June 2012 Archives

June 27, 2012

Good Reading/Watching

Here are some interesting articles I have found:

On Texas' drought, from the PBS News Hour:



On Texas' drought, from Texas Tribune:



"The Arithmentic of Shale Gas," from Forbes' Christopher Helman:


In this article, Helman reviews a paper published by a group of Yale economis graduates seeking to quantify the economic benefit of the recent shale gas boom in the U.S. They estimate that the boom has saved consumers more than $100 billion a year in gas costs. They estimate the potential benefit of converting cars to natural gas: at a gas price of $5 per mcf, you would need $30 worth of gas to replace $100 worth of oil. Replacing 1 million barrels of oil per day of oil demand with natural gas would save $70 million a day, or nearly $26 billion in a year.


"How Deadly is Your Kilowatt?"


Another article from Forbes, this one by James Conca. Conca calculates a "mortality rate" attributable to production of various forms of energy. His conclusions:

Energy Source               Mortality Rate (deaths/trillionkWhr)

Coal - global average         170,000                            (50% global electricity)

Coal - China                     280,000                            (75% China's electricity)

Coal - U.S.                        15,000                             (44% U.S. electricity)

Oil                                     36,000                             (36% of energy, 8% of electricity)

Natural Gas                         4,000                             (20% global electricity)

Biofuel/Biomass                 24,000                             (21% global energy)

Solar (rooftop)                         440                             (< 1% global electricity)

Wind                                     150                              (~ 1% global electricity)

Hydro - global average         1,400                              (15% global electricity)

Nuclear - global average           90                         (17%  global electricity w/Chern&Fukush)

Coal is by far the deadliest, from carbon particulates that cause respiratory illnesses. Conca says that US deaths from coal are much less "strictly [as] a result of regulation and the Clean Air Act ... one of the most life-saving pieces of legislation ever adopted by any country in history." "Another way to describe this human health energy fee is that it costs about 2,000 lives per year to keep the lights on in Beijing but only about 200 lives to keep them on in New York." Deaths from wind energy? - mostly from workers falling off wind turbines during maintenance.


June 22, 2012

Goodbye to Aubrey McClendon?

The fall of Aubrey McClendon, CEO of Chesapeake Energy, has been meteoric. He was forced to step down as Chairman of its board, and yesterday he was replaced as board chair by Archie Dunham, the 73-year-old former CEO of Conoco. Aubrey's fall from grace started only a few months ago with articles in the business press about his deal with Chesapeake to own a small interest in every well Chesapeake drilled. Aubrey was borrowing heavily against his personal interests, to the tune of $1 billion, to keep his ship afloat. Then there were allegations about McClendon's personal trading in futures that "could have been" opposed to the company's interests, for which the he and the company are now under an SEC investigation. Chesapeake's shares started falling, and shareholders began complaining about him and his board. At the company's recent shareholder meeting four board members were forced out, and two who stood for election were soundly defeated. Carl Icahn smelled blood, bought 7.6% of the company, and installed one of his own as a board member. For now, McClendon remains CEO. Archie Dunham's job is to sell some $7.4 billion of Chesapeake's properties to get it out of its hole.

McClendon co-founded Chesapeake with Tom Ward in 1989, with $50,000 and 10 employees. He made the company into the nation's largest domestic gas producer by investing heavily in shale gas plays across the country. In my opinion, he is responsible for the huge resurgence in domestic exploration, and in the rapid increase in gas production -- and the precipitous decline in natural gas prices -- over the past few years. McClendon and Boone Pickens were the promoters of natural gas, touted as the fuel of the future and the solution to global warming. McClendon is hated by other independents for sweeping into new shale plays with his pocketbook open and offering $25,000 per acre for leases.  

I'm no financial expert. But it seems clear to me that Chesapeake's problems arise from the huge decline in oil and gas prices, and not from any sculduggery by McClendon. In all the press coverage, I have not read anything to indicate that McClendon actually did anything for his personal benefit and against the interests of his company. He may have had bad judgment in betting so big on natural gas, but that is his nature. He is a landman, a speculator, and a wildcatter.

It will be interesting to see if Chesapeake actually benefits from being handed over to a more traditional E&P executive, and can survive as a mature company.

June 21, 2012

Another Hydraulic Fracturing Study

The Pacific Institute has issued a study of issues related to hydraulic fracturing and water resources: Hydraulic Fracturing and Water Resources: Separating the Frack from the Fiction. The Pacific Institute is a non-profit research and policy organization based in Oakland, California. The study is largely a summary of interviews of environmental and industry experts and of research in the area; it provides a good summary of the present issues surrounding fracing and the literature on the subject.

The authors comment on the debate of whether hydraulic fracturing is the cause of any groundwater contamination by characterizing it as an issue of definition: those in the industry, they say, define the term narrowly as including only the actual process by which fluids are injected into the wellbore under pressure to fracture the formation. The authors elect to define the term more broadly, "to include impacts associated with well construction and completion, the hydraulic fracturing process itself, and well production and closure." It is true that people outside the industry have tended to use the term "fracing" to include anything that can go wrong in the process of drilling, completing and producing a well and cause contamination. It is a mistake, however, to use the term to include risks of contamination from well construction, production and closure; those risks occur with all wells, whether they are vertical or horizontal and whether they are completed in shale or conventional formations.

The authors discuss the following issues surrounding "fracing," as they broadly define it:

Water Withdrawals

The study has the following graphic showing the amount of water used in fracing:

Frac water requirements per well.jpg

The authors point out that use of water for fracing is a "consumptive" use, meaning that the water is not available for subsequent use but is generally disposed of by injection into disposal wells, so that it leaves the water cycle. They cite a report that, in Texas, companies have recently been paying between $9,500 and $17,000 per million gallons ($.40 to $.70 per barrel) for frac water. In addition to affecting the availability of water for other uses, withdrawal of such large quantities of water can adversely affect water quality, according to the study: "withdrawals of large volumes of water can adversely impact groundwater quality through a variety of means, such as mobilizing naturally occurring substances, promoting bacterial growth, causing land subsidence, and mobilizing lower quality water from surrounding areas."

Groundwater Contamination Associated with Well Drilling and Production

This is the problem of defective casing, which has been documented to cause groundwater contamination by methane. Such contamination can also take place through old abandoned wellbores when a well in close proximity is fraced. The authors cite the controversial study in Pennsylvania that found methane levels in drinking water wells located within 1 kilometer from a gas well were 17 times higher than in water wells outside of active gas production areas. And the authors discuss the controversial EPA study of wells in Pavilion, Wyoming and the contamination of groundwater by methane in Dimock, Pennsylvania as associated with poor casing practices.

Wastewater Management

The authors include contamination caused by poor wastewater management practices as a problem associated with fracing - poorly constructed disposal wells, attempts to use municipal treatment facilities to treat frac water, and the long hauls of flowback water to distant disposal wells.

Truck Traffic

Another "fracing" problem the authors associate with fracing: they estimate 3,950 truck trips per well for horizontal shale wells, including hauling of fresh water to the wells.

Surface Spills and Leaks

The authors list the following causes of land and groundwater contamination under this heading: accidents and equipment failure during onsite mixing of frac fluids; vandalism; illegal dumping and disposal of flowback water; and truck accidents.

Stormwater Management

This is the risk of contamination caused by runoff from wellsites.

The authors call for more study of the effects of well operations in these areas, "to clarify terms and definitions associated with hydraulic fracturing, to support more fruitful and informed dialog and to develop appropriate energy, water, and environmental policy."


June 11, 2012

Lease Ratifications

I have recently been asked to review requests for lease ratifications sent to my clients, and I thought that ratifications would be a good topic for this site.

Companies generally ask owners of royalty and non-executive mineral interests to ratify oil and gas leases covering the lands in which they own an interest. The companies ask for the ratification because they want the right to pool the royalty or non-executive mineral interest covered by the lease. In Texas, even though the holder of the executive right (the right to lease) has the right to negotiate and grant leases covering the interests of royalty and non-executive mineral owners, the holder of the leasing right does not have the right to grant the lessee the right to pool those interests (unless that right was expressly granted or reserved in the instrument creating the royalty or non-executive interest). In order for a pooled unit to be effective as to a royalty or non-executive mineral owner's interest, the owner must either agree to the pooled unit or grant the lessee the right to pool his/her interest.

A non-executive mineral owner is the owner of a mineral interest who has given up the right (by conveyance or reservation) to lease his/her interest. The non-executive mineral owner has the right to receive his/her share of any bonus and royalty paid pursuant to the lease granted by the holder of the leasing right.

Ratification of a lease by a royalty owner or non-executive mineral owner may or may not be in his/her best interest, depending on the circumstances. If you own a royalty or non-executive mineral interest and are asked to sign a lease ratification, you should first ask for a copy of the lease you are being asked to ratify. You should determine whether the lease covers only the acreage in which you own an interest or also covers additional acreage in which you own no interest. If the lease covers lands in which you own no interest, you should be sure that you understand the effect of the ratification. That will depend on the language in the lease. You should confer with an oil and gas attorney about the legal effect of the ratification.

You should also determine whether a well has already been drilled on the lease (or on a pooled unit in which the lease is included). Companies should obtain lease ratifications before wells are drilled, but they often do not. If a well has already been drilled and if it is located on the tract in which you have an interest, there is usually no benefit to you to ratify the lease, and the result might be that your interest is unnecessarily diluted by a pooled unit that you have not consented to. If the well is not located on your tract but is in a pooled unit in which your land is included, you will not share in production from the well unless you ratify either the lease or the pooled unit.

Finally, if you own a non-executive mineral interest and are entitled to a share of the bonus paid for the lease, you should be sure that you get your share of the bonus. The entire bonus may have been paid to the owner of the executive interest, in which case you have a claim against the executive interest owner to get your bonus share. Or the company asking for the ratification may have taken and recorded the lease but not paid you your bonus share. A company landman may tell you that you are not entitled to get your share of the bonus unless you ratify the lease. This is not correct. You are entitled to your share of the bonus whether or not you ratify the lease.

Lease ratifications are legally binding documents, and owners should be sure that they understand the legal effect of the instrument before signing.