May 2012 Archives

May 31, 2012

News Around the Oil Patch

Rig count remains steady:

Baker Hughes Rig Count.jpg


Gas prices rise:

NYMEX Prices.jpg


Oil prices decline:

NYMEX Crude prices.jpg


The Haynesville Shale is now one of the largest gas fields in the nation. The Texas part of the field alone has produced almost 800 Tcf of gas since inception from some 800 wells. The biggest producers are Anadarko, Chesapeake, Devon, EOG and Exco.  Anadarko recently said that it has opened a liquids-rich play in the Carthage area with an estimated 300 million Boe, and more than 350 drill sites in the Haynesville and 100 in the Cotton Valley.

Haynesville map.jpg 


News reports recently announced that North Dakota has now surpassed Alaska as the second-biggest oil-producing state in the US, behind Texas. Five years ago, when the Bakken play in North Dakota was just beginning, North Dakota's average daily production was 118,000 bbl/day. Today it is 575,500 bbl/day. Texas produces about 1,287,000 bbl/day. North Dakota's top oil and gas regulator said that the state's production could double to more than one million bbl/day by 2015. There are now 214 rigs drilling in North Dakota, a record. Experts at a recenty symposium on the Eagle Ford Shale said it could reach on million bbls/day by 2016.

An independent review of the US EPA's draft report on water pollution near Pavillion, Wyoming has concluded that there is no scientific basis to conclude that hydraulic fracturing caused underground water contamination. The report, by SS Papadopulos & Associates, concluded that the EPA used improper analytical methods and field procedures and misinterpreted the data.

Meanwhile, EPA is requesting more money to finish its Congressionally mandated study on hydraulic fracturing.

The Texas Tribune reported recently that Texas oil producers are increasingly flaring gas because of lack of pipeline infrastructure in areas such as the Eagle Ford Shale and Permian Basin. Flaring permits have risen from 107 in 2008 to 651 in 2011.  The RRC has called for increased regulation of flaring. 

Increased drilling activity has also caused a headache for road maintenance across the country. States and counties are trying to figure out how to get the industry to help maintain and repair roads damaged by increased oil field traffic.

The Texas Railroad Commission has limited public access to the portion of its website that allows for searches of well information between 8 am and 11 am. The RRC says that use of its site has grown beyond its capacity and is limiting its staff's ability to process permits and completion reports. It says it is working on the problem and hopes to have a solution in about 12 weeks. It is estimated that the RRC is about 12,000 behind in its processing of well completions.

Kinder Morgan has completed its $21 billion acquisition of El Paso Corp., making it the largest natural gas pipeline operator in the US.

The International Energy Agency has issued a report concluding that the shale gas boom in the US, and the substitution of gas for coal, have reduced CO2 emissions by almost 5 million tons in five years. During that time, coal use declined 19% and gas use jumped 38%.

David Blackmon, director of govenmental affairs for El Paso Corp., recently told an energy conference audience what I have been saying all along -- that water pollution for oil and gas operations typically stems from wastewater and other spills on the surface rather than from hydraulic fracturing.

New developments in Range's battle with the Lispkys over alleged contamination of their water well have taken an interesting turn. District Judge Trey Loftin required Sharon Wilson, the Lispkys' consultant, to turn over emails she exchanged with the EPA and Lispky, and refused to dismiss Range's $3 million counterclaim. The Lispkys and Wilson alleged that the counterclaim violated Texas' SLAPP Act, the law prohibiting lawsuits intended to limit public participation in legitimate issues of public concern. The Lipskys have appealed that ruling. Judge Loftin has been criticized recently because he referred to the Range case in campaign materials that criticized the EPA's involvement in the Lispky matter. Critics contend that the campaign materials violate the state's code of judicial ethics.

Meanwhile, three families in Washington County, Pennsylvania sued Range alleging that leaking impoundments caused contaminated water to get onto their properties and make them sick. And the Pennsylvania DEP is investigating complaints of methane contamination in three private water wells and two streams in Bradford County, near a Chesapeake well site.

The Alamo Area Council of Governments reported to the Texas Raiload Commission's Eagle Ford Shale Task Force that oil and gas activity around San Antonio could push that city ogver the federal government's limits for ozone. San Antonio is currently the nation's largest city in compliance with the EPA's ozone standards.

One of the newest shale plays is the Utica Shale in Ohio. State legislatures, concerned about use of fresh water for fracing, are considering legislaton to limit water withdrawals and sources. One producer plans to try out GasFrac Energy's process for using liquefied petroleum gas in place of water for fracing. Little is known about the success of the GasFrac technology. Last year Chevron tried it on several wells in the Pisceance Basin and said that the technology "significantly increases production while minimizing water usage." BlackBrush recently said it signed a two-year contract with GasFrac to use its technology in the Eagle Ford.





May 23, 2012

MIT Study of Relationship Between Oil and Gas Prices

One of the remarkable aspects of the oil and gas markets over the last few years has been the rapid decline of natural gas prices despite the continuing high price of crude oil. Historically, analysists have assumed that there is a relationship between the price of the two commodities. After all, both are basically sources of stored energy, which can be measured in British Thermal Units, or Btus.  One barrel of crude oil has about the same energy as six million Btu of natural gas, so it has been assumed that one barrel of crude should have about the same value as six MMBtu of gas.  When companies report their reserves, they often use the term BOE, or "barrels of oil equivalent," meaning that they convert their gas reserves to oil barrels using this 6-to-1 ratio.  But at today's prices, the ratio on a Btu basis is closer to 12-to-1; it has been as low as 2.5-to-1 and as high as 19-to-1. So why is there now such a de-coupling of oil and gas prices? 

I recently ran across a paper published by two MIT professors titled "The Weak Tie Between Natural Gas and Oil Prices," by David J. Ramberg and John E. Parsons. You can find it here. The authors ask the question: Is there a relationship between the price of oil and the price of natural gas? If there was formerly such a relationship, has it been broken? They use historical data and analysis to answer these questions. Their conclusion:

despite large temporary deviations, natural gas prices continue to exhibit evidence of a cointegrating relationship with crude oil prices, and gas prices consistently return to a long-run relationship. However, this relationship has apparently shifted at least once over a 12-year period to a new equilibrium. There is no statistical evidence to support the claim that a relationship between the two price series has been completely severed.

However, the authors also point out that "there is an enormous amount of unexplained volatility in natural gas prices. The raw price serices for natural gas ... is approximately twice as volatile as the raw oil price series. And the relationship between oil and gas prices "does not appear to be stable through time. ... In the 1989 to 2005 period, the price of natural gas seemed to be shifting up compared to the price of oil, but in recent years this reversed."

The authors analyze the effect on natural gas prices of seasonality -- heat and cold waves and supply disruptions from hurricanes -- and the relationship between gas prices and the amount of natural gas in storage. After taking these effects into account, there is still a large unexplained volatility in natural gas prices.

Nevertheless, the authors say that their analysis shows that "when the natural gas price has been pulled away from the fundamental tie, it will predictably drift back towards it." Producers with large natural gas reserves are hoping the authors are correct.


May 8, 2012

Groundwater Districts' Regulation of Water Supply Wells - What Landowners Should Know

A lot has been written lately about the amount of groundwater being used for hydraulic fracturing in shale plays - particularly in the Eagle Ford Shale, and more recently in the Permian Basin. This raises the question whether -- and to what extent -- exploration companies' water wells used in fracing are subject to regulation by groundwater districts in Texas. It turns out that this is not an easy question to answer.

I am indebted to Mary K. Sahs (Carls, McDonald & Dalrymple, LLP), an Austin attorney who specializes in water law and who has written an excellent paper, Frac Water - Regulation of Quantity and Quality, and Reporting by Texas Groundater Conservation Districts, for the State Bar conference "The Changing Face of Water Rights" held on February 23 of this year in San Antonio, for a thorough explanation of this subject. I have borrowed liberally from her work.

Groundwater conservation districts are governed by the Texas Water Code, Chapter 36, and by any special provision in the law that authorized creation of each district. Section 36.117 (b) (2) of the Water Code provides that the following are exempt from regulation:  "drilling a water well used solely to supply water for a rig that is actively engaged in drilling or exploration operations for an oil or gas well ... located on the same lease or field associated with the drilling rig." This has been referred to as the exemption for "rig supply wells." Rig supply wells are still subject to any water well spacing rules imposed by the water district, and the district may require the well to be registered and may require it to be properly equipped and completed.

The Texas Railroad Commission interprets the rig supply well exemption in the Water Code to apply to hydraulic fracturing operations. ("The RRC interprets the phrase "a rig that is actively engaged in drilling or exploration operations for an oil or gas well permitted by the commission" to mean a drilling rig or a workover rig and interprets "exploration operations" to include well completion and workover, including hydraulic fracturing operations.") But Mary Sahs quotes Ben Sebree, representing the Texas Oil and Gas Association, testifying at a House Natural Resources Committee hearing last year, as saying, with regard to water wells used in hydraulic fracturing: " ... our water wells are not exempt from the rules of the districts. We don't have to get a permit for them, and I know that sounds kind of odd, but they do have to comply with all the rules of the district, whether it's spacing, production, whatever, our ... water wells have to comply with those rules." Clearly, there is some ambiguity in the statutory language.

So how do groundwater districts regulate rig supply wells in practice? Mary Sahs went to considerable effort to review the rules of, and interview, several groundwater districts in areas where shale drilling is taking place. Their rules and practices vary considerably. Some districts impose spacing requirements. Some districts require registration and reporting of production. Only one district considered such wells to be fully subject to its regulations.

Districts also have jurisdiction to prevent "waste" of groundwater. Waste can occur where groundwater, stored in earthen pits, leaks into the soil or evaporates; or when the groundwater is transported through aluminum pipes with joints that leak. According to Mary, few districts are addressing this issue.

From Mary's survey:

The Evergreen Underground Water Conservation District (Frio, Wilson, Atascosa and Karnes Counties, in the heart of the Eagle Ford) believes it does not have authority to regulate spacing. Wells must be registered, but no drilling permit is required. If the well is turned over to the surface owner, the well must then comply with spacing rules to get a permit.

The Gonzales County Underground Water Conservation District (parts of Gonzales and Caldwell Counties) only has authority to regulate water wells producing from the Wilcox, Carrizo, Queen City and Sparta aquifers. Rig supply wells are generally not completed in those aquifers because of their depth. The District has asked operators to report production from their wells. The District encourages operators to use water that is too saline for human consumption, to avoid competition with human uses.

The Upper Trinity Groundwater Conservation District (Montague, Wise, Parker and Hood Counties, in the Barnett Shale) has special legislation allowing it to assess and collect production fees on all groundwater used for oil and gas drilling. Rig supply wells must be registered and production metered and reported, both the volume produced and the volume used at the well head. This allows the district to assess how much water is being lost between the water well and the point of use.

Panola Counter Groundwater Conservation District (Panola County) considers rig supply wells exempt, but asks that they be registered and their production reported. If a landowner sells water for fracing, his well becomes a non-exempt commerical well and must comply with all the district's rules. Mary reports, from her interview with the General Manager of the district, that "frac water wells create an approximate 1700 foot cone of influence as long as they are filling the frac ponds. Once that use ceases, the water levels recover within 2 months."

Pineywoods Groundwater Conservation District (Angelina and Nacogdoches Counties) asserts the right to regulate all aspects of rig supply wells. They must be registered and report production monthly, and are considered non-exempt industrial or commerical production wells that must obtain drilling and operating permits and pay a production fee.

Landowners should make themselves familiar with rules of their GCD's. They should call the district and ask what rules apply to rig supply wells. If the landowner wants to take over a rig supply well it should know what requirements the district will impose, and it should if possible require in its lease that the operator comply with all district rules so that the landowner will be able to use the well. If a landowner wants to use its own well to supply water for hydraulic fracturing it should know the district rules and should, if required, register the well and comply with all reporting requirements.

Groundwater Districts are so far taking a cautious approach to regulation of rig supply wells. In general, they are busy enough trying to establish their desired future conditions and their permitting and production requirements for non-exempt wells. But as they mature, and as drilling in shale plays continues and begins to affect the water levels in aquifers, districts may assert their authority to regulate how the oil and gas industry uses groundwater in their jurisdiction.