Texas Oil and Gas Attorney Blog

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!

Oil and gas pipelines in Texas and throughout the country are needed to bring oil and gas to refiners and to markets, and result in cheaper fuel prices for consumers by lowering transportation costs. With the oil and gas industry flourishing, particularly in areas of the country like Texas, more pipelines are needed to transport increasing amounts of these raw materials. Without enough pipeline capacity, producers have to use trucks, barges, and trains to move oil, gas and condensate to refiners and to the market–all of which cost more than pipeline transport. There are numerous pipelines in the works right now. However, some of these pipelines are still subject to financing issues and face challenges with government approvals (such as with the high-profile Keystone pipeline project).

On the financing issue, the Association of Oil Pipelines (AOPL) has requested that the Federal Energy Regulatory Commission (FERC), the agency that oversees interstate oil pipeline tariffs, step in to fix a dispute that AOPL claims may impair the financing of new pipelines. Financing of pipelines often relies on secured revenue accrued after the pipeline is completed. This is accomplished through contracts setting the rates ahead of time for the delivery of crude oil, gas, condensate, diesel, and other products. Andrew J. Black, President of AOPL, said earlier this month that “(t)hese committed rate agreements give confidence to shippers that the infrastructure they need to deliver their production to market will be there when they need it. They also give confidence to companies and investors ready to fund new pipeline projects that their investments will be repaid.”

The problem has arisen in an ongoing pipeline case being considered by FERC, which includes testimony threatening the mutually beneficial rate contracts agreed upon by energy suppliers and pipeline companies. The case involves the Seaway Pipeline, which goes from Cushing, Oklahoma, to Houston, Texas and is expected to carry 150,000 barrels of crude oil per day initially. AOPL filed a motion asking FERC to confirm its rate contracts and to rule that the contracts are not subject to review during the pipeline’s future rate proceedings. Instead, FERC staff recommended a new rate and rate structure, throwing out the old agreements which were the basis for financing this pipeline. AOPL responded that this action could not only deter new pipeline projects, it could also bring a halt to pipelines currently under construction.

In a significant win for reasonable and sensible energy regulation, the DC Circuit Court rejected the Environmental Protection Agency’s (EPA) 2012 cellulosic biofuels projection. It is sad that this is what passes as a “win” for the energy industry however, since the Court simply acknowledged that the EPA’s requirements are based on fiction and require supplies of materials that are not even available currently!

The case being decided involved a challenge by the American Petroleum Institute (API) to the EPA’s regulation. The regulation in question was adopted under the renewable fuel standard program, which requires refiners to blend 36 billion gallons of biofuel with traditional fossil fuels by 2022. That goal has incremental targets leading up to it, and by 2012 refiners were required to blend 10.45 million biofuel ethanol gallons with their gasoline– an impossibility considering that the entire industry only produced 22,000 gallons of biofuel last year. API argued that these rules forced refiners to buy “credits” for the cellulosic biofuel since this product does not not, and may never, get produced in sufficient quantities to comply with the EPA regulations. API fairly asserted that the EPA should base the biofuel requirement on a realistic assessment of current production levels.

The decision, written by Judge Stephen Williams, stated, “We agree with API that because EPA’s methodology for making its cellulosic biofuel projection did not take neutral aim at accuracy, it was an unreasonable exercise of agency discretion.”

More advocates are spreading the message that the energy industry can help our county work though not only its energy needs but its budget shortfalls and economic problems as well. US Chamber of Commerce President Thomas J. Donohue noted in his 2013 State of American Business address that developing American energy can help our fiscal problems, including reducing the trade deficit and bringing more manufacturing jobs back to the US.

He said that he has already seen indications that lower gas prices are attracting businesses back. Donohue stated that to take advantage of these opportunities, more federally controlled land, both on and offshore, must be opened for exploration and development with a predictable and fair regulatory system in place. He also encouraged further development of alternative energy sources, such as nuclear, wind, geo-thermal, and solar. Donohue asserted that the Chamber’s top priorities for 2013 remain creating jobs and increasing economic growth. He said that “(w)e must get this economy moving faster. Growth of 1.5% to 2% is not acceptable.”

Donohue and the Chamber of Commerce are not the only ones optimistic about renewed growth in US manufacturing. Fitch Ratings analysts issued a special report called “Shale Boom: A Boost to Manufacturing but Not to Energy Independence” earlier this month. It states that low gas prices provide an advantage for some industries, including steel, petrochemicals, and other high-energy industries, as well as (to a lesser degree) copper, aluminum, and cement. Shale gas is providing the lower costs that allow this comparative advantage, particularly due to the expanded use of increasingly efficient hydraulic fracturing. The current utilities gas price is $2.50/ mcf, down tremendously from the 2008 average of $8/ mcf. The advantage is most notable in petrochemicals, because natural gas is both an ingredient in the products made by this industry as well as a source of energy to manufacture products. The report states it “appears to be a permanent advantage” in this industry and that America’s gas-run petrochemical industry is more efficient and competitive than Europe’s oil-based industry.