Sidley Shale and Hydraulic Fracturing Report - December 14, 2015

Federal

Interior appeals injunction against hydraulic fracturing rule. The U.S. Department of the Interior, along with several environmental groups, appealed a federal district court’s preliminary injunction barring enforcement of its rules governing hydraulic fracturing on federal and tribal lands while the case proceeds. Industry groups questioned the timing of the appeal, arguing that it would be a waste of time and resources since the district court would likely reach a final decision before the Tenth Circuit resolved an appeal of the preliminary injunction. Environmental groups stated they believe that, since the district court found that the U.S. Bureau of Land Management (BLM) lacked the authority to regulate hydraulic fracturing, there is no point in proceeding toward a final judgment as the legal question should be resolved by the court of appeals. 

Protests lead to second BLM lease sale postponement. Facing pressure from climate change activist groups, BLM postponed a proposed lease sale for federal lands in Arkansas, Michigan and Utah. The groups, calling themselves the Keep It in the Ground movement, threatened to block the entrances to the federal buildings where the lease sales were scheduled to be held. Similar threats led BLM to postpone a planned lease sale that was scheduled for November 17, 2015. The groups are demanding that BLM end federal lease sales for fossil fuel development altogether, claiming BLM has discretionary authority to do so under the Mineral Leasing Act. Although BLM disputes whether it has the authority to refuse to lease federal lands for oil and gas development, the Keep It in the Ground activists cite a 1931 case upholding President Hoover’s cessation of oil and gas leasing in the 1920s amidst a crude oil price crash. Industry groups, however, argue that 1987 amendments to the Mineral Leasing Act mandate quarterly lease sales in each state where eligible lands are classified as being available under resource management plans. 

States

Colorado Supreme Court hears arguments on municipal bans. Proponents of municipal bans on hydraulic fracturing argued that lower courts were wrong to hold that Colorado law has exclusive control over oil and gas regulation. The municipalities claim state law allowing hydraulic fracturing is not enough to preempt local regulation because while Colorado has an interest in oil and gas development, there is no interest in any particular technique, such as hydraulic fracturing. The state’s interest, they argued, can be met through conventional drilling techniques. The Colorado Oil & Gas Association, which obtained injunctions against the bans in lower courts, argued that state law provides “cradle to grave” regulation of oil and gas development, leaving no room for local regulation. An attorney for the Colorado Oil & Gas Conservation Commission also argued that the state has an interest in uniform regulation and a statutory duty to maximize efficient production through cost-effective methods like hydraulic fracturing. TOP Operating Company, which negotiated rights to conduct hydraulic fracturing with the City of Longmont just months before voters imposed a ban through a ballot measure, argued that its drilling rights would be worthless if the ban were sustained.

Pennsylvania judge rejects landowner request for remand to state board. A Commonwealth of Pennsylvania court declined to grant a landowner’s request to remand his case to the Pennsylvania Environmental Hearings Board (EHB) on the grounds that new evidence regarding alleged well contamination would not have led to a different result. The landowner had argued that a report by the federal Agency for Toxic Substances and Disease Registry established that the chemicals in his drinking water well came from a nearby gas production well. The judge, however, said that the report did not go far enough in establishing that connection and would not have led the EHB to reverse its decision that the landowner had failed to establish a hydrologic connection between the well and his drinking water well, and that both his own poorly maintained septic system and a neighboring salvage yard were more likely sources of contamination. 

Oil and gas companies move to dismiss Oklahoma quake suit. Defendants Spess Oil and New Dominion moved to dismiss claims by an Oklahoma resident Sandra Lass, who alleges that a 5.6 magnitude earthquake caused her two-story fireplace to collapse in 2011, injuring her legs. The suit claims the quake was caused by underground injection wells used to dispose of oil and gas wastewater, citing U.S. Geological Survey and Oklahoma Geological Survey work allegedly linking wastewater disposal wells to earthquakes. The companies moved to dismiss on statute of limitations grounds but noted that if the suit proceeds, it could significantly hobble Oklahoma’s oil and gas industry. The trial court previously dismissed the suit for lack of jurisdiction, but the state Supreme Court reversed the decision and remanded it in June 2015.

Kern County drilling ordinance challenged. Environmental and farming groups filed suit to block Kern County, California’s new changes to its zoning ordinances, claiming that it acts as a “rubber stamp” for new oil and gas drilling without complying with the California Environmental Quality Act. The Kern County Board of Supervisors explained that the zoning revisions allow for general permits without public hearings so long as applicants provide a set of required information and meet heightened surface-use requirements. The plaintiffs claim that the common split of surface and subsurface rights will allow companies to drill under private property without any site-specific mitigation measures that could avoid damage to groundwater or crops. An attorney for Kern County, however, argued that the new zoning ordinance enacts far more stringent environmental protections from oil and gas operations than under prior law. 

Business

EIA: Short-term crude oil trends may be correcting, and natural gas edges coal for power generation.The U.S. Energy Information Administration (EIA) released its December 2015 Short-Term Energy Outlook. The report indicates that world crude oil consumption increased in November 2015 while supply fell. The sign of a possible supply-demand correction is good news for oil producers, as West Texas Intermediate futures recently fell below US$40 per barrel. U.S. crude oil production declined by approximately 60,000 barrels per day in November 2015. U.S. companies have slowly ramped down production since April 2015, but a production surplus remains. Consumption in member countries of the Organization for Economic Co-operation and Development (OECD) fell through 2014, but the EIA forecasts that OECD countries will increase consumption of crude oil and other liquids by about 300,000 barrels per day in 2016. EIA also reported that natural gas edged out coal as the United States’ primary fuel for electricity generation for July–September 2015. On an annual basis, it is expected that coal will still have a slight advantage in 2015 and 2016, with the EIA predicting that 34 percent of the country’s power will come from coal and about 32 percent from natural gas. EIA expects that high inventories, continued production growth and expectations of a warm winter will keep gas prices consistently below US$3 per MMBtu and allow companies to prioritize gas-fired electricity generation.