Articles Posted in Oil and Gas Law

With all the news about the false controversy involving hydraulic fracturing, the Railroad Commission of Texas is pre-emptively addressing concerns about another important issue for the Texas oil and gas industry–natural gas flares. Commissioner David Porter announced that the Eagle Ford Task Force will study the issue of whether Texas’s regulations on flaring and ventilation need to be updated.

Gas flares are generally associated with a booming industry where the production is outstripping the infrastructure capacity, especially in terms of pipelines. In high producing areas, like the Eagle Ford Shale, drilling and first production is reached weeks before pipeline companies get natural gas infrastructure such as pipelines into the area. Oil can be moved by truck, but natural gas needs pipelines. In general, the use of gas flares as a safety valve is not used in an abusive fashion, because it is in the oil and gas companies’ interest not to waste gas. But Mr. Porter still wants to ensure that everyone is complying with the current regulations on flaring and venting.

This issue of gas flares is tied to the debate on hydraulic fracturing, as the Eagle Ford Task Force was also commissioned to look into issues of how hydraulic fracturing affects groundwater. The Task Force is branching into this new area, with its main concern being the effect of gas flares on air quality. At Eagle Ford, there is concern that the San Antonio metro might exceed federal limits on ozone emission standards. The Texas Railroad Commission intends to work with other state agencies to streamline the air pollution rules in Texas and also to make monitoring and reporting on air emissions easier.

In April 2012, President Obama signed an executive order creating a six person committee to coordinate efforts among three government agencies to research the risks and benefits of unconventional oil and gas production. The committee is composed of two members each from the Department of Energy, the Environmental Protection Agency, and the US Geological Survey, which is part of the Department of the Interior. It was set up to use each agency’s particular competencies to address concerns about unconventional technologies and shale development and to make sure the industry properly mitigates any risks involved. The first meeting of the group was in May 2012. The overall goal of the committee is to develop a research plan for prudent development of U.S. oil and gas reserves.

The Energy Department representative who is up heading the committee, Christopher Smith, the Deputy Assistant Secretary for Oil and Natural Gas, in May 2012 told a breakfast meeting hosted by the Chamber of Commerce in Fort Worth, Texas, that he believes shale drilling can be done safely. He later toured the manufacturing facility of FTS International, formerly called Frac Tech, which makes equipment for hydraulic fracturing-the “controversial” technology involved in getting oil and gas from shale. Mr. Smith is a Fort Worth native who graduated from Southwest High School in 1986 and is also a graduate of both West Point and Cambridge University.

This was Mr. Smith’s second visit to the Fort Worth area in his official capacity since his appointment at the Department of Energy in 2009. Two years ago he was in Fort Worth with a Chinese delegation in the US to learn more about hydraulic fracturing. At the time, Mr. Smith told the Chinese that the Barnett Shale is ground zero for learning about shale oil and gas development, because “they can see the benefits, but also the ways the City has worked with some of the environmental concerns.”

Abundant oil and gas in Texas and the rest of the U.S. has already proven to have significant economic benefits, and not just to mineral owners in Texas and the U.S. It will continue to benefit the country as technology in this sector continues to improve. Our energy independence has the capacity to improve for the next decade or more. Increased domestic fuel production rose by 1.4 million barrels per day between 2008 and 2011, while net imports of fuel declined by 2.7 million barrels per day. More production will create jobs and help reduce the trade deficit.

However, a newly released study, “The New American Oil Boom: Implications for Energy Security,” by the Securing America’s Future Energy’s Energy Security Leadership Council (ESLC), a group comprised of top military brass and CEOs of major companies, suggests that while increased domestic oil production is important, alone it is not a long term solution for America. The report was released at the Bush Institute at Southern Methodist University in Dallas, Texas recently.

“Energy independence” for the United States is an admirable goal, but even if the U.S. were to produce enough oil to meet our demand, the domestic price is still set on the global market, meaning a potential supply disruption anywhere can impact the price of oil everywhere,” said Herb Kelleher, co-founder and chairman emeritus of Southwest Airlines and a member of the ESLC. The U.S. remains tied to unpredictable Middle East politics because of oil needs.

The film Gasland purported to show how communities are adversely affected by hydraulic fracturing (also known as “fracing”). This film was full of inaccuracies and half-truths, and was apparently intended to incite opposition to fracing by masquerading as a “scientific” documentary. Environmentalists and politicians with a specific anti-energy agenda use films like this one to promote their own cynical goals. This campaign against a decades-old drilling practice continues despite numerous scientific studies and solid evidence disproving fracing’s naysayers.We can now add another study to that growing list. A effort by scientists and researchers at Durham University, Cardiff University (both in the UK) and the University of Tromsø (in Norway) has found that fracing at least 2,000 feet below an aquifer minimizes chances of water contamination in the United States. Their study was published at the end of April, 2012 in the journal Marine and Petroleum Geology. Of particular interest to Texans, it examined the Barnett and Eagle Ford Shales in Texas, as well as the Marcellus Shale in Pennsylvania, the Niobrara Shale in Colorado, and the Woodford Shale in Oklahoma.

One of the authors of the study, Richard Davies, said: “[T]he Earth has a number of safety mechanisms which stop natural hydraulic fractures from going on forever.” The study explains how hydraulic fractures can happen naturally, as rocks embedded with water deep underground get pressurized over millions of years. The liquid can cause the rock to crack, and the crack will continue until it hits another type of rock, and then it stops. What happens with man-induced hydraulic fracturing is very similar, as pressurized water is pumped into the rock to crack the shale and release the trapped natural gas. People worry that these cracks will go so far vertically as to connect the wells to the aquifers.

The study authors looked at thousands of natural and man-induced fractures all over the world. In particular, the authors looked at data from five natural gas shale reservoirs around the United States (those listed above). They found that the longest vertical crack was 2,000 feet long. That sounds like quite a long distance, but in reality these natural gas wells are usually fraced below 7,000 feet and the water aquifers generally exist above 1,000 feet. The study also points out that the chance of a crack being longer than 1,500 feet is less than one percent. The longest such crack anywhere in the world is 3,600 feet in Namibia. That crack apparently took billions of gallons of water and millions of years to reach that length. Even that fracture is not close enough to affect the aquifers at stake here-they are at least 6,000 feet away from the fractured area.

Bayside Petroleum Company, based in Dallas, Texas, has been busy increasing its oil and gas production by renewing or acquiring leases in two mature oil and gas fields in Texas.

Bayside recently renewed its leases in the Muscadine Field in Tyler County, Texas in preparation for rejuvenating this field, first discovered in the 1950s. This field has three wells on 230 acres of land and has produced 400,000 barrels of oil and 350 million cubic feet of natural gas. Bayside plans to drill a new well, to a depth of 8,175-8,500 feet. This well will replace the older well, called the No. 2 well, which will be reserved for future use as a saltwater disposal well. The other two wells, Nos. 3 and 4, are on lands surfaces controlled by the National Park Service (the NPS). The company will file a Plan of Operation with the NPS and, upon approval, Bayside will commence reworking wells 3 and 4. The company will also evaluate the Muscadine Field for future additional drilling. Bayside specializes in reworking and recompleting “marginal” oil and gas wells.

Gordon Johnson, CEO of Bayside, stated, “This is an excellent opportunity for Bayside to bring increased production from this field to the market.” Bayside owns 100 percent working interest in the Muscadine Field and a 70 percent net revenue interest for this lease.

It seems like a noncontroversial statement to say that increasing the supply of a product will lower its price. But because of politics, that statement still elicits arguments and recriminations in Washington when the discussion is about oil or gas production. At a March 20, 2012 press conference, American Petroleum Institute President and CEO Jack Gerard stated the obvious, that increased oil and gas production domestically will relieve the price at the pump, and said that President Obama needs a “reality check” about the mixed signals his administration is giving to the market. The President’s comments about releasing oil from the Strategic Petroleum Reserve, and encouraging other countries, like Saudi Arabia, to step up production, proves that even the Obama administration understands that supply is a big factor in the high gas prices Americans are facing at the pump in the midst of the summer driving season. At the same time, the Obama administration is talking about raising taxes on gasoline, which sends the opposite message to the market and increases prices.

Mr. Gerard stressed in his press conference that voters understand that tax increases are not the solution to the high price of gas, and voters are overwhelmingly supportive of the oil and gas industry in America. He discussed the findings of an API Harris International poll that questioned 1,009 registered voters in early March. According to Mr. Gerard, 81 percent of those polled believed that more US oil and natural gas development would reduce gas prices. Another 84 percent thought it would help US energy security, and 90 percent of those polled think that more oil and gas development will lead to more American jobs.Mr. Gerard explained his prescription: “A true all-of-the-above energy strategy would include greater access to areas that are currently off limits, a regulatory and permitting process that supported reasonable timelines for development, and immediate approval of the Keystone XL pipeline to bring more Canadian oil to US refineries. This would send a positive signal to the market and could help put downward pressure on prices.” As evidence of the impact of market signals and increased supply, he points to gas prices over $4 a gallon during President George W. Bush’s administration, and how lifting the moratorium on Gulf of Mexico drilling resulted in a dramatic drop in the price of oil, and therefore the price of gas, within days. He further asserted that the US has ample domestic energy reserves and can safely produce more oil and gas as the country needs it.

This issue is becoming more critical to Americans by the day. Business Week reported that the national average price for a gallon of gas is $3.97, which is an increase of almost 4 cents in just two weeks. These prices affect every American, and none of us can afford to be shelling out so much money unnecessarily.

Until recently, most of us in Texas and throughout the country (unless you had an oil and gas lease) struggled with high gasoline prices. However, a new study entitled, “Are the Energy States Still Energy States?” by Mark Snead, an economist and Vice President of the Federal Reserve Bank of Kansas City, provides more context to the overall interaction between the energy industry and the economy. The study suggests that thirteen energy producing states, (we’ll call this group the “Energy States”), have strong enough energy industries that higher oil and gas prices actually help, rather than hurt, their economies. Mr. Snead’s list of the thirteen Energy States are Alaska, Louisiana, Mississippi, Oklahoma, Texas, Colorado, Montana, New Mexico, Utah, Wyoming, Kansas, North Dakota and West Virginia.Texas itself is the largest single producer of both oil and gas in the country, and by itself produced 21% of crude oil and one-third of natural gas output in the U.S. in 2008. The same year, the Texas energy industry generated nearly $65 billion in oil and gas earnings, more than half of the national earnings from oil and gas.

Mr. Snead’s study shows that during the recent recession, the Energy States did better than other states that lacked a robust energy sector. Individually, all the Energy States economically outperformed both the nation as a whole and non-energy states as a group. The Energy States experienced faster job growth prior to the recession, entered the recession much later, and have posted better job growth overall since the recession. Between December 2007 and September 2009, non-energy states saw a contraction of employment by 5.7%, compared to 2.8% in Energy States. Since the start of the recession, Energy States were four of the top five states, and seven of the top ten states, in job growth. Energy States North Dakota and Alaska were the top two states in terms of job growth and had the only net job increases throughout the recession! Contrary to general expectations, the economies of the Energy States actually start to decline when gas prices go down. Lower oil and gas prices have the inverse effect on the Energy States compared with non-energy states, where high gas prices can take a severe toll on economic productivity.

Mr. Snead stated that on their own, the increased employment and income produced in the Energy States is not enough to offset the economic effect of high gas prices, but that if the country as a whole increased energy conservation and production efforts, it could make a significant difference. He pointed to two obvious benefits to Americans-more jobs and more money focused on domestic resources instead of foreign oil and gas.

Finally a piece of good news and an intelligent decision has come from the Environmental Protection Agency (EPA)! It has taken them more than a year, but in the end even the EPA had to accept scientific fact. Recently, the EPA vacated an emergency order from December 2010 prohibiting Fort Worth-based Range Resources from pumping natural gas from two wells in Parker County, Texas.

In the EPA’s original 2010 order, it accused Range (without any evidence, mind you) of contaminating drinking water in Parker County with methane gas, allegedly caused by hydraulic fracturing in the Barnett Shale. The Texas Railroad Commission, the oldest regulatory body in the State of Texas, invited the EPA and the owners of the affected wells to a January 2011 hearing on the issue. Neither the EPA nor the supposedly affected well owners showed up. (No doubt they did not want to be confused by the facts or by real science). The hearing proceeded as scheduled, however, with scientific experts in the oil and gas field testifying. These experts can determine the geochemical gas fingerprint of a substance like methane that identifies where the gas originates.

The scientific evidence conclusively showed that the methane found in the drinking water was from a shallower Strawn gas field and not from fracing in the Barnett Shale by Range Resources. The sample did not match the fingerprint of Barnett Shale gas, which is more than 5,000 feet below the surface. Range Resources staff also testified that their gas wells were mechanically sound and that there were no leaks. After considering the evidence, the Railroad Commission found that Range Resources’ drilling had not caused the contamination in the water wells. Despite this decision and the solid scientific evidence behind it, the EPA stood by its 751 page Emergency Order and continued with its case against Range. The conflict ended up in federal court. It took another 14 months of grasping at straws and stalling for the EPA to admit they never had a valid case. While it is frustrating that the legal fight had to drag on at all, I guess those of us in the oil and gas industry should at least be glad that the EPA finally admitted its error, rather than continuing to waste more taxpayer money and time on pointless litigation.

Earlier this month, a study by the New York-based World Economic Forum (WEF) found that the energy industry was responsible for 9% of all new job growth in the United States in 2011. In the US, the oil and gas industry grew at 4.5% last year, compared to a 1.7% total GDP growth nationwide. The WEF Report, entitled “Energy for Economic Growth”, was released on March 7, 2012 in Houston, Texas during the IHS-Cambridge Energy Research Associates Energy Week, and states that the US oil and gas industry directly created 37,000 jobs and indirectly created 111,000 jobs in 2011 alone. Those numbers indicate that the energy sector has trended towards creating more growth indirectly than via direct job creation, highlighting the ripple effect that industry growth has on the job market as a whole.Roberto Bocca, senior energy industries director at WEF, has been quoted as saying that “we always suspected that energy had a vital role to play in the economic recovery, but we were still surprised when the data uncovered the magnitude of the sector’s multiplier effects.” The report concludes that the energy industry is by its nature capital intensive and therefore contributes significantly to the economy as a whole. In addition, energy sector jobs in general require highly trained and skilled workers and those workers are paid good salaries. Per worker earnings for the industry are twice as high as average earnings in Germany, Norway, the UK, and the US, and four times the average in Mexico and South Korea. Because of these higher earnings, industry workers have more disposable income to spend than the average worker and therefore help the economy by spending in other areas. Also important for the “multiplier effect” is the industry’s extensive supply chain to keep the sector running. The oil and gas industry has a greater impact on the economy than even the financial, telecommunications, software, and non-residential construction sectors.

The WEF Report also looked at the role of energy prices and how they affect economies. The Report pointed out that lower energy costs reduced prices across the board, thus making products more affordable to consumers. Lower energy costs also increase the discretionary spending of consumers and businesses. The study showed that lower natural gas prices will result in a 1.3% increase in US GDP in 2013, one million more jobs in 2014, and, by 2017, a 3% increase in industrial production output than without the anticipated shale gas development.

This Report was good news for the rest of the world as well, because it also predicted that the global energy sector would help pull the world economy back from the recent recession. The report highlights some countries-China, India, and South Korea-that have focused on renewable energy sources as growth sectors for their economies. Other developed countries are focusing on this renewable sector, as well, to achieve sustainability goals. The Report pointed out, however, that these new technologies have higher costs and so creates trade-offs that should be considered. In any case, HIS-CERA Chairman and Pulitzer Prize-winning author Daniel Yergin said, “The energy sector has the potential to be a tremendous economic catalyst and a source of innovation in its own right, while it simultaneously produces the very lifeblood that drives the broader economy.”

In a suit with implications for Texas gasoline consumers, the American Petroleum Institute filed a petition for review in the US Court of Appeals for the District of Columbia last week against the Environmental Protection Agency over what it deems unachievable bio-fuels use requirements. These latest requirements are in the 2012 Renewable Fuel Standard. It seems that once again the government is trying to use the EPA as a cudgel to beat the oil and gas industry, and the API is having none of it.

The Clean Air Act requires that the EPA determine the required amount of cellulosic bio-fuels used in gasoline each year, depending on the volume available. This year, the EPA mandates that refiners and importers of gas and diesel use 8.65 million gallons of cellulosic bio-fuels, but in reality, there is an almost complete dearth of that type of fuel commercially available. Bob Greco, API’s director of downstream and industry operations, has been quoted as saying that the “EPA’s standard is divorced from reality and forces refiners to purchase credits for cellulosic fuels that do not exist. EPA’s unrealistic mandate is effectively a tax on manufacturers of gasoline that could ultimately burden consumers.” He went on to call it a “regulatory absurdity.”

The API has historically a realistic and workable Renewable Fuel Standard and wants the EPA to base its assessments on at least two months of actual cellulosic bio-fuel production in the current year when deciding upon the following year’s requirements. Instead, what the EPA does is rely on the promises of cellulosic bio-fuel production companies of how much they can produce, even though those promises have been, and continue to be, of questionable validity.