Energy & Environmental Law Blog : Energy & Environmental Lawyer & Attorney : Vorys, Sater, Seymour and Pease Law Firm : Oil, Gas & Green Technology

The Federal Energy Regulatory Commission (FERC) recently issued a final rule revising the contract reporting requirements for natural gas pipeline companies falling under the Commission's jurisdiction under section 311 of the Natural Gas Policy Act (NGPA) and section 1(c) of the Natural Gas Act (NGA) (i.e., Hinshaw pipelines).  Designed to increase market transparency, it increases the reporting frequency from annual to quarterly, requires certain additional information related to storage transactions, and makes the reports public and not to be filed with information redacted as privileged (among other things).

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Sex-offender failure to register used to justify imposition of new severance tax on Pennsylvania industry, according to this article in the Times Leader.  "Gov. Ed Rendell’s office cited those crime problems as well as road damage caused by overweight and unsafe trucks serving the natural gas industry as just two reasons a state severance tax should be imposed on the industry."

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Two new studies came out this month on the benefits of drilling the Marcellus Shale, according to this report from News Channel 34, Binghamton.  The Business Council of New York State recently published a report from Petro Enterprises, Inc., a New Hampshire consulting firm, finding that the Marcellus and Utica shales will be more extensive and more prolific than the Barnett in production of natural gas for New York.  More:  "We project that New York State will experience an annual economic uplift of $92 billion from the Marcellus and Utica shale development," based on Petro's analysis of the Barnett Shale.

Also, Penn State University released a report entitled, The Economic Impacts of the Pennsylvania Marcellus Shale Natural Gas Play:  An Update (May 24, 2010), finding that producers spent a total of $4.5 billion to develop Marcellus shale resources in 2009.  "We estimate that this spending generated $3.9 billion in value added, $389 million in state and local tax revenues, and more than 44,000 jobs."  Moreover, the study finds that producers plan to spend even more this year and next, generating over $8 billion in added value in 2010 and another $10 billion in 2011.  "This higher economic activity generates almost $1.8 billion in additional state and local tax revenues during 2010 and 2011.  Employment in the state expands by more than 88,000 jobs during 2010 and 2011."

Not bad.

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Hydraulic fracturing has seen several legislative initiatives lately.  For example, the Kerry-Lieberman climate legislation introduced earlier this month (at just under 1,000 pages) contains the following 36-word provision:  "A hydraulic fracturing service company shall disclose all chemical constituents used in a hydraulic fracturing operation to the public on the Internet in order to provide adequate information for the public and State and local authorities."  See here (NYT article on legislation generally); here (Senator Kerry's website); here (text of bill itself).

Also, Representative DeGette (D-Colo.) planned last week to introduce an amendment to the Assistance, Quality and Affordability Act in the House Energy and Commerce Committee designed to accomplish the same thing, i.e., require public disclosure of chemicals used in hydraulic fracturing.  See here (from the Dallas Morning News).  The NYT has reported that Rep. DeGette withdrew that amendment after considering the possibility of a compromise with industry.

Don't think it won't come up again ...

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We linked recently to a roundup of articles at the NYT and a BP website on the Deepwater Horizon incident (see here), and encourage readers to visit those sites often if they are interested in the latest information.  We thought we'd link to this article as well from the LAT, illustrating the tension between BP and U.S. EPA on the appropriate means of cleanup - with BP refusing to switch to a less-toxic oil dispersant that, in its view, would be less effective.

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The Energy Information Administration (EIA) recently posted a summary analysis on natural gas residential choice programs that also provides an overview of the status of natural gas industry restructuring in each State.  In a good overview of Ohio, it finds:  "More than 50 percent of the State's residential natural gas customers were participating in choice programs as of December 2009, with by far the largest participation (94 percent) in Dominion East Ohio's (Dominion) service area."  In tabular form:

For more, see here.

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The Scranton Times-Tribune is reporting that UGI Penn Natural Gas will be asking for two 14% rate cuts this year due to expectations about local natural gas volumes produced from the Marcellus shale.  Local benefits from local production.

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That's the message being sent by the Administration over the Deepwater Horizon spill, as reported in this article from the Houston Chronicle.  "Obama castigated company executives for 'a ridiculous spectacle' during two days of congressional hearings on the oil spill this week, as the business leaders — all targets of negligence lawsuits — traded blame over what went wrong."  The article goes on to note the changes being made at the Minerals Management Service as a result of the incident.

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At a recent summit, the Acting Secretary for the Pennsylvania Department of Environmental Protection has asked operators to comply with new E&P rules even before they become effective, according to this article in the Scranton Times-Tribune.  "The summit came ahead of action by the state Environmental Quality Board on Monday on several proposed regulations to require that oil field-grade cement be used in Marcellus Shale wells, to delineate responsibility and notification procedures for gas migration problems and to strengthen requirements for treating drilling wastewater and limiting sediment erosion from wells."

For more on the regulations themselves, see this press release issued by the PA DEP.  Also, see here, which contains links to presentations, comments and other documents related to the proposed rulemakings (scroll down to the May 17, 2010 Meeting Agenda).

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The Star-Telegram is reporting that a Texas Department of State Health Services investigation has found that residents of Dish, TX, do not have higher levels of benzene and other contaminants in their bodies compared to the general population - dealing a significant blow to claims that residents were being injured due to natural gas E&P operations in the area.  For a copy of the report, see here.

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We've mentioned before that Europe is looking to the U.S. for technology to assist with its own shale development.  See here, e.g.  The NYT is reporting on Polish efforts to develop shale resources to increase its energy security, particularly with respect to Russia.

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The Energy Information Administration (EIA) has posted its Short-Term Energy Outlook for May 2010, stating - among other things - that it:

[E]xpects total natural gas consumption to increase by 3.0 percent to 64.4 billion cubic feet per day (Bcf/d) in 2010 and decline by 0.4 percent in 2011 ***. Consumption growth in 2010 is led by the industrial and electric power sectors. Despite higher natural gas prices in the first quarter of 2010 compared with the same period in 2009, natural gas accounted for a slightly higher share of generation in the electric power sector. This gain in the natural gas share of electric-power-sector generation is expected to continue through this year. In the industrial sector, EIA's natural-gas-weighted industrial production index (a measure of industrial activity in natural-gas-intensive industries) showed a year-over-year increase of 6.8 percent during the first quarter of 2010 and is forecast to rise by 5 percent on average for the entire year.  [Emphasis is ours.]

For more, see here.

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Earlier this month, the United States Court of Appeals for the Seventh Circuit affirmed a lower court decision finding that a mineral deed granting "all the coals, clays, minerals and mineral substances underlying" the defendants' land, "together with the right to mine and remove said coals," did not grant the right to strip mine the land.  See American Land Holdings of Indiana, LLC v. Jobe (Case Nos. 09-3151, 09-3265), here.  Particularly significant to the court was the state of technology at the time - Permitted extrinsic evidence showed that there was no strip mining of coal anywhere in the United States beyond isolated experimentation.

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The EPA has just announced its final rule for greenhouse gas emissions from large fixed sources such as power plants and refineries. Starting in January of next year large facilities already required to obtain Clean Air Act permits for other emissions will have to seek a greenhouse gas permit if such admissions increase by 75,000 tons/yr or more. Six months later the requirements will expand to cover all new facilities with emissions of at least 100,000 tons/yr and older installations with modifications that result in increases of 75,000 tons/yr or more. The rule covers not only CO2 but also methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride. It's anticipated that the rules will be expanded to additional sources effective July 2013.

The EPA believes that these new standards will avoid overwhelming permitting burdens that otherwise would have fallen on the government and most sources of greenhouse gas. The EPA notes that without this rule the permitting and "best available control technology" burdens would fall on operations with emissions as low as 100 tons/yr producing "an absurd result" - not to mention an immense political backlash propelled by an impossible to administer regulatory scheme. Instead, conceding in essence the slippery slope objection, expansion of the regulations to smaller emitters will proceed "one-step-at-a-time". Had the rules become effective for all emitters at once an estimated 6 million U.S. farms and businesses would have suddenly become subject to the permitting process with the time from application to permit approval lengthening to a decade or more.

The CliffsNotes version is here: Fact Sheet and here's the Final Rule

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The natural gas market remains potentially volatile despite the recent calm, according to this article in the WSJ.  "But the domestic nature of the gas market also makes it less liquid than much larger, globally traded commodities such as crude oil and gold, which means gas futures should remain volatile enough to attract financial traders. A hurricane in the Gulf of Mexico, which remains a major source of gas production despite growing shale-gas output, could spark a double-digit percentage rally in gas futures, for example."  Very interesting.

(Note:  Subscription required.)

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The Times-Leader has an article on EnCana Oil & Gas (USA) Inc.'s move into the Marcellus Shale in Pennsylvania.  Not a bad local take on development.

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The WSJ has a good article on the potential of shale gas.  A sample:  "The shale boom also is likely to upend the economics of renewable energy. It may be a lot harder to persuade people to adopt green power that needs heavy subsidies when there's a cheap, plentiful fuel out there that's a lot cleaner than coal, even if gas isn't as politically popular as wind or solar."

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Michigan's Department of Natural Resources and Environment is reporting a record oil and gas lease auction of state-owned land - $178 million.  "'To put the historic significance of this auction in perspective, since 1929, the state has collected a total of $190 million in bonus payments,' said Lynne Boyd, chief of the Department of Natural Resources and Environment's Forest Management Division, which administers the oil and gas program. 'In one day, we collected nearly as much as we have collected in 81 years.'"  Congratulations!

The auction was driven by reports of a successful well drilled in the Utica Shale.

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The Philadelphia Inquirer is reporting that Pennsylvania has entered into a lease with Chesapeake Energy Corp. to drill the Marcellus Shale under a 7-mile stretch of the Susquehanna River - for $6.15 million.  Nice.

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The Oil Pollution Act (33 U.S.C. s. 2702 et seq.) contains liability limits related to oil spills, including a potential $75 million limit applicable to the Deepwater Horizon spill in the Gulf of Mexico.  Not surprisingly, there are efforts to raise that limit - substantially.  See, e.g., here (from the Sun Herald, noting an effort to raise the limit - retroactively - to $10 billion).

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USEPA is already making changes to its new Lead Renovation Rule, which became effective April 22, 2010.  Today, EPA has eliminated the opt-out provision of the new rule which had exempted a renovation firm from the training and work practice requirements of the rule where the firm obtains a certification from the owner of a residence he or she occupies that no children under age 6 or pregnant women resides in the home and the home is not a child-occupied facility.  EPA also proposed revisions adding requirements designed to ensure that lead-based paint hazards generated by renovation work are adequately cleaned after renovation work is finished and before work areas are re-occupied.

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We mentioned in a previous post that the E&P industry can expect increased regulatory scrutiny as a result of the spill in the Gulf of Mexico.  That, of course, isn't the only reason to anticipate such scrutiny.  This article from the Pittsburgh Tribune-Review is a timely reminder of the environmental issues being raised regarding development of the Marcellus Shale.  At a conference intended to develop a series of recommendations for the Pennsylvania legislature, the state's Department of Environmental Protection Secretary warned that "[u]nless steps are taken to protect the state's environment, development of Marcellus Shale natural gas reserves could overwhelm its benefits."

A separate article regarding the same event suggests that industry, rather than being a guest at the table, is really on the menu - see here, from the Philadelphia Inquirer.

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Last week, I had the privilege of giving a presentation on hydraulic fracturing at the Ohio State Bar Association's 25th Annual Ohio Environment, Energy and Resources Law Seminar (yes, shameless self-promotion).  I mentioned as part of the talk the benefit that shale oil production was seeing from the technologies developed to access gas in the Barnett Shale and other shale formations around the country.  As luck would have it, the Fort Worth Business Press yesterday had a related article here, observing that:  "The past decade has been all about gas, gas, gas, but new technologies developed for that commodity are turning out to be just as effective in a burgeoning rejuvenation of a more storied fuel: oil."

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On April 20, 2010, an explosion occurred on the Deepwater Horizon, an oil rig working in the Gulf of Mexico 50 miles offshore Louisiana, that led to the deaths of 11 crew members and possibly one of the worst oil spills in American history.  For a roundup of articles, see here (NYT).  See also here (a link to BP's website, including also a link to the Joint Information Centre established to provide the latest information and response).  Producers, even onshore producers, should expect increased scrutiny in the future.

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The Pittsburgh Business Times has a good article on the various infrastructure projects planned to process and take Marcellus gas to Northeast markets.  For example:  "The Keystone Connector will be a 240-mile pipeline stretching across southern Pennsylvania from Dominion’s Crayne Compressor Station in Waynesburg to Williams’ TRANSCO pipeline in Delta, Pa., with an expected in-service date of 2013."

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The Dallas Morning News has an article on the attempts by independents to preserve decades-old industry tax incentives - such as percentage depletion.  "Devon and other producers say the tax subsidies don't give them any special favors. They note that the incentives were originally designed to help offset the risk of prospecting for oil and gas. They argue that the same risk exists today, particularly in offshore exploration."

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The Houston Chronicle has an editorial authored by Andrew Liveris, president, chief executive officer and chairman of the board of the Dow Chemical Co., explaining the need for stable natural gas prices from a manufacturer's perspective.  Addressing American job losses since the 1990's, Mr. Liveris writes:  "America did not lose these jobs because it lacked capable employees, nor was it as simple as the reason most immediately believe, wages. A principal reason for the loss of jobs was the high and extremely volatile cost of energy. Manufacturing depends heavily on energy, and volatility in energy costs has been driving production and the high-paying jobs that support it away from our shores and to competing countries."  Interesting.  Read it all.

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Consol Energy, Inc.'s purchase of the Appalachian exploration and production operations of Dominion Resources Inc., closed last Friday, tripling its Marcellus Shale assets, according to this article in The Intelligencer.

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We reported previously that the Energy Information Administration (EIA) planned on modifying the methodology it uses to estimate production data.  Here is the revision methodology (EIA's new simple ratio method implemented for the first time this month).  From EIA's website:  "Beginning this month, EIA introduces a new method to estimate monthly natural gas production and uses it to estimate production in February 2010 and to revise previous estimates for 2009 and January 2010. Using the new method, EIA revised January 2010 estimates downward 0.6 Bcf/d for the lower 48 States. Nearly all of this revision came from 3 areas: the Federal Gulf of Mexico (GOM), Louisiana, and Texas. Revisions to 2009 estimates for the lower 48 States were generally negative as well, ranging from -0.3 percent at the beginning of the year to -1.3 percent at year end."

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Every year, the Federal Energy Regulatory Commission (FERC) issues a state of the market report reviewing significant events of the past year.  This year, the agency addresses what it characterizes as a new gas paradigm:

Not that long ago, it would take several months from the start of drilling to initial production.  Average-time-to-drill in 2009 was about 20 days.  Nowadays, production is almost certain before drilling begins, and well efficiency increases as producers learn the particular nuances of a given play.  Because shale production has many of the characteristics of gas in storage, companies have greater flexibility to produce gas when the market calls for it.  Production can be deferred without risking the integrity of the well.  Ending long production lead times and the risk of failure or loss may dramatically temper the gas market's systemic boom-and-bust cycle.

For a complete copy of the report, see here.  Review it all - it's pretty interesting.

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In Discovery Operating, Inc., v. BP America Production Co., the Texas Eleventh Court of Appeals recently held that a producer can bring a negligence per se claim - for violating a state regulation prohibiting waste - against the owner of a nearby injection well for damages sustained when the producer encountered a highly pressurized flow of brine water while drilling an oil well.  See here (Case Nos. 11-08-00127-CV and 11-08-00171-CV).  The primary factual issue:  Whether BP's injection of brine at a depth of about 6,100 feet into the War-San San Andres reservoir really caused the water flow encountered by Discovery at a depth of 3,895 feet nearly one mile away.

The matter has been remanded for a new trial.

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