April 2012 Archives

April 30, 2012

EPA Region 6 Administrator Al Armendariz Resigned

Controversial EPA Administrator Al Armendariz has resigned his post as Administrator of Region 6, which includes Texas, after Senator James Inhofe (R-Okla.) called for an investigation of the EPA's actions related to oil and gas exploration. Armendariz was previously a professor at Southern Methodist University in Dallas. Prior to his appointment by the Obama administration he published a highly criticized study of air quality in the DFW area that found that oil and gas exploration in the Barnett Shale is a significant contributor to air pollution in that region. Since his appointment Armendariz has been a lightening rod for the exploration industry's criticism of the EPA.

In his remarks on the Senate floor, Senator Inhofe highlighted a talk given by Armendariz that was captured on video and recently posted to YouTube, in which he says that, because of the limited number of staff in his office, his approach is to act like the Romans: "They'd go into a little Turkish town somewhere, they'd find the first five guys they saw and they would crucify them. And then you know that town was really easy to manage for the next few years.". Inhofe also wrote a letter (Inhofe letter 04-26-12.pdf) to EPA Administrator Lisa Jackson, highly critical of Armendariz's actions. 

Armendariz was also responsible for the "emergency order" issued by his office against Range Resources for allegedly contaminating groundwater in Parker County -- an allegation since disproven. Recently, EPA voluntarily dismissed its suit seeking to enforce the emergency order, after the Texas Railroad Commission found that Range was not responsible for the methane in the contaminated water well.

April 25, 2012

Exxon, XTO and Shale Plays

Fortune Magazine's April issue has three good articles on the resurgence of oil and gas exploration and production activity US onshore. The lead article, "Exxon's Big Bet on Shale Gas," provides a good summary of the growth and success of unconventional shale plays in the US in the last 8-10 years. A second article chronicles the revival of the North American oil and gas industry and its effects on the US economy. The third article is an interview with Daniel Yergin, author of The Prize: the Epic Quest for Oil, and most recently The Quest: Energy, Security, and the Remaking of the Mordern World.

In 2010 Exxon purchased XTO Energy for $35 billion in stock, Exxon's largest acquisition since its merger with Mobil in 1999. Exxon's acquisition was an effort to get in on the shale gas revolution by buying XTO, one of the biggest holders of shale gas reserves. Exxon has (wisely in my view) kept XTO as a separate entity, in what Rex Tillerson, Exxon's CEO, calls "reverse integration." Since Exxon acquired XTO, XTO's gas reserves have increased 81% to 82 Tcf. Fifty percent of Exxon's total reserves are now in natural gas. XTO is Exxon's big bet on the long-term success of domestic natural gas as the preferred energy source for the US.

US natural gas production has increased 28% since 2005, and about one-third of that production is from shale gas. By 2035 it is estimated that shale gas will make up about 60% of US production. Rex Tillerson believes that natural gas will be the fuel of choice for electricity generation. Exxon estimates that world demand for electricity will grow 80% by 2040 and that natural gas will pass coal as the world's second-largest fuel source (behind crude oil) by 2025. Daniel Yergin: "I believe natural gas in the years ahead is going to be the default fuel for new electrical generation. Power demand is going to go up 15% to 20% in the US over this decade because of the increasing electrification of our society -- everything from iPads to electric Nissan Leafs. Utilities will need a predicable source of fuel in volume to meet that demand, and natural gas best fits that description."

Increased gas production has rippled through the US economy. According to Fortune, the US is now a net exporter of refined petoleum products, for the first time since 1949; plans to build facilities for the import of liquified natural gas are being revised to use those facilities to export LNG -- Cheniere Energy plans to begin construction of a new LNG processing unit at Sabine Pass on the Louisiana coast, to begin exporting LNG by 2015; cheap gas has revived the US steel industry -- Nucor Steel has broken ground for a $3.4 billion steel plant near Baton Rouge, La., and US Steel is building a new facility in Lorain, Ohio. In Texas, increased tax revenues are expected to save the state from another disastrous bienneum of deficits. Texas unemployment is well below the national average because of the oil industry.

"We call it the great revival of the North American oil industry," says Daniel Yergin. "This is a turnaround not just for North America's oil supply, but one with global impact. It's certainly the biggest development in the world oil market of this century."

April 10, 2012

Report Card on HB 2259 - Inactive Wells

In its 2009 Legislative Session, the Texas Legislature passed House Bill 2259, whose stated purpose is to ensure that inactive oil and gas wells get plugged and that surface equipment associated with those wells gets removed. I provided a summary of the bill's terms in a post on this site. A summary of the bill's requirements from the Texas Railroad Commission may be found here. The Texas Land and Mineral Owners Association, which lobbied for the bill, has now issued its report card: the Railroad Commission is not doing its job.

HB 2259 does not actually require that inactive wells be plugged. It imposes requirements on operators of inactive wells, depending on how long the wells have been inactive, to: disconnect the wells from electricity; post additional bonds to assure that the wells will eventually be plugged; and remove surface equipment from the wells. These provisions are phased in over a 10-year period. HB 2259 provides that an operator who does not comply with the new requirements will lose its operating permit (known as a P-5) -- meaning that it will not have the right to continue to operate any wells in the State.

Recently, TLMA asked the RRC how many P-5 permits have been denied because of failure to comply with HB 2259. The answer: none. Even though, according to TLMA, almost 1,500 operators failed to comply with the statute.

After HB 2259 was passed, operators complained to the Lege that they could lose their P-5 for simple paperwork violations that were not substantive. So the Lege in 2011 amended the statute to provide to the operator an opportunity to appeal the RRC's denial of an operating permit.

TLMA asked the RRC how many violations of the statute resulted from paperwork problems and how many were substantive violations. The RRC was unable to provide that information.

According to the RRC's website, there are 38,854 inactive wells in Texas that have been inactive for 10 years or more. Inactive wells pose a hazard to the environment, including groundwater resources, and are an eyesore on Texas land.

Under a typical oil and gas lease, the operator has no obligation to plug a well as long as the lease remains in effect. When leases reach their later stages of production they are often transferred to smaller operators who continue to operate the active wells on the lease as "stripper" wells. When a lease is transferred, the RRC requires that the permit to operate wells on the lease be transferred to the new operator. As long as the wells are in compliance with RRC rules and the new operator has a valid operating permit, the transfer will be approved. Once transfer of the permits for the wells is approved, the prior operator has no further obligation with respect to the wells transferred. So the prior operator in effect has transferred the obligation to plug any inactive wells on the lease to the new operator. Stripper well operators may have limited financial resources and will continue to defer plugging of active wells as long as they can. In many instances, the stripper operator eventually goes broke, and the obligation to plug the wells falls on the State. The wells become "orphan" wells.

I have struggled to find an appropriate way to address inactive wells in my oil and gas leases. Operators naturally want to delay spending the money to plug inactive wells. One solution I have used in oil and gas leases is to impose a "rental" on inactive wells. The lease provides that the lessee must pay the landowner for the right to keep a well unplugged and inactive. The annual rentals increase over time, thus increasing the operator's incentive to either plug the well or put it back into production. Failure to pay the rental may result in termination of the lease.

With the new drilling boom in Texas, the problem of inactive wells will only continue to increase. It remains to be seen whether HB 2259 will improve the situation.

April 3, 2012

News from the Oil Patch

EPA Dismisses Suit Against Range

The Environmental Protection Agency has thrown in the towel. It dismissed its suit against Range Resources that sought to enforce its emergency order claiming that Range was responsible for contamination of water wells in Parker County. See Bloomberg's article here.

I have previously written about this controversy. See my previous posts here and here and here and here and here. The EPA alleged that the water well belonging to the Lipskys had been contaminated with methane by Range's fracing of wells in the area. Range called a hearing at the Railroad Commission and invited the EPA and the Lipskys to attend, but they declined. The RRC found that Range's well was not the cause of the water well contamination; it concluded that the methane was naturally occurring and was caused when the water well was drilled too deep, into a shallow gas formation. Range fought the EPA's allegations vigorously. So far, the EPA has been unable to link any groundwater contamination to hydraulic fracturing.

The Lipskys also filed a civil suit against Range seeking damages -- a big mistake. Range got the Lipsky's case dismissed, on the ground that the RRC had already determined that Range was not at fault. Range filed a counterclaim against the Lipskys for defamation and to recover the costs of its litigation, and also filed a cross claim against the Lipskys' expert Alisha Rich, claiming that she conspired with the Lipskys to produce false evidence in the case. Those claims remain pending.

Horizontal Wells Now Have As Many As 20 Frac Stages

In 2003, the average number of frac stages for a horizontal well was four. (A "frac stage" is the process of using hydraulic fracturing in an isolated segment of a horizontal well, thus concentrating the pressure and energy in a limited portion of the formation.) Last year, the average number of frac stages was twenty. Lateral lengths have also increased dramatically. In 2003, the average lateral length in Tarrant County (the Barnett Shale) was 2,433 feet. In 2010, it was 3,599 feet. The standard length in the Eagle Ford is now a mile (5,280 feet), and some wells are being drilled to 8,000 feet or more.

GAO Says That Regulators Don't Have Sufficient Information to Ensure Safety of Gathering Lines

The US General Accounting Office has issued a report on the safety of gathering lines. Gathering lines are generally the pipelines that go from the well head to the transmission line. While transmission lines are heavily regulated by US and state regulators, gathering lines are for the most part unregulated. The GAO report says that:

state pipeline safety agencies cited construction quality, maintenance practices, unknown or uncertain locations, and limited or no information on pipeline integrity as among the highest risks for federally unregulated pipelines. Without data on these risk factors, pipeline safety officials are unable to assess and manage safety risks associated with these pipelines.

Coal Industry Struggles Because of Cheap Natural Gas

Bloomberg reports that Appalachian coal companies are in trouble because utilities are switching to cheaper natural gas:

For U.S. power utilities, who consumed 90 percent of the country's coal production in 2010, the prospect of relatively cheaper gas supplies now and in the foreseeable future has pushed them to switch some of their generation to gas-burning plants from units that use coal.

KNOC To Buy El Paso E&P Unit for $7.15 Billion

A consortium of companies including the Korea National Oil Company is buying El Paso Corp's exploration and production assets. Kinder Morgan previously acquired El Paso Corp. for $21 Billion and announced that it would sell its E&P business.

Valero and Chesapeake May Put CNG Pumps on Texas Highways

Valero and Chesapeake are negotiating to install natural gas fueling stations for vehicles on Texas roads. The Texas Commission on Environmental Quality has offered $4.5 million in grants to establish a triangle of CNG fuel stations between Houston, Dallas and San Antonio.

Eagleford Expands into Fayette County

Eagleford shale wells are being drilled in the southwestern part of Fayette County, expanding the north edge of the field. Nine wells have been drilled so far. Oil production from the Eagleford has climbed from 12,981 bbl of oil/condensate in 2006 to 55 million barrels in 2011. By comparison, oil production from the Bakken, Three Forks and Sanish shale plays in North Dakota, the other big oil shale area in the US, was 129 million barrels in 2011. EOG Resources' CEO Mark Papa predicted that oil shales could add another 1.5 million barrels/day of oil to US production by 2015.

Investor Groups Complain About Flaring of Gas

Thirty-six large institutional investors representing $500 billion in assets sent a letter to 21 E&P companies pushing them to disclose the amount of natural gas flared in connection with their oil shale production. Because of a lack of pipeline infrastructure and low gas prices, companies producing shale oil in North Dakota and Texas are flaring much of the gas produced from their wells. The investors claim that flared gas in North Dakota produced 2 million tons of carbon dioxide last year, the equivalent of 384,000 extra cars on the road. The investor group claims that, even with low natural gas prices, the state of North Dakota lost about $110 million in revenue last year from the flaring. Companies anxious to get oil flowing from their wells begin oil production before the necessary gas gathering and transmission lines are in place.

Petrochina Now Produces More Oil Than Exxon

The Associated Press reported last week that Petrochina, the Chinese national oil company, now produces more oil than Exxon and has become the world's largest oil producer. Petrochina announced that it pumped 2.4 million barrels a day last year, exceeding Exxon by 100,000 barrels. Exxon's output decreased 5.5% last year, while Petrochina's increased 3.3%.