October 2012 Archives

October 29, 2012

"Energy Independence"?

We're in the crazy election season once again, and once again all candidates have promised "energy independence." Newt Gingrich promised to lower gasoline prices. President Obama takes credit for low natural gas prices. Governor Romney says we can eliminate imports of crude oil. Presidential candidates have promised energy independence ever since the oil embargo in Jimmy Carter's administration. The candidates know that, in fact, government policies have little to do with energy prices, and there is little they can do to influence those prices. It might be good to look at a little history.

First, natural gas prices are still essentially a domestic phenomenon. Although transportation of liquefied natural gas is beginning, it is still very expensive in comparison to domestic prices. And natural gas prices are still essentially a matter of domestic supply and demand. Consider these graphs:

U.S. Gas Production Graph.jpg

NG Wellhead Price Graph.jpg


Prices for natural gas spiked in the last decade; production increased; and prices declined. Supply and demand.

Unlike natural gas, crude oil is a world market, governed by world supply and demand.

U.S. Crude Production Graph.jpg

U.C. Crude Imports.jpg

World Crude Price Graph.jpg


World oil prices climbed over the last decade to reach $100/bbl at the beginning of this decade, and have remained high; U.S. production of oil increased, and U.S. imports declined. Yet prices remain high, due to global demand.

Texas has prospered as a result, increasing its crude production for the first time in decades, largely as a result of unconventional plays, principally the Eagle Ford:

Texas Crude Production Graph.jpg 

Let's hope that some sanity will return to politics and energy policy after the crazy season.


October 16, 2012

Guar, XL Pipeline Protests, and Hart on the Eagleford

Three interesting stories:

Guar, a bean grown mostly in India, has become a hot commodity because of its use as an additive in frac fluid. See this CNBC Report. Indian farmers are getting rich, American farmers are looking into growing the bean, and Halliburton's income is down "due to increased costs, particularly for guar gum."

Protests are popping up all along the XL pipeline being built by Transcanada to transport heavy oil from Canada. Eight demonstrators were arrested in Wood County for chaining themselves to heavy equipment. Seven platforms have been built in trees and occupied by protestors within the pipeline right-of-way. Protestors appeared at the Texas Capitol. Actress Daryl Hannah has joined demonstrations along the pipeline route. See Austin Statesman article here.

Speakers at Hart Energy's third conference on Developing Unconventional Gas, at the convention center in San Antonio, called the Eagle Ford the top unconventional play in the world. See article here.

October 10, 2012

More Studies of Barnett Shale Activities' Impact on Air Quality

The debate about effects of Barnett Shale drilling and production on air quality in the Dallas-Fort Worth area continues. The debate started when Al Armendariz, then a professor at Southern Methodist University, published a study in 2009 concluding that increased drilling activity in the DFW area would greatly increase polllution and ozone levels. Armendariz postulated that in the nine counties included in the D-FW metroplex area, gas drilling produced about 112 tons per day of pollution, compared with 120 tons per day from vehicle traffic. His study was sponsored by the Environmental Defense Fund, and was heavily criticized by industry. Armendariz was later appointed head of the Dallas office of the EPA, and resigned earlier this year amid Congressional criticism of remarks he made about EPA enforcement policies.

As a result of Armendariz's study, the Texas Commission on Environmental Quality installed automatic air monitors at locations within the Barnett Shale area. Eight automatic gas chromatographs now sample air twenty times each day for 46 volatile organic compounds. The monitors cost $250,000 each and cost $100,000/year to operate. Readings from the sample analyses are posted by the TCEQ and can be found here.  According to an analysis by Powell Shale Digest, none of the 236,120 air samples taken by these devices have shown amounts of VOCs exceeding limits set by the Environmental Protection Agency.

There are also sixteen samplers in the DFW area that measure ozone. Powell's analysis of that data shows that ozone levels in the Barnett Shale have been dropping even as drilling activity in the area increased:

ozone graph.jpg


Powell Shale Digest concludes that

This scientific data from millions of tests run by the TCEQ in the Barnett Shale plus the shale gas production plots against the ozone levels show no influence caused by shale gas development and production on air quality. The Barnett Shale area of north Texas has been the most thoroughly tested air quality of any industry. This scientific data plus thousands of other tests run by the TCEQ laboratories in Texas totally contradict the fear of polluted air quality caused by shale development in the United States and throughout the world.

Notwithstanding the TCEQ's data, the debate continues:

A study published in the August 2012 issue of the Journal of the Air & Waste Management Association, Vol. 62, Issue 8, "The Potential Near-Source Ozone Impacts of Upstream Oil and Gas Industry Emissions," by Eduardo Olaguer of the Houston Advanced Research Center, concludes that, based on Olaguer's model of air dispersion, "under average midday conditions in June, regular emissions mostly associated with compressor engines may increase ambient ozone in the Barnett Shale by more than 3 ppb beginning at about 2 KM downwind of the facility, assuming there are no other major sources of ozone precursors."

Olaguer's study was immediately criticized by Energy in Depth, an industry research, education and public outrach organization, as a part of "the anti-shale crowd's agenda" containing multiple errors and oversights. Dr. Olaguer's response to Energy in Depth's criticism can be found here. He says that the TCEQ's monitoring network "remains to sparse to reliably draw conclusions about air emissions from individual oil and gas sites."

Dr.Ed Ireland of the Barnett Shale Energy Eduction Council also criticized Olaguer's paper as "grounded on some erroneous assumptions, a failure to consider existing air control regulations and some misinterpretations of other study results." Dr. Olaguer also responded to Dr. Ireland's critique: Dr. Olaguer's paper was peer-reviewed in three publications; and "the acqual effectiveness of [fedeal and state regulations on emissions] has yet to be studied in a satisfactory manner."

And so it goes.

  • October 2, 2012

    Reuters Pursues Chesapeake Again

    Reuters published a new story on Chesapeake recently, continuing its series critical of the company and its CEO Aubrey McClendon. In this article Reuters reports on its research of Rule 37 cases filed by Chesapeake. Incredibly, Reuters researchers identified all Chesapeake Rule 37 requests back to January 2005 - all 1,628 of them, more than twice the number filed by the next most-frequent filer, XTO (now owned by Exxon). Reuters also got hold of "hundreds of internal Chesapeake emails and thousands of pages of documents" showing how Chesapeake deals with landmen and landowners in lease plays, and the article cites some of those documents relating in particular to Chesapeake's lease acquisitions in Michigan.

    A "Rule 37" exception is a permit to drill a well that would otherwise violate the applicable spacing rules for the well because it is closer than those rules allow to an adjacent tract. In the last few years Chesapeake has made extensive use of Rule 37 exceptions, particularly in the urban portions of the Barnett Shale play in Tarrant County, where most lot owners own the minerals under their homes. Some lot owners refuse to lease on any terms. These unleased owners create "holes" in the pooled units Chesapeake puts together for drilling horizontal shale wells, and sometimes there are so many unleased tracts in the units that it is impossible to drill a horizontal well without coming too close to the unleased tracts. So, Chesapeake asks the Railroad Commission to let it put its well closer to those unleased tracts than Barnett Shale field rules would otherwise allow. Chesapeake is required to give the unleased homeowner notice of its application for the Rule 37 exception, but most homeowners don't have the resources to contest the application, and if no objections are filed the Commission typically grants the exception. As a result, the Chesapeake well, when completed, is likely to drain hydrocarbons from under the unleased tract, and the owner of the unleased tract receives no compensation. Reuters characterizes Chesapeake's tactic as "exploit[ing] little-known laws to force owners to hand over drilling rights and sometimes forfeit profits."

    In April of this year, Reuters reported on Aubrey McClendon's loans of some $1.5 billion to finance his share of drilling costs on his 1% interest in Chesapeake wells, alleging a conflict of interest. In June, Reuters issued a story questioning whether Chesapeake and Encana had colluded to avoid competition in their rush to acquire oil and gas leases in Michigan, resulting in a Department of Justice investigation of possible anti-trust violations. At least partly as a result of Reuters' stories, McClendon resigned as chairman of the board, and a new set of directors was elected.

    Chesapeake was also in the news last month when it settled a long-running claim brought by Dallas/Fort Worth International Airport for underpayment of royalties due on Chesapeake wells drilled under the airport. Chesapeake agreed to pay $5 million in back royalties and the DFW lease was amended to require royalties to be based on an index price for gas.

    Reuters' story relates Chesapeake's tactics on leasing in Michigan in some detail. It quotes emails from an independent landman in Michigan hired by Chesapeake to acquire leases, who was subsequently told by Chesapeake to "put on hold" hundreds of leases after a Chesapeake test well had disappointing results. The leases had already been approved, signed, and submitted to Chesapeake. The landman was forced to tell the landowners that Chesapeake had changed its mind and would not pay for the leases, resulting in 150 breach-of-contract lawsuits against the landman's company. Earlier this year, two state court judges in Michigan held that Chesapeake had no legal obligation to pay for the leases and could reject them for any reason. (More recently, an appeals court upheld a $20 million judgment against Chesapeake in Louisiana for attempting to back out of a deal to buy oil and gas leases from another company. See my previous post on that case here.)

    While Chesapeake's rejection of leases may not be illegal, it certainly has given the industry a black eye and made it more difficult for other companies to do business with landowners. The landman who got the brunt of landowners' anger in Michigan clearly is not happy. I am personally familiar with Chesapeake's practice of "cold-drafting," a term used for the practice of sending a lease to a landowner with a draft for the bonus, in effect making an offer to lease, but with no present intent to honor the lease; evaluating whether to pay for the lease after the draft has been deposited and the lease signed and returned to the landman; and then picking and choosing which leases the company wants to take and which they want to reject. It allows the company to "lock up" the acreage by committing the landowner to the lease for the (usually 90) days that the draft is outstanding. I'm aware of one case in which Chesapeake even recorded the lease and then attempted to reject it. Landmen should, in my view, refuse to participate in such practices, and they should certainly be considered unethical.