Texas Oil and Gas Attorney Blog

The US House of Representatives Natural Resources Committee has held at least five meetings in the last two years on the problem of federal oil and gas regulations overlapping with existing state regulations. The Committee’s chairman, Representative Doc Hastings, had a common sense solution to this confusion: “There is a simple solution to prevent duplication: Don’t duplicate the states. The ‘one size fits all’ regulatory structure being pursued by the Obama administration is a waste of time and energy.” This issue is particularly significant in light of the increase in hydraulic fracturing, a process that has become increasingly politicized at the national level.

That is exactly the message of three of the witnesses at the Committee’s latest meeting. These three witnesses, all state officials, agreed that states are in a unique position to understand the geological and environmental conditions and issues within their states. The states represented by these three witnesses were Utah, Texas, and Ohio.

Utah’s Lieutenant Governor Gregory Bell told the Committee: “From Utah’s perspective, increasingly national political considerations are unduly influencing land use decisions that are more effectively addressed locally.” He went on to assert that “political jockeying” in Washington within national policy debates hurts local communities, who are better placed to decide what is best for their land. He pointed to the sequester cuts to mineral lease royalty payments, which confuses what royalties are supposed to be- they should be dedicated revenues held in trust, not subject to federal spending rules.

Due to increasingly onerous regulations, oil and gas industry associations have filed suit in federal court over the Environmental Protection Agency’s (EPA) planned regulation of greenhouse gases from power plants and vehicles. The regulations come from a 2009 EPA finding that greenhouse gases pose a public health threat- the so-called “endangerment finding”.

Last year, a three judge panel at the District of Columbia’s Circuit Court of Appeals upheld the EPA regulations. That same court denied the energy industry Petitioners a rehearing in December, so the Petitioners recently asked the US Supreme Court to review the regulations at issue.

The Petitioners’ request explains that the regulations are hurting the economy, that there are clear legal issues that need to be adequately addressed, and that the need for review was particularly acute in light of two articulate dissenting opinions at the Court of Appeals, one by Judge Brett Kavanaugh and one by Judge Janice Rogers Brown.

The Environmental Protection Agency’s (EPA) Science Advisory Board, recently announced the creation of a new panel on hydraulic fracturing, generally referred to as “fracing”. The formation of the panel comes as the Obama administration is working to revise draft rules for fracing. With new technologies like fracing leading to historic amounts of oil and gas production for the US, this topic is hotter than ever.

The new panel, called the Hydraulic Fracturing Research Advisory Panel, will be made up of 31 experts (see the list of experts here).Among the 31 are several consultants, two government employees, and 21 academics and college professors. To compose the panel, the EPA asked for nominations of recognized scientists and engineers in the field of hydraulic fracturing, which resulted in 144 candidates. That group was whittled down to 31 through checks for financial and other conflicts of interest. There are at least three experts representing each of the following areas: Petroleum/Natural Gas Engineering; Petroleum/Natural Gas Well Drilling; Hydrology/Hydrogeology; Geology /Geophysics; Groundwater Chemistry/Geochemistry; Toxicology/Biology; Statistics; Civil Engineering; and Waste Water and Drinking Water Treatment. The Chair of the panel is Dr. David A. Dzombak, an environmental engineering professor at Carnegie Mellon University in Pittsburg.

This panel of experts will peer review the EPA’s 2014 draft report on the potential impact of hydraulic fracturing on drinking water. It will also provide scientific feedback on the EPA’s research methods. In particular, the panel is expected to provide information on emerging science and technology for the Science Advisory Board. The report itself is the product of a request by Congress that the EPA commenced in 2010. The draft study plan for the proposed report was submitted in March 2011.

Recently the IHS hosted CERAWeek in Houston, Texas (you can view the brochure here). CERA stands for Cambridge Energy Research Associates, an organization founded in the early 1980s to consult on energy issues for both the government and private companies, and that hosts the annual event in Houston each year. This year’s event, the 32nd such conference, had about 2,200 participants from the energy industry coming from about 50 countries around the world, including 300 speakers.

This year’s CERAWeek’s conference was called “Drivers of Change: Geopolitics, Markets & the New Map of Energy.” It focused on the profound transformations in the industry and hoped to shed new light on the future of energy and focus on changes in the competitive landscape, the unconventional oil and gas revolution, and new fuels and technologies of the future. Daniel Yergin, the conference’s chairman, said, “All this is leading to a vigorous discussion of how the energy needs of a growing world economy will be met over the next 2 decades and what the mix will be. Will an energy transition unfold over years or over decades?”

In terms of the US, we are expected to average 7.3 million barrels per day of oil in 2013, up 900 million barrels since just last year. Our oil imports have been declining since they peaked in 2005, because of this growth in production. Tight oil development in the US and Canada has far outpaced any other region of the world, and the question will continue to be one of the pace of growth. Michael Stoppard, managing director of global gas for IHS, said there was a “redrawing” of the global gas map focusing on three supplies- unconventional gas, deepwater gas, and gas from tight oil. He noted that the world demand for gas would continue to grow in the next few years but that the US probably could not export significant light natural gas until 2015. He also predicted a rebalancing of gas prices from their “unsustainably low levels” of today.

The University of Texas at Austin’s Bureau of Economic Geology recently released a new study, entitled the Sloan Foundation Shale Gas Assessment Study, funded by the Alfred P. Sloan Foundation, predicting a reliable, although decreasing, supply of natural gas from the Barnett shale until 2030. Barnett shale is the country’s second most productive shale formation.

This new study is believed to be the most thorough yet on the topic of natural gas production in the Barnett shale, and it predicts a total recovery of over three times cumulative production to date. The study integrated engineering, geology, and economics to do scenario testing. The testers studied the actual data produced from 16,000 wells in the play until 2011. Most other studies of Barnett took a “top down” approach, relying on aggregate views of average production. This study, in contrast, took a “bottom up” approach by studying the production history of every well as well as those areas that remained to be drilled in the future, which they believe yielded a more accurate model. The researchers increased the accuracy of the study by identifying and assessing the production in ten different quality tiers and using that information to predict future production even more accurately. Their new method of estimating production for each well was integral and will contribute to future forecasting of production declines in shale natural gas wells. One of the investigators on the project, Svetlana Ikonnikova, an energy economist at the Bureau, said, “We have created a very dynamic and granular model that accounts for the key geologic, engineering and economic parameters, and this adds significant rigor to the forecasts.”

The study also demonstrated the correlation between gas prices and production. It noted that in the early years of drilling, the correlation is weak because it is not very expensive to drill in better quality rock areas, making it efficient even when the prices are low. In later years, when the natural gas is harder and more expensive to retrieve, price becomes the dominant factor.

Forecasts for the oil and gas markets for 2014 were released recently. They predict a somewhat loose market, along with more positive news for those involved in the North American oil and gas industry. These projections were published in the “Short-Term Energy Outlook”, a document produced by the US Energy Information Administration. The report says that a “loose market” will result from higher global consumption of oil being offset by the increased global supply of fossil fuels.

The Short-Term Energy Outlook predicts that global liquid fuel consumption will remain stable in 2013 but will pick up again and increase in 2014 due to economic recovery–increasing by about 400,000 million barrels per day. The report predicts that most of the increase in consumption will come from outside the Organization for Economic Cooperation and Development (OECD), a group of the world’s developed countries. In the OECD countries, the report predicts a decline in consumption of 300,000 million barrels per day due to decreasing use of liquid fuels in Europe that is not offset by the modest rise in consumption in North America. In 2014, the OECD overall decline will slow to 100,000 million barrels per day. The increase in the US is expected to be 70,000 barrels per day in 2013 and 60,000 barrels per day in 2014. Most of that increase will be in fuel oil and liquid petroleum gas.

Perhaps the more interesting information in the report pertains to energy production. The members of Organization of Petroleum Exporting Countries (OPEC) are expected to decrease crude oil supply in 2013 by 600,000 barrels per day due to a decline in production in Saudi Arabia. Other OPEC members, such as Iraq, Nigeria, and Angola, will increase production to pick up the slack over the next two years. But most growth in oil and gas production will come from non-OPEC members. The report projects that non-OPEC fuel production will grow by 1.4 million barrels per day in 2013 and 1.3 million barrels per day in 2014. The days of fuel shortages due to OPEC policies like in the 1970s are looking more and more like the distant past. Production in North America alone is expected to account for two thirds of that non-OPEC growth!