertheless, Chevron stated that it is committed to its LNG export business. Chevron has invested $77 billion in two Australian LNG export terminals and is a 50% owner in a planned export terminal in British Columbia.
LNG-fueled vessels are unlikely for deepwater drilling. LNG has made inroads with railroads and heavy duty trucks, but the CEO of Hornbeck Offshore Services, which builds and supplies support vessels for offshore applications, does not see LNG making an impact in the marine vessel market. In addition to LNG-engines costing as much as 20 times that of those using heavy fuel oil, most marine vessels lack the storage space for LNG, which must be kept at - 260° C. Despite the pessimism, Harvey Gulf International Marine recently announced that it would construct a $400 million offshore LNG fueling station near Port Fourchon, Louisiana. The company is hoping that deep draft cargo vessels may be more amendable to LNG as a fuel.
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