Articles Posted in Oil and Gas Law

Congress is considering whether to eliminate or limit a federal tax deduction for intangible drilling costs. Intangible drilling costs are those costs incurred to develop an oil or gas well other than the costs of the actual well. It includes costs such as surveying, clearing the land for a well pad or storage tanks, drainage modifications, fuel, and workers’ wages. Current US tax law allows oil and gas companies to deduct these operating expenses from their taxes, exactly like other businesses deduct the intangible business expenses incurred in operating their business.

Understandably, the oil and gas industry is quite concerned about the potential elimination of this deduction. Elimination of this deduction would effectively make exploration, drilling and production of oil and gas more expensive. That means that there will be less exploration, drilling and production in Texas, as well as in other states. In turn, that means that some number of Texas mineral owners who hope to lease their minerals, and who may really need the royalty income, may lose that opportunity.

A coalition of 33 national, regional and state oil and gas associations sent a letter to the leaders of two key congressional committees, the House Ways and Means Committee and the Senate Finance Committee, who are dealing with this issue. Groups who signed the letter included the American Exploration and Production Council, or AXPC, the American Petroleum Institute, the Independent Petroleum Association of America and the Western Energy Alliance, as well as ten other national and two other regional associations and 17 state organizations, including some from Texas.

During all of the budget talks in Washington, DC, I was interested to read a recent report entitled “CO2 Enhanced Oil Recovery” by the U.S. Chamber of Commerce regarding how enhanced oil recovery (“EOR”) techniques could add significant revenue to the Texas and federal budget, as well as enhance our energy security and benefit the environment!

Enhanced oil recovery is a general term that refers to techniques for increasing the oil that can be extracted from a given oil field. The type of enhanced oil recovery technique discussed in this report is carbon dioxide recovery. It works by pumping carbon dioxide into the reservoir, and the gas improves the flow of the remaining oil. Once the oil-carbon dioxide mixture reaches the surface, the two are separated and the carbon dioxide is recycled back into the reservoir. The U.S. is already leading the world in this technique and it is providing nearly 6% of our onshore oil production.

The new report was written by the Chamber’s Institute for 21st Century Energy. The report notes that the U. S. Department of Energy estimates that enhanced oil recovery could produce 67 billion barrels of oil, which is three times the size of the U.S. current proven oil reserves. If the price is $85/bbl, $1.4 trillion in new government revenue would result directly from these procedures, in addition to billions in private investment.

Recently, NuStar Energy LP announced that they are proposing a new system of oil pipelines to bring oil from the Niobrara Shale in Colorado to Texas’s oil refineries. The Niobrara Shale is a promising play and there is a need to get the oil produced there to refineries that can process the increasing amount of oil. Colorado is set to produce between 42 and 44 million barrels of oil this year, in a growing industry for the state. NuStar is calling this new pipeline project the “Niobrara Falls Project.”

The new pipeline would extend from Niobrara, which is near Platteville and Watkins, to an already existing pipeline in Denver. From there the oil would be transported via Denver to a McKee, Texas pipeline, which has a capacity of about 70,000 to 75,000 barrels per day. From McKee, the project would utilize other existing pipelines to get the oil to refineries in Wichita Falls, Texas. NuStar states that once the oil gets to Wichita Falls, it can be sent to the Nederland-Beaumont, Texas market and the Cushing hub via other third-party pipeline connections in Wichita Falls. This pipeline could also supply refineries such as Suncor Energy’s Denver refinery, Valero Energy’s McKee, Texas refinery, Ardmore, Oklahoma refineries, and WRB’s Bolger, Texas refinery. The new pipeline system could also transport oil from Granite Wash and Permian basin to Dixon, Texas, where NuStar has a tank farm.

To find out what kind of interest exists for this new pipeline project, NuStar held a binding open season the end of last year. A binding open season allows companies to make a long-term commitment to use the pipeline. Commitment terms of five, seven, or ten years are available for this project.

The United States, including Texas, will be self-sufficient in natural gas within the next ten years, according to a recent survey of oil and gas professionals. The survey, entitled Energy Independence and Security: A Reality Check was published by the Deloitte University Press. There is less optimism about self sufficiency in oil, however. Deloitte released the results of this survey at their recent Oil and Gas Conference in Houston, and the full report will be available shortly.

The survey questioned 250 oil and gas professionals. The participants averaged about 20 years of experience in the oil and gas industry. Also, all the participants had college or graduate degrees and were primarily executives.

Of those surveyed, 75% think the US is already self sufficient in natural gas or will be within ten years. John England, the vice chairman of Deloitte, said: “It’s not surprising that oil and gas decision-makers are enthusiastic about the role of natural gas in our national energy future, given burgeoning supplies, America’s comparatively low cost of extraction, and its relative cleanliness.” He noted that the most surprising thing about natural gas is that just a few years ago the country was prepared to import it. How quickly things changed. In relation to gas prices, 86% responded that in 2013 the price should remain at less than $4/MMbtu. 40% predict prices lower than $3/MMbtu.

Ever since Gasland came out and hydraulic fracturing became a hot topic that everyone, even people with no knowledge of the field, had an opinion about, the federal government has sought to use the issue for political gain. When people in Pavillion, Wyoming, complained about their drinking water and claimed that hydraulic fracturing, or fracing, had contaminated their wells, the Environmental Protection Agency (EPA) went rushing out to do tests.

The EPA constructed two monitoring wells and tested water samples from these wells. It issued a draft report in December 2011, concluding that it was “likely” that fracing contributed to water contamination, and claimed that they found elements of methane, ethane, diesel components, and phenol in their samples. Oil and gas industry experts at the American Petroleum Institute (API) criticized the study at the time for its unscientific data and flawed research methodology. One of API’s directors, Erik Milito, noted that the lack of properly conducted research also casts doubt on the EPA’s upcoming national study.

Another federal government agency, the US Geological Survey (USGS), also tested in the area and came to different results, described in two public releases, the “Sampling and Analysis Plan for the Characterization of Groundwater Quality in Two Monitoring Wells near Pavillion, Wyoming” and the other entitled “Groundwater-Quality and Quality-Control Data for Two Monitoring Wells near Pavillion, Wyoming, April and May 2012”.

Another independent study titled “America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US Economy,” released recently concluded that shale oil and gas drilling and development has helped create 1.75 million jobs in the last few years in the United States. The study also indicated that there was a possibility of 2.5 million new jobs by 2020 and 3.5 million by 2035. The study was done by IHS-CERA, an independent global energy research firm, and was commissioned by a group led by the US Chamber of Commerce’s Institute for 21st Century Energy. Other organizations that supported the research for this study are the American Petroleum Institute, the American Chemistry Council, and the Natural Gas Supply Association.

This study is the first of a series of three intended to shed significant light on the impact of shale development. This first study, titled “National Economic Contributions”, is about the impact of “upstream operations,” that is, oil and gas extraction. The second study will look at the impacts of shale development on a state by state basis. The third will go into “downstream operations”, or the impact of shale development after production.

This particular effort claims to be the first to examine the nationwide impact of shale energy development and to provide concrete numbers about the beneficial developments. Karen Harbert, the President and CEO of the Energy Institute, explained that this study is proof that shale energy is a game changer for the US. She said, “This new, comprehensive study demonstrates that shale energy is already contributing over $200 billion to our economy, with much more to come, if policymakers at all levels of government don’t stand in the way.”

There is more evidence from yet another study, the “Hydraulic Fracturing Study“, published in October 2012, that concludes that hydraulic fracturing, or fracing, is safe and does not pollute either air or water or cause earthquakes. This study was prepared for Plains Exploration & Production Co., an independent oil and gas company, and the Los Angeles County Department of Regional Planning, and was conducted by Cardno Entrix, an international environmental and natural resource management consulting firm. The study examined two test wells at the Inglewood Oil Field in Los Angeles County, California, and determined that there were no detectible indications that fracing might induce earthquakes or have a negative impact on air or water quality.

The Inglewood Oil Field is one of the largest urban oil fields in the United States and is adjacent to Baldwin Hills, View Park, Windsor Hills, Blair Hills, Ladera Heights, and Culver City, California. The oil field was discovered near Culver City by Standard Oil in 1924. Plains Exploration has been operating there since December 2002, and conventional fracing has been used in the field by prior operators. The field contains 1,200 acres and a total of 1,475 wells have been drilled. 469 wells are in active production and 168 waterflood injection wells are active at this time.

The Cardno study was part of a settlement in 2011 of a lawsuit filed in 2008 against Los Angeles County and Plains Exploration over land use. Schlumberger Ltd. and Pinnacle, a company owned by Halliburton, did the micro-seismic monitoring and fracture mapping. Plains Exploration also did a high-rate gravel pack job at two different wells earlier this year to help collect information for this study. The study concluded, in part, that: “(t)ests conducted before, during, and after the use of hydraulic fracturing and high-rate gravel packing showed no effects on the integrity of the steel and cement casings that enclose oil wells. There is also an ongoing program of well integrity tests at Inglewood oil field.”

American Petroleum Institute‘s Chief Economist John Felmy has warned policymakers that unnecessary duplicate regulations could obstruct the development of unconventional oil and gas plays in the US. He pointed out at a news conference in Washington, DC that these plays have already created jobs and helped improve economic conditions in many areas of the country.

Mr. Felmy restated API’s position that regulation by state agencies is best suited for shale development and techniques like hydraulic fracturing, or fracing. He particularly noted the “North Dakota Miracle,” which turned that state into the number two oil producer in the nation and reduced unemployment to three percent while increasing incomes overall. He also highlighted other successes in states such as Texas, Arkansas, Ohio, Pennsylvania, and Louisiana. API and the industry are getting involved in states to raise awareness about the economic benefits of shale, including doing workshops in shale states. API has also issued fracing best practice guidelines, which can be helpful for a discussion of safety standards and industry safeguards. These standards include information about well construction and integrity, water management, mitigating surface impact, environmental protection, and isolating potential flow zones during well construction.

Aside from these statements regarding state regulations, Mr. Felmy also spoke at a recent DC conference about the possibility that New York may lift its high-volume fracing ban. New York is home to part of the Marcellus Shale, and there is potential there for growth and development. Fracing has taken place in New York since the 1950s, and horizontal wells since the 1980s. Both are legal. But newer technology with high-volume fracing, which makes it possible to get to oil and natural gas that was unreachable before, has been banned since 2008.

Another company is increasing its presence in South Texas in the Eagle Ford Shale. Penn Virginia Corporation has increased its holdings by 4,100 net acres in Gonzales and Lavaca counties for $10 million. This brings the company to 31,000 net and 41,100 gross acres in the Eagle Ford. In Gonzales County, the new 3,200 net acres is adjacent to Penn Virginia’s development area and is estimated to have 20 horizontal well locations. The 895 net acres in Lavaca County is complimentary to existing Penn Virginia locations in nine units, with an estimated additional 10 horizontal well locations.

This activity is bringing an economic boom to South Texas. The Railroad Commission of Texas has issued an estimated 4,293 drilling permits for the Eagle Ford in 2012 alone. This has brought jobs to a region that long suffered from double digit unemployment and poverty.

“If you’re looking for a job, this is the place to be. If you want to relocate, this is the place to be,” said Diane Laplow of San Antonio. There were 48,000 new jobs created by activity in the shale last year. Aside from working directly in the oil and gas industry, this boom is bringing opportunities for small business as well, creating many jobs in other sectors of the local economy. For example, people are opening family businesses, like restaurants, to feed hungry oil workers. “It’s a very good spot to start a business,” said Sarah Cadena, a native of the area whose family now owns a burger and wings joint on a busy highway.

Sanchez Energy Corporation, a fast growing independent oil and gas company based in Houston, Texas, announced recently that it will accelerate its 2012-2013 drilling in the Eagle Ford shale play. This shale play covers 11 million acres from the Mexican border in South Texas to East Texas near Louisiana and covers 1/16th of the state of Texas. It has a unique geologic composition that allows for more production of oil and gas than other shale areas, and it is an excellent candidate for the use of hydraulic fracturing, or fracing.

Sanchez has a 95,000 net acre position in Eagle Ford, and the corporation is gathering cash from proceeds from a recent private placement of preferred stock, using the $144.6 million in proceeds to fund capital expenditures. Those expenditures focus on accelerating the drilling program across all Eagle Ford operating areas. Tony Sanchez, III, President and CEO of Sanchez, said, “Our recently closed $150 million convertible preferred offering, combined with our future cash flow from operations and modest debt from our anticipated credit facilities, provides the liquidity to continue executing and accelerating our drilling plans in 2012 and 2013.” In addition, the company will close shortly both a $250 million first lien revolving credit line, with an initial borrowing base of $27.5 million, and a second lien loan also of $250 million, with an initial commitment of $50 million, to provide more cash for the Sanchez expansion of operations.

With the money it has raised, Sanchez can grow and expand-the company has already identified 800-1200 potential drilling locations. Production has grown more than 90 percent just since the end of June, 2012, with 2300 barrels per day of oil equivalent being pumped by the end of August, 2012. The company sees a rate of 4000 to 5000 barrels of oil equivalent per day by the end of 2012, due to the more developmental-type drilling planned.