June 2011 Archives

June 29, 2011

New York Times Articles on Shale Plays Create a Stir

Two recent articles by a New York Times reporter, Ian Urbina, have caused strong reactions among the industry and those following shale plays in the U.S. Urbina's articles may be found here and here. Urbina's basic theme is that the new reserves of natural gas attributed to shale plays are not real, but are a "Ponzi scheme" created by overestimates of reserves by companies desiring to pump up their stock prices. Urbina bases his conclusions on emails from different industry players and analysts, including the Energy Information Administration, PNC Wealth Management and IHS Drilling Data, and anonymous sources in the industry, including Chesapeake and Enron. Links to these emails are in the articles. Many of them date back to 2009. "In the e-mails, energy executives, industry lawyers, state geologists and market analysts voice skepticism about lofty forecasts and question whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves. Many of these e-mails also suggest a view that is in stark contrast to more bullish public comments made by the industry, in much the same way that insiders have raised doubts about previous financial bubbles," says Urbina.

Urbina's articles have provoked strong responses.

  • ExxonMobil responded with a post on its "Perspective" blog page:   

"It is unfortunate that the words "rigorous" and "methodical" can't be applied to the New York Times' recent articles. Understanding the facts surrounding the potential for development of our nation's energy resources is every American's business.  Our economic recovery, environmental progress and energy security depends in part on a sound, stable and sensible policy and regulatory framework informed by honest, fact-filled debate.  The Times' current campaign undermines this debate and is a disservice to its readers."

  • The Energy Information Administration issued a press release defending its estimates of shale gas reserves.

 

  • Chesapeake weighed in with its criticism of the NYT articles:

"The Times story was obviously motivated by an anti-natural gas agenda. It is telling that the reporter chose not to interview a single reliable source and instead selectively quoted emails from unnamed sources or well-known industry critics dating back to as early as 2007 to invent a series of inaccurate and misleading allegations. If the Times was interested in reporting the facts and advancing the debate about the prospective benefits of natural gas usage to energy consumers, it could easily have contacted respected independent reservoir evaluation and consulting firms that annually provide reserve certifications to the U.S. Securities and Exchange Commission or contacted experts at the U.S. Energy Information Administration, the Colorado School of Mines' Potential Gas Committee, the Massachusetts Institute of Technology, Navigant Consulting and others who would gladly have gone on record to confirm the abundant resources that have been made available thanks to the horizontal drilling and hydraulic fracturing techniques that Chesapeake and other industry peers have pioneered in deep shale formations across the U.S."

  • IHS CERA responded to the Times that
"Emails referenced in the article were written in 2008 and 2009, early in the understanding of the performance metrics for shale gas and have been proven completely wrong by events. One of the emails that was referenced in the article as from IHS was apparently written by someone misidentified as an IHS employee when in fact that person had not been employed by IHS for more than a year.

 

"Unconventional technologies and resources have moved with great speed. There is much more information about the performance and potential of shale resources available today than in the past. Shale gas supplies have built up very rapidly and now are 25 percent of total U.S. gas supply, as costs have come down dramatically and experience and knowledge have progressed.

 

"In February 2009, the IHS CERA report, "The Shale Gale," stated that the "recent revolution in the production of unconventional shale gas" would result in "a substantial increase in shale production and reserves"' and "a rapid growth of shale gas supply."  Also in February 2009, IHS CERA's study Rising to the Challenge said: "Unconventional gas will drive growth."  

 

"That was the IHS position then and it continues to be our position today.  Both of these reports were released well before the 2009 email cited in the NY Times story."
 
  • ProPublica published its own article alleging that the SEC revised its rules on how reserves are calculated, allowing companies to greatly increase their reserve estimates, relying heavily on the Times articles and research.

 

  • Forbes Magazine published a blog post calling the Times "all hot air on shale gas." 

The best and most thoughtful response to the Times articles is from this post by Michael Levi of the Council on Foreign Relations: "I can't say that I've read through all of the hundreds of pages of documents that the Times has posted on its site. But I've gone through a good enough slice of them (including all the emails that the Times references in its articles) to get a feel for how Urbina went about using them in his stories. There's a pattern: Urbina was clearly looking for negative views of shale gas, and had no problem finding them." Levi goes on to write that Urbina did raise some significant issues about how shale gas reserves should be assessed, but he did so without really understanding the economics of the E&P industry.

This is not the first criticism of industry estimates of shale gas reserves. In 2009, Arthur Berman, a geologist and then consultant with World Oil, published a gloomy analysis of Barnett Shale economics and reserves in 2009. See my earlier post about Berman here.

June 23, 2011

Oil and Gas-Related Legislation from the 82nd Texas Legislative Session

Bills of Interest from the Texas Legislature's now-completed session:

  • SB 652 - re-authorized the Texas Railroad Commission for two more years. The Lege was unable to agree on changes recommended by the Sunset Commission to reform the RRC. See my discussion of Sunset recommendations here and here. Legislators could not agree on a provision changing the terms of the three commissioners from 6 to 4 years, and could not agree on a provision transferring hearings involving enforcement and gas utility rates to the State Office of Administrative Hearings.  See story here.
  • HB 3134 - Revises earlier legislation (HB 2259, passed in the previous session) that made it more difficult for an operator to renew its operating license if it had unplugged wells not in compliance with rules. The revision gives the operators more time to achieve compliance, and will make it more difficult to require operators to plug inactive wells. See my description of HB 2259 here.
  • HB 3328 - mandates public disclosure of chemicals used in hydraulic fracturing treatments in Texas. The oil and gas industry supported the measure. Environmental groups called the legislation a mixed bag.  EDF advisor Scott Anderson said that the bill doesn't allow for a "simple, statewide list of what chemicals are used by whom and in what quantities." Also, the bill may not be fully implemented until 2013.  Railroad Commissioner David Porter said he would push the RRC to complete its rulemaking on the bill by July 1, 2012, a full year before the deadline set out in the bill.
  • SB 875 - prohibits nuisance suits against gas companies as long as they have a valid permit and are in compliance. The bill was pushed by the industry to prevent nuisance lawsuits related to emissions and noise from gas compressor facilities and other installations near populated areas.
  • SB 332 - provides that a landowner "owns the groundwater beneath the surface of the landowner's land as real property," and entitles the landowner to drill for and produce the groundwater, subject to reasonable regulation. This bill as originally filed provided that a landowner "has a vested ownership interest in and right to produce groundwater below the surface of the landowner's property." The bill is likely to give rise to litigation about the ability of groundwater districts to regulate water wells.

Other legislation of interest that did not pass:

  • HB 2087 - would have allowed operators to force-pool non-participating royalty interests. The bill was opposed by landowners, including the Texas Land and Mineral Owners' Association.
  • HB 2939- would have required operators to submit an annual report of groundwater used to the RRC, the TCEQ and the TWDB.
  • HB 3586 - would have allowed for compulsory unitization for purposes of enhanced oil recovery and CO2 storage.
June 17, 2011

Motions for Rehearing in BP America v. Marshall Blasts Supreme Court

Counsel for the plaintiffs in BP v. Marshall filed unusual motions for rehearing after the Texas Supreme Court reversed the judgments of the courts below awarding substantial damages for fraud. See my discussion of the Supreme Court's decision here. The Marshalls' attorneys' motion for rehearing accuses the court of engaging in "de novo review of a jury finding," exceeding the court's constitutional authority, violating the Marshalls' constitutional right to a jury trial, ignoring uncontradicted expert testimony, and ignoring its own prior precedent. The motion calls the court's reasoning "disingenuous." The Vaquillas attorneys' motion for rehearing says that "the decisional process has gone awry," and the court "has not decided, or even recognized, the main issue in the Vaquillas-Wagner case." From the Vaquillas motion for rehearing:

"The Opinion resolves the BP-Marshall dispute on a legal insufficiency point, but the Opinion never uses the phrase 'standard of review,' never alludes to the standard of review, and never undertakes to apply one."

"Perhaps the Court has in mind an explanation -- maybe even a devastating explanation -- for making the evidence that supports the verdict all vanish. Very well, then, but the Opinion ought to opine on these things, rather than leaving the world wondering."

"Again, any fair observer will acknowledge the Court's heavy workload, with many administravie duties and 900 cases a year clamoring for review. The torrent of cases means that not every Justice can read every record. A system of triage is inevitable. Still, when an Opinion can miss the main issue in one half of the case, forget the standard of review in the other, and speak of an 'adverse possession cause of action' -- while still going out the door unanimously -- something would seem to be wrong."

"The Opinion analyzes the accrual issue in terms of 'Wagner's adverse possession cause of action.' But Wagner has no 'adverse possession cause of action.' Nobody does. Adverse possesssion is not a cause of action, and this Court has never before uttered the phrase 'adverse possession cause of action.'"

"These issues need attention. For one thing, the Court has built a reputation as a leading American tribunal, perhaps the leading American tribunal, for oil and gas cases. Mistakes that might matter little if made by the Supreme Court of Vermont may have more far-reaching effects if made by the Supreme Court of Texas. Further, the Court faults the Marshalls for not acting as a 'sophisticated lessor' should. Under those circumstances, it is in the Court's interest to ensure that its Opinion displays the kind of precision that has historically characterized the Court's oil and gas cases."

"The Court should vacate its decision and start over."

Not your usual motions for rehearing.

 

June 16, 2011

New MIT Study, "The Future of Natural Gas," Touts the Future of Natural Gas Shale Development

A study group sponsored by the Massachusetts Institute of Technology has issued a report, The Future of Natural Gas, the fourth in a series of MIT multidisciplinary reports examinging the role of various energy sources and the effects of carbon dioxide emissions restraints.  The full 170-page report can be found here. The report analyzes the relative carbon footprint of natural gas compared to other fuels and the environmental impact of the development of shale gas reserves, among other topics. Here are some excerpts:

Major conclusions of the report:

  • "There are abundant supplies of natural gas in the world, and many of these supplies can be developed and produced at relatively low cost."
  • "The role of natural gas in the world is likely to continue to expand under almost all circumstances, as a result of its availability, its utility and its comparatively low cost."
  • Natural gas is "one of the most cost-effective means by which to maintain energy supplies while reducing CO2 emissions."

Regarding gas's carbon footprint, the report concludes that "Among the fossil fuels, it has the lowest carbon intensity, emitting less CO2 per unit of energy generated than other fossil fuels. It burns cleanly and efficiently, with very few non-carbon emissions. Unlike oil, natural gas generally requires limited processing to prepare it for end use."

Regarding potential natural gas supply:

  • "The mean projection of [worldwide] remaining recoverable resource [of natural gas] in this report is 16,200 Tcf, 150 times current annual global natural gas consumption .... Of the mean projection, approximately 9,000 Tcf could be developed economically with a natural gas price at or below $4/Million British Thermal units (MMBtu) at the export point."
  • "The mean projection of recoverable shale gas resource in this report is approximately 640 Tcf, with low and high projections of 420 Tcf and 870 Tcf, respectively. Of the mean projection, approximately 400 Tcf could be economically developed with a natural gas price at or below $6/MMBtu at the wellhead."

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June 1, 2011

Discussion and Debate Increase on Environmental Hazards of Fracking

Fracking has become more and more a topic in the general media and part of the state and federal environmental energy agenda, with new stories appearing daily. A sample:

Secretary of Energy Steveb Chu has appointed an advisory panel, officially called the Secretary of Energy Advisory Board's subcommittee on natural gas, to study the environmental issues around hydraulic fracturing and shale gas production.  Members of the subcommittee are John Deutch, former head of the CIA during the Clinton administration, in the Department of Energy during the Carter administration, now a professor at MIT, and former board member of Schlumberger, Ltd.; Daniel Yergin, IHS Cambridge Energy Research Associates Chairman; Susan Tierney, Chair of the board of the Energy Foundation; Stephen Holditch, chair of the Department of Petroleum Engineering at Texas A&M; Fred Krupp, President of Environmental Defense Fund; Kathleen McGinty, former head of Pennsylvania's Department of Environmental Protection; and Mark Zoback, geophysics professor at Stanford University. Steven Chu, Secretary of Energy, has charged the subcommittee to make recommendations on ways to improve safety of fracking in 90 days, and offer advice to other agencies within six months on how they can better protect the environment from shale gas drilling.  http://thehill.com/blogs/e2-wire/677-e2-wire/164057-overnight-energy-fracking . Beginnings of the subcommittee's work have not shown promise: at the first meeting of the committee, Dusty Horwitt of the Environmental Working Group said its chairman John Deutch should resign because of his former ties to Schlumberger and Cheniere Energy. On the other side, Republicans including Darrel Issa (R-Calif), chair of the House Oversight and Government Reform Committee, have said that Chu's subcommittee is composed primarily of Democratic appointees hostile to drilling interests. 

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