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All industry in Texas, not just the oil and gas industry, could be harmed by new ozone regulations proposed by the EPA. If there were recognizable health benefits, they would probably be worth it. In fact, the EPA has been trying to sell its new, tighter ozone standards based on its claims that they would provide substantial health benefits. However, the American Petroleum Institute, in a recent study entitled Summary and Critique of the Benefits Estimates in the RIA for the Ozone NAAQS Reconsideration, has found that the EPA has misrepresented the benefits of EPA’s proposed new ozone standards.The EPA’s figures are based on escalating benefits due to ozone-related mortality, even though the EPA has found no causal link between ozone levels and mortality. The result could be that industries are forced to make changes to produce less ozone, while the savings that they produce would never materialize.

The EPA seeks to tighten regulations that were put in place under President Bush in 2008. It claims that while the cost would be $90 billion per year, the costs would be offset by $100 billion per year in savings from medical expenses and missed workdays. However, the API study found that ozone benefits alone do not produce these savings. The EPA’s “savings” are based in part on cuts in soot pollution that may occur because of the new regulations. The problem with this is that soot pollution has nothing to do with ozone pollution. The API declares that, overall, the EPA’s plan for tightening standards is “out-of-cycle, not supported by science, and would have devastating economic consequences.” What’s more, the EPA has no idea how the new standards would be met, but one guarantee is that they would have a heavy impact on business, especially large businesses. Khary Cauthen, API’s government affairs director, predicts that “operations would close and business moved elsewhere. This isn’t a recipe on how to rebuild an economy.”

These findings throw a wrench in President Obama’s plans to tighten environmental regulations. While normally, the Clean Air Act requires the EPA to review regulations every five years, the administration claims that the standards need to be tightened sooner because the Bush administration ignored the EPA scientific panel’s recommendations. Yet by ignoring the five-year standard, the administration risks catching businesses off guard, which would make it even harder for them to meet the new stringent standards. Khary Cauthen believes that the president should pull the new regulations and wait until 2013 before making any changes. Obama has claimed that he wants regulations based on “science, not politics,” and that he would weigh the costs on businesses and local communities before enacting a rule. The API findings ought to give him plenty of reasons to rethink the new regulations, unless the president believes no other scientists besides the pseudo-scientists at the EPA are credible. There is mounting evidence that this is exactly what he believes.

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The oil and gas industry is under attack not only in Texas, but nationally. Several months ago, a new study by Louisiana State University Professor Joseph Manson, An Economic Analysis of Dual Capacity and Section 199 Proposals for the U.S. Oil and Gas Industry, was released. Professor Manson’s study found that tax changes proposed by the Obama administration would actually increase the deficit.One of Obama’s proposals would prohibit oil and gas companies from using the manufacturer’s deduction created by Section 199 of the American Job Creation Act of 2004. The other proposal would create limits on foreign tax credits used by U.S. dual-capacity taxpayers. The Obama administration claims that these changes would lower the deficit and has included them in every annual budget proposal. Instead, Professor Manson demonstrates that these proposals would result in a loss of $53.5 billion a year in tax revenue.

Section 199 allows taxpayers who produce or manufacture in the United States to deduct a certain percentage of domestic production activity from their taxable income each year. The dual-capacity taxpayer rules prevent U.S. firms operating in foreign countries from being doubly taxed. Professor Manson’s study, sponsored by the American Energy Alliance, took a detailed look at the effect that the loss of these credits would have on the oil and gas industry. Professor Manson concluded that there would be a loss of 155,000 lost jobs, a loss of $68 billion in wages, and a loss of $83.5 billion in reduced tax revenues. Not only that, beware the unintended consequences: as more people are laid off, more people will request unemployment benefits, food stamps and other forms of assistance.

Professor Manson made his calculations using the Modern Regional Input-Output Modeling System II, developed by Nobel Economic Laureate Wassily Leontief, which supposes that when a company has to pay $1 more in taxes, it must take it out of other sources, such as workers’ pay. As a result, Professor Manson notes: “[A] tax on just a small number of firms can be felt throughout the economy.” He found that job losses go beyond those strictly related to oil and gas production: construction, retail, food services, and even arts and entertainment would feel the pain. Not only would there be significant job losses, but also the U.S. could suffer $341 million in lost output. The region hardest hit would be the Gulf of Mexico, where the local community has already suffered extensively following the Deepwater Horizon tragedy.

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The Edwards Aquifer case is sure to be a hot legal topic in Texas this year. The landmark decision by the Texas Supreme Court a few weeks ago will probably effect countless Texas landowners. Joel McDaniel, one of the plaintiffs in the Edwards Aquifer case, noted that “this changes everything for everyone who owns a well.”

I discussed this important decision in my March 5, 2012 article (that you can access here), but there remains a lot to be discussed about this opinion, particularly because the Court’s decision raised some questions in addition to answering others. Readers may recall that the Court held that landowners own the groundwater under their land, thus treating groundwater similarly to subterranean minerals, such as oil and gas. However, Judge Hecht’s opinion for the Court notes that regulation of groundwater is still within the state’s power. He noted that in many areas of Texas, including where the Edwards Aquifer is located, the demand for water is greater than the available supply. However, the decision goes on to say that although the State of Texas is empowered to regulate, when a landowner believes that the regulation is unreasonable, they can take the issue to the courts.

In the wake of this decision, it is still unclear how the San Antonio area will be affected. The water for that area is controlled by the regulations of the Edwards Aquifer Authority (EAA). The chairwoman of the EAA’s Board of Directors, Luana Buckner, said that this decision left the Authority with more questions than answers about how to move forward. She noted that the decision confirmed that the EAA followed the correct procedures, as set out in the Edwards Aquifer Authority Act. However, she believes that the decision gives no guidance as to whether following the correct procedures to limit water pumping always requires the EAA to compensate landowners for limiting their rights. The Supreme Court of Texas left it up to a trial court to determine whether Mr. McDaniel, the sole surviving Plaintiff in the case, should receive compensation. Supporters of the Plaintiff’s position believe that, regardless of the how the case is finally resolved in the lower court, the Texas Supreme Court’s confirmation that landowners can turn to the courts to adjudicate these groundwater disputes is incredibly important.

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Readers may recall that last year the Supreme Court of Texas issued an opinion with profound implications for the rights of Texas landowners when they are faced with a request for a pipeline or utility easement. In Texas Rice Land Partners Ltd. and Mike Latta v. Denbury Green Pipeline-Texas LLC, issued on August 26, 2011, the Court addressed the issue of the requirements a pipeline company must meet in order to be deemed a common carrier and thus be entitled to use the power of eminent domain. My discussion of the original opinion can be found here.

In its original decision, the Court limited the eminent domain powers of pipeline companies, stating that they must show more than that the pipeline could be used by others, aside from the company building the pipeline, at some indefinite point in the future. In addition, the Court held that a permit issued by the Texas Railroad Commission, which was previously assumed to confer common carrier status (and thus eminent domain power), no longer has this effect. This decision, therefore, shifts the burden onto the pipeline company to prove that it meets the requirements to be classified as a common carrier. The Court’s decision gives vastly more power to landowners, and the case is likely to impact the attitude of all pipeline and utility companies negotiating with landowners for easements and rights of way.

In an opinion last Friday, the Supreme Court not only denied Denbury Green Pipeline’s motion for rehearing, but Court also clarified its previous judgment in significant ways. In stating that a company cannot wield the power of eminent domain for a private oil or gas pipeline, the Court added that “private” means a pipeline that is limited in its use to wells, stations, plants, and refineries of the owner. The Court went on to say that a “common carrier” means that the company is transporting gas for hire and therefore implies more customers for the gas than the owner of the pipeline. In other words, the pipeline cannot be built for the owner’s exclusive use and still be a common carrier.

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Recently, the Texas Supreme Court issued an important opinion that clarified a Texas landowner’s groundwater rights. In the case of Edwards Aquifer Authority and the State of Texas v. Burrell Day and Joel McDaniel the Court was faced with the issue of whether land ownership includes an interest in groundwater in place, which therefore could not be taken for public use without the adequate compensation mandated by the Texas Constitution. The Court found that it does, and used Texas oil and gas law to assist in its reasoning, comparing the characteristics of mineral rights to groundwater rights.

Burrell Day and Joel McDaniel bought land situated over the Edwards Aquifer in 1994 to grow oats and raise cattle. A well for irrigation had been drilled in 1956 but had collapsed or been removed by the early 1980s. However, water continued to flow due to artesian pressure, contributing much of the water to a lake on the property. To continue to use the well or replace it, Mr. Day and Mr. McDaniel needed a permit from the Edwards Aquifer Authority. The Authority has detailed, strict requirements that are based heavily on historical use for water from this aquifer, which supplies most of the water for south central Texas. Mr. Day and Mr. McDaniel requested a permit from the Authority to allow them to draw 700 acre-feet from the well. The Authority granted them a permit for only 600 acre-feet. They took the matter to an administrative judge, who found that the historical use for this property was only 14 acre-feet.Mr. Day and Mr. McDaniel appealed to the District Court, where they alleged that the Authority’s denial of their requested use was an unconstitutional taking without compensation. The Texas Constitution allegation required the State of Texas as a party. The Texas District Court granted Mr. Day and Mr. McDaniel’s claim on the issue of the amount of water allowed to be used, but it denied relief on the constitutional claim. Both sides appealed that ruling. The Texas Court of Appeals reversed, and held that landowners have a right to the water under their land, but that groundwater flowing into a reservoir for public use was “state water” and therefore subject to regulation.

All three parties-Mr. Day and Mr. McDaniel, the Authority, and the State-petitioned to the Texas Supreme Court to hear this case. In a decision by Justice Hecht, the Court found that groundwater in place beneath property is owned by the landowner and restricting its use can constitute a taking under the Constitution which requires adequate compensation. The Supreme Court found that the Authority’s process of allowing water based on historical use was contrary to the Texas Water Code. The State and the Authority failed to show why the Authority’s permit process should be more restrictive than the Water Code. Finally, the Supreme Court held that a landowner cannot be deprived of groundwater under his property either because he did not use it previously or because the water supply is limited.

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Environmentalists like to argue that oil and gas are harmful to the planet, that their sources are drying up, and that “clean” green energy is the way of the future. However, more studies are finding that green energy is far from harmless to the environment. In fact, it may actually be more harmful than traditional energy sources.

This is because the batteries that run “clean” energy hybrids, electric cars, and other related products are made up of rare earth elements (REEs). REEs consist of 15 periodic elements of the lanthanide group, along with scandium and yttrium. These metals are in nearly all batteries due to their unique properties.According to an EPA report, because REEs are generally concentrated evenly throughout the Earth’s crust, there are few locations where they can be economically mined. That doesn’t mean, however, that a determined government would be unable to gain a monopoly over REEs. Or that REEs would not require extensive mining and refining.

While the United States controlled the REE industry up until 1985, in recent years, China has taken over. By some accounts, it now produces 95% of all REEs. China managed to gain control by flooding the market with cheap REEs, due to large high-quality reserves and low labor costs. Since then, China has sent the cost of REE products — such as fluorescent light bulbs — soaring. The United States is trying to regain its dominance, and American producers have received permission to conduct exploratory drilling for heavy metals. Currently Mountain Pass mine in California is the only mine that has been used for heavy metal mining. Government and industry have set their sights on the Bokan Mountains in Alaska, Diamond Creek in Idaho, and the Bear Lodge Mountains in Wyoming as other potential mining locations.

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The conventional wisdom is that when oil prices are high, gasoline prices follow. Yet is that really true? Just recently, oil prices were up more than 9%, yet gas prices at the pump actually dropped 15 cents, to 3.30 a gallon. Why is this? Well, it turns out the conventional wisdom is mostly true, but gasoline prices do not follow oil prices perfectly, and each has its own reasons for prices rising and falling.First, why do gas prices tend to follow oil prices on an upward climb? According to one source, it is simply because when oil prices rise, gas dealers raise their prices in order to avoid losing money. At the same time, when oil prices go down, it can take anywhere from two days to three weeks for gas prices to fall. Another reason may have to do with the type of crude oil on the market. When crude oil is plentiful, but gas prices are still high, the reason may be because the crude is heavy and sour, which requires greater processing — as opposed to light, sweet crude oil, which is easier to refine.

If this is the case, then why do oil and gas prices sometimes vary? There are several reasons, most very specific to the way oil and gas are produced and to their intended purpose. While nearly half of crude oil — 42% — is used for producing gas, the other 58% is used for diesel fuel, jet fuel, and is even used to make everyday products such as tires. Therefore, the more demand for these items, the more the price of oil will be affected.

As for why gas prices rise and fall, the reasons range from the methods of production to the state of the economy. First, gas prices are affected by demand — when people travel in the summer, prices tend to go up. During the winter, with less travel, prices tend to drop. Second, there is not just demand for oil in the United States, but all across the world. China, India, and Brazil, all enjoying economic expansion, require more energy to keep their economies moving. Less oil means that it is more valuable, which increases the price of any product associated with it, including gas.

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In what is hopefully a sign of a healthy Texas oil and gas industry, as well as good news for Texas mineral owners, Apache Corporation (the subject of a recent post) has not only renewed its lease of 365,000 square feet at its Post Oak Central office building, but has also leased another 132,000 square feet of space. This represents a 36 percent office space increase, bringing Apache’s total square footage to 467,000. The company also extended its current lease term to 2018, a five year add-on to their agreement, which was set to expire at the end of this year. The Houston office complex is owned by JP Morgan and is distinct for its three 24 story glass and steel towers.Apache’s move to expand its operations was likely prompted by the company’s healthy profit margins. The Wall Street Journal recently reported that Apache’s fourth quarter earnings were up 73 percent as the company benefited from high oil prices and increased production. Apache’s fourth quarter profit was $1.9 billion, or $2.98 a share. That is a substantial increase over their $689 million profit and $1.77 share price from 2011. Chief Executive G. Steven Farris said the company expected to spend $9.5 billion on drilling capital this year, up from $8 billion in 2011. Revenue also increased for the company by about 25 percent to $4.3 billion. Apache’s global production was up by 4.2 percent from a year earlier and average prices went up 24 percent for oil and nearly 3 percent for natural gas. These reports on Apache’s success are good news for the Texas energy industry and a benefit to Houston, the company’s headquarters.

This comes on the heels of other big real estate transactions in Houston, a city fortunate to be at the center of the oil and gas industry’s resurgence. In January, Noble Energy signed a lease for 467,000 ft2 of office space at the former headquarters of Hewlett Packard, taking over the northwest Houston building in its entirety. The 10 story building opened in 1998 as the headquarters for Compaq Computer Corporation. The building was one of Houston’s largest vacant office buildings and Noble’s lease is helping bring the city’s vacancy numbers down significantly-showing once again how a robust and profitable energy industry can help the economy as a whole.

In December, Shell Oil renewed its 1.2 million ft2 office lease at One Shell Plaza and Two Shell Plaza in downtown Houston. Shell’s Houston lease was the biggest lease signed in the United States in 2011. Last year, 1.8 million square feet of office space was occupied in Houston and that number is expected to be the same or greater this year, spurring new construction for the first time in years.

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The battle in Texas and in the country in the oil and gas field over hydraulic fracturing, or “fracing”, rages on, of course. There are several recent developments in the effort to uncover the facts about fracing, as opposed to unsubstantiated claims and political posturing. These research efforts are important resources for better understanding of this technology and how it affects the environment and the natural gas industry. With so much discussion and debate on the issue of fracing, a technology used for years but subject to intense criticism only recently, it is especially important to publicize the scientific evidence related to the process, rather than buying into the political hype (see a previous post on my opinions here).

The University of Texas at Austin released its preliminary findings, entitled “Boom or Bane: A Report on Hydraulic Fracturing of Shale”, excerpted from an intensive ongoing research and study project on this issue, on November 9, 2011. The University’s Energy Institute examined the use of hydraulic fracturing in shale gas drilling. The preliminary findings indicate that there is no direct link between fracing and groundwater contamination. The researchers suggest that, at worst, any contamination is probably from above ground spills, mishandling of drilling waste products, or faulty cement casings-not the the hydraulic fracturing itself. Dr. Charles “Chip” Groat, a UT geology professor and Energy Institute associate director who is leading this research project, stated at the release of the preliminary findings: “Our goal is to inject science into what has become an emotional debate and provide policymakers a foundation to develop sound rules and regulations.” The final report is expected to be released soon, in the early part of this year. The Energy Institute has two other projects on hydraulic fracturing in shale gas development in the works which may also shed light on the issue in the near future.

In November of last year, the Environmental Protection Agency released its Plan to Study the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources. This study intends to look into the potential effects on drinking water from various natural gas drilling techniques associated with hydraulic fracturing. The EPA plans to use existing data as well as developing case studies at the Haynesville, Marcellus, Bakken, and Barnett fields. They will study drinking water at sites where fracing has already been used and collect data both before and after fracing at new sites where the process has not been used before. This report will be released in two parts, the first of which is expected by the end of 2012. That first report will contain the analysis of existing data. The longer-term results of this EPA project will be released in a supplemental report in 2014, which will include information and conclusions from the case studies of new sites.

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Texas mineral owners who have signed oil and gas leases with Chesapeake Energy may be faced with some unanswered questions.

The American natural gas industry faces the paradox of having been too successful in recent years. A glut of natural gas on the market due to technological advances have allowed access to previously inaccessible gas, especially through horizontal drilling and hydraulic fracturing. The glut of gas has pushed prices down 45 percent in the past year. In fact, natural gas prices are at a ten year low right now. As a consequence, the second largest natural gas producer in the nation, Chesapeake Energy Corporation, recently announced that it will cut gas production by half. The company will only operate 24 of its dry gas drilling rigs, down from the 50 rigs it operated in 2011.

Chesapeake’s measures will only reduce America’s supply of gas by 1.4 percent. The indications from other natural gas companies regarding cutting gas production has been mixed. EQT Corporation stated that it would suspend natural gas drilling in Kentucky indefinitely because of low prices. Exxon declined to comment. Cabot Oil & Gas has no plans to cut production.

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