U.S. Forest Service set to ban horizontal drilling in GW National Forest. The U.S. Forest Service announced that it would issue a final regulation by the end of June which would prohibit the use of horizontal drilling within the George Washington National Forest in Virginia and West Virginia. This would effectively preclude the use of hydraulic fracturing for shale development in the Forest. Industry groups and Virginia Governor Bob McDonnell criticized the potential ban, stating that it is unjustified and inconsistent with the Administration’s promotion of energy security and greenhouse gas reductions. A ban could also set a precedent for how the Forest Service may act in response to lease areas in other national forests. Currently, no company is developing shale resources in the George Washington National Forest although the Forest Service previously leased 12,000 acres of mineral rights.
EIA: new estimate of worldwide technically recoverable shale resources. The Energy Information Administration (“EIA”) issued an updated assessment on worldwide technically recoverable hydrocarbon resources. EIA now estimates that approximately 26% of the United States’ crude oil reserves and 27% of its natural gas are technically recoverable from shale formations - 35% more than in EIA’s 2011 estimate. Outside of the U.S., more than half of the known shale resources are concentrated in Russia, China, Argentina, Libya, and Canada. EIA estimates that, worldwide, shale formations contain up to 345 billion barrels of crude oil and 7,299 trillion cubic feet of natural gas, although development outside of the U.S. and Canada is still considered “highly uncertain.” According to one industry analyst with PFC Energy, private ownership of subsurface rights, a market of experienced well service contractors, an existing pipeline infrastructure, and available water supplies provide significant advantages to the U.S. and Canada. Without this structure, there is some skepticism about the pace of development outside of North America.
“FRAC Act” reintroduced in the Senate. Pennsylvania Senator Bob Casey re-introduced legislation that would require oil and gas companies to publicly disclose chemicals used in hydraulic fracturing fluid and effectively repeal a provision in the Energy Policy Act of 2005 that exempted hydraulic fracturing from the definition of underground injection under the Safe Drinking Water Act. A similar version of the Fracturing Responsibility and Awareness of Chemicals Act (or “FRAC Act”) has been sponsored by Rep. Diana DeGette in the House every session since 2008. Both House and Senate FRAC Act bills would include protections for chemicals deemed to be trade secrets.
The City of Boulder passes moratorium on hydraulic fracturing. The Boulder City Council unanimously passed a one-year moratorium on hydraulic fracturing within city limits. The Colorado Oil & Gas Association responded that the vote was a political gesture given that there are no drilling activities in Boulder. It noted that even without a moratorium, the state’s new setback requirements would have made shale development in the city’s urban areas virtually impossible. The group stated that it was unlikely to take any legal action to challenge the moratorium. The environmental group Clean Water Action suggested the vote was part of a growing movement by Colorado municipalities to outlaw hydraulic fracturing. The Colorado OGA disagreed, noting that Boulder County allowed its own moratorium to expire last week while several municipalities voted against imposing a moratorium. Fort Collins initially imposed a moratorium but rescinded it three months later.
Proposed Wyoming rules would require additional groundwater sampling. The Wyoming Oil & Gas Conservation Commission proposed a new rule that would require oil and gas companies to conduct baseline groundwater sampling before drilling new wells with additional sampling after drilling and in intervals during operation. All “available water sources,” such as aquifers and water wells, within one half-mile of the drill site would have to be sampled. Only Colorado requires a similar groundwater sampling scheme. The Commission stated that the baseline sampling could quickly resolve allegations that oil and gas drilling contaminated groundwater. Environmental groups praised the new draft but the Petroleum Association of Wyoming had concerns. A spokesman stated that, although the Association agreed with the principle, there are some additional details that it would like to see included. The draft rule is currently open for public review and comment.
Pennsylvania collects $200 million from shale gas impact fees. Pennsylvania Governor Tom Corbett announced that, under the state’s $50,000 per well impact fee, it collected just over $200 million from shale gas development in 2012. About half of the impact fees will be distributed to municipal governments for road repair, first responders, and other public expenditures related to the shale gas boom. The Governor’s office estimated that the shale gas industry contributed another $303 million in corporate, sales, and income taxes last year. Critics maintain that a severance tax, similar to that used in West Virginia, would have doubled the revenue from gas drilling.
Kinder Morgan pays $220,000 in fines for well violations. The Colorado Oil & Gas Conservation Commission (“COGCC”) fined Kinder Morgan, Inc. $220,000 for improperly storing drill cuttings at four well sites and failing to report the piles of drill wastes as spills. According to the COGCC, its inspectors found soil staining and leaching fluids at the site. The company will pay $140,000 in penalties and $80,000 towards a public project that has yet to be named. COGCC stated that Kinder Morgan has taken all of the required corrective actions and changed its internal operating procedures related to drill waste storage.
Polls show support for California moratorium on hydraulic fracturing. A poll by the University of Southern California and the L.A. Times found that 58% of Californians would support a state-wide moratorium on hydraulic fracturing. California’s Monterey Shale play is estimated to hold approximately 2/3 of the country’s shale oil reserves. The poll of 1,500 registered voters found that 70% wanted either a moratorium or stricter regulations for energy companies. Support for hydraulic fracturing was higher in the Central Valley, where most shale development would take place. There, respondents supported shale development 42% to 32%.
Germany defers hydraulic fracturing regulation. Legislation that would regulate the use of hydraulic fracturing in Germany was tabled until after the September elections. The bill faced dim prospects given the opposition from the Social Democrat and Green parties which held enough seats in the Bundestat, Germany’s upper house of parliament, to block it. German Chancellor Angela Merkel, who supports the bill, is seeking a third term and currently has high approval ratings. The bill’s backers are hoping that the new election will create a majority in support of the bill.
EC polling finds strong backing for shale development. A poll commissioned by the European Commission’s environmental department, surveying 22,000 citizens, found substantial support for hydraulic fracturing in European Union member countries. Those in favor were evenly split between the passage of comprehensive regulations and a combination of voluntary action with non-binding guidance. Only a third of the respondents believed that shale gas should not be developed under any circumstances. Environmental groups were predictably opposed to any shale gas development while local and regional government officials largely supported development. Among supporters, reducing dependence on other countries for natural gas was the leading benefit cited by the respondents.
OPEC meeting: U.S. oil production is a growing concern. During its recent meeting in Vienna, Organization of the Petroleum Exporting Countries (“OPEC”) officials acknowledged that increasing U.S. crude oil production, its highest since 1992, was a growing concern. The cartel will soon commission a study on oil prices based on the assumption that the United States will no longer be a major crude importer by the end of the decade. An analyst at Citigroup in London opined that, if U.S. production leads to a drop in world crude prices, OPEC will no longer be able to restrain crude oil output among its member countries. It could also mean that Asia would become OPEC’s main customer base. The concern is a change from the sentiments voiced at OPEC’s December 2012 meeting where Secretary-General Abdalla el-Badri stated that U.S. oil output was insignificant and would not impact the cartel. As for the present, OPEC concluded its meeting with a resolution to hold member output steady through 2013.
New shale gas deposit discovered in the U.K. IGas Energy announced that it discovered a new shale deposit in northwestern England that could hold up to 172 trillion feet of natural gas. The company declared that developing the new play could mean energy independence for the United Kingdom. Shale gas development remains controversial in the U.K., in part, due to a series of small earthquakes in 2011 related to shale gas drilling by Cuadrilla Resources.
New LNG export terminal planned in Eastern Canada. Pieridae Energy announced it plans to develop a liquefied natural gas (“LNG”) export terminal in Nova Scotia following a deal with German utility E.ON. The Goldboro LNG terminal would draw on natural gas from the Marcellus Shale but would sell at European prices instead of the much lower U.S. Henry Hub prices. Pieridae has already began the environmental review process with the Nova Scotia government and the First Nations tribes in the area. The company expects that construction will begin in 2015 with operations starting in 2019.
Japanese industry group urges Alaska to increase gas exports. Resources Energy Inc. (“REI”), a consortium of Japanese companies and government officials, is urging Alaska to expedite plans to build a gas pipeline that would run from the North Slope to an LNG export terminal. Spurred by $15/MMBtu gas at home, Japanese industry has taken a significant interest in expanding LNG exports. The group wants to sign agreements to take title to the gas at the wellhead and become a full or part-owner of the pipeline and LNG export terminal. Under their vision, REI would start receiving LNG by 2020, even though the prospects of a North Slope pipeline have a long and controversial history. Several U.S. companies have contemplated building the pipeline, then scrapped those plans when shale gas development led to a sharp decline in gas prices. Prodded by the state, the companies are now examining plans for the pipeline again but Alaskan officials are concerned that those plans are moving slowly. This prompted an independent state corporation, the Alaska Gasline Development Corporation, to draw up plans for its own pipeline. REI stated that it would be willing to work with either pipeline developer and offered to begin seeking approvals for an LNG export terminal. The total cost for a 42-inch pipeline and LNG export terminal is estimated to be between $45 and $65 billion.
Oil and gas companies spend record amounts in 2012. An Ernst & Young study found that the 50 largest oil and gas companies plowed $185.6 billion into onshore oil and gas capital expenditures in 2012, a record amount, despite lower profits. The study’s lead author stated that companies are paying a premium for domestic tight oil development while selling off international assets to fund the projects. The rush to oil was prompted partly by low natural gas prices, a cause of the nearly 60% decline in profitability for the companies studied. Although natural gas prices are up to just over $4/MMBtu, Ernst & Young predicted that large companies would remain wary of further natural gas development until the price stabilized between $4 and $5/MMBtu.
Chesapeake sells Utica Shale play leases. Chesapeake Energy Corporation, the largest leaseholder in the Utica shale play, sold off nearly 1,100 eastern Ohio leases to Hilcorp Energy Company. The company previously sold off 94,000 acres in leases in April. Chesapeake has long been bullish on the Utica Shale play, but thus far the oil and natural gas liquids production have been disappointing, prompting several companies to sell off their interests. Hilcorp has been one of the largest buyers of the unwanted acreage and the company stated that it is committed to developing eastern Ohio shale. The sale price for the leases was not publicly disclosed.
Devon Energy spins off midstream assets. Devon Energy Corporation spun off midstream oil and gas assets in Texas, Oklahoma, and Wyoming into a new master limited partnership. Low natural gas prices have pinched the company’s cash flow, so Devon relented to shareholder pressure to restructure its pipeline and processing plant business. Master limited partnerships can aid in attracting outside investment due to tax advantages. Despite being one of the earliest companies to use horizontal drilling with hydraulic fracturing, Devon has recently struggled with debt, leading its stock prices to lag behind its peers.
Shale developers shift from exploration to efficiency. Some industry analysts report that independent energy companies are shifting investments away from new acreage to improved technology, as it is believed that profitability will now depend more on better imaging data, faster and longer horizontal drilling, and other technological innovations to reduce operating costs while improving production yield. Noble Energy, for example, reported that its new horizontal drilling techniques in the Denver-Julesburg Basin could yield 1 million barrels per well, compared with 40,000 barrels just three years ago. Similarly, Chesapeake Energy recently reported that average drill times in the Eagle Ford shale play have been cut from 25 days to 18, with the company striving to drill each well in 13 days. Many of the independents had cash flow deficits in 2012 and are now facing significant pressure from shareholders to turn profits instead of just building up asset bases.
Plaintiffs’ lawyers are turning to nuisance suits. A Pennsylvania lawyer is filing nuisance claims on behalf of six families against Chevron and WPX Energy claiming damages allegedly caused by noise and odors from nearby compressor stations, as well as by disposal of wastewater produced by hydraulic fracturing of wells. In an interview, the attorney claimed that proving a nuisance is easier because a plaintiff allegedly need only show drilling interfered with the use and enjoyment of property (odors, noise, vibrations, and other “quality-of-life” issues), not that it caused actual contamination. Plaintiffs have filed similar complaints in at least ten different states, according to a report by the Yale Law School’s Center for Environmental Law & Policy.
Petronas to build $16 billion LNG export terminal. Malaysia’s national oil company, Petronas, announced plans for a $16 billion LNG export terminal to be constructed in Western Canada. Petronas will finance the estimate $9-$11 billion for the terminal itself with TransCanada investing $5 billion in a 750 kilometer pipeline to supply the gas. The Pacific Northwest LNG Project would be located on Lelu Island in Northeastern British Columbia. Petronas also announced that it already inked its first deal from a buyer, Japan Petroleum Exploration Company.
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