Articles Posted in Oil and Gas Law

Before the election, the House of Representatives passed sweeping energy legislation, including HR 4480, in an attempt to facilitate the development of the oil and gas industry. The bill passed by 248 to 163 and its sponsor, Representative Cory Gardner of Colorado, urged the Senate to take up this bill promptly, for the good of the American economy.

Included in the package of seven bills the House passed, all directed at oil and gas development in the Western US and on federal lands, there are provisions requiring the Secretary of Energy to have a plan for leasing federal land, directing the Secretary of the Interior to offer previously unavailable land as at least 25% of the annually nominated total, and requiring analysis of impacts of certain Environmental Protection Agency (EPA) rules on gas, diesel, and natural gas prices. Other included bills would require the Secretaries of the Interior and Agriculture to have a new federal onshore energy production strategy every four years to guide leasing plans, the Secretary of the Interior to hold at least one lease or sale per year in the National Petroleum Reserve-Alaska, and allow the Secretary of the Interior to hold oil and gas lease sales online.

Republican members of the House pointed out that while gas prices may be going down a bit, they are still double what they were in January 2009. The bills are intended to alleviate the devastating impact of government regulations on job creation and gas prices for the American consumer. Democrats and some radical environmentalist allies, of course, see it differently and have been complaining about the bill’s theoretical and speculative environmental impact. The Democrats also tried to attach amendments to the various bills to preserve major regulatory provisions, fully fund the Commodities Futures Trading Commission, and require federal oil and gas lessees to more diligently develop their holdings. These amendments were voted down.

There is now even more evidence that the Environmental Protection Agency (EPA) is using politics, and not science, in opposing hydraulic fracturing and the oil and gas industry. A recent survey and report entitled “Characterizing Pivotal Sources of Methane Emissions from Unconventional Natural Gas Production“, done by the American Petroleum Institute and America’s Natural Gas Alliance (ANGA) reached a few interesting conclusions, especially for those of us skeptical of the EPA’s stance on hydraulic fracturing. The survey found that the methane emissions levels from fracing in the US were 50% lower than the EPA estimated in its 2011 emissions inventory. Between 2010 and 2011, this new study found the natural gas industry emitted 4.4 million tons of methane gas, compared to the EPA’s estimate of 8.7 million tons. This is an important distinction because methane can be a potent pollutant.

There is little to dispute in this extensive and thorough new survey and report, which studied 91,000 wells operated by more than 20 companies over a vast geographical area. It represents nearly one-fifth of all US oil wells (18.8 % to be precise). The survey examined ten times more dates than those used in the EPA’s study on methane emissions. This survey and report show even more drastic differences in numbers in specific areas. For example, venting of methane into the air during liquid unloading was 86% less and emissions from well workovers were 72% less than indicated in the EPA report.

Howard Feldman, API’s regulatory and scientific affairs director, mentioned earlier this month that, “The industry is voluntarily reducing its environmental footprint and not waiting for regulatory mandates or incentives to continue to make progress. The technology and equipment used to reduce emissions were created by the industry, and companies are already implementing those technologies in locations where it is most effective. By January of 2015, all wells are required to include reduced emissions completions, which will further ensure emission reductions.” Mr. Feldmen said there are no plans to challenge the EPA’s emission standards in court, and added he hopes the agency will look at the industry report’s findings and reassess its regulations.

In great news for the Texas oil and gas industry, as well as the Texas economy, drilling at the Eagle Ford Shale, a band of rock in south Texas containing a mixture of light, sweet crude oil, natural gas, and high quality condensates, may outpace last year’s boom. UK based research company GlobalData, issued a report earlier this year indicating that production will increase in 2012.

The report confirms there has been explosive growth in oil and gas activity in this area of south Texas. This was already apparent last year, when production of crude oil, natural gas and natural gas liquids tripled compared to 2010. Combined liquids production is estimated to have increased by an even greater factor, from 10.8 million barrels of oil equivalent in 2010 to 57.5 million barrels of oil equivalent in 2011, an increase of 432%.

This data confirms other reports and evidence that drilling has shifted away from natural gas and towards the more lucrative crude oil and condensates, largely as a result in the drastic decrease in North American gas prices. Regardless of this shift in focus, natural gas continues to play a significant role in Eagle Ford drilling. The GlobalData report states that combined liquids and gas production was at 105 million barrels of oil equivalent in 2011. Only five years earlier the output was 200,000 million barrels of oil equivalent. By the end of the current year, the company expects the production to have doubled from last year, to 207.3 million barrels of oil equivalent.

As many Texas oil and gas lease owners know, fracing creates new channels in rock that can increase extraction rates for the recovery of fossil fuels. However, some claim that the process contaminates groundwater or risks air quality. The traditional process works by pumping fracturing fluid into the well-bore at a sufficient rate to increase down-hole pressure. But a new technology is on the horizon to achieve the same results without using water. This new process is only a few years old and was largely invented by Robert Lestz, the chief technology officer at GasFrac Energy Services Inc.

The Process & Benefits

Waterless fracing works with almost the same process as traditional methods, but it replaces the traditional mixture of water, sand, and chemicals with a thick gel made from propane. The company claims this petroleum gel is as natural to a well as soil is to the earth. This gel is called “liquefied propane gas,” or LPG for short. LPG has the added advantage of reverting to vapor while still underground, and it therefore returns to the surface in a recoverable form. Also, unlike water-based methods, LPG does not carry chemicals used in drilling back to the surface. In that way it requires less post-job cleanup and almost no flaring. Another benefit of this new technology is that it is more efficient, because the fracturing fluid can be recovered and re-used or re-sold, saving the oil and gas producer substantial expenses.

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.