September 5, 2011

Texas Railroad Commission Staff Proposes Draft Rule for Disclosure of Frac Chemicals

The staff of the Texas Railroad Commission has proposed to the Commision rules to implement House Bill 3328, passed by the last Legislature, requiring the disclosure of chemicals used in frac fluids. The rules will be subject to a period for public comment, and a hearing will be held on the rules, now proposed for Wednesday, October 5.

Earlier this year, the 82nd Texas Legislature passed HB 3328, requiring the RRC to adopt rules requiring disclosure of chemicals in frac fluids. The draft rule would require operators to disclose chemical content of frac fluids on FracFocus, a website developed by the Ground Water Protection Council and the Interestate Oil and Gas Compact Commission. (The website contains a lot of good information about hydraulic fracturing and its benefits and risks.)  FracFocus was launched on April 1, 2011. As of August 16, 2011, according to RRC staff, operators had registered 950 Texas wells on the website, including wells drilled by Anadarko, Chesapeake, Chevron, Conoco-Phillips, Devon, El Paso, Energen, EOG, Forest, Newfield, Occidental, Penn Virginia, Petrohawk, Pioneer, Plains, Range, Rosetta, Shell, Williams, and XTO. You can search for a well near you by using FracFocus's search feature. An example of the information disclosed can be found here:  4243935364-3212011-10792272-CHESAPEAKE[1].pdf The disclosure includes the percentage by mass of each chemical used in the frac fluid.

Under the proposed rule, an operator must also provide the same information with its completion report for the well, as part of the completion report. The completion report for all Texas wells can also be found on the RRC's website.

RRC's staff's discussion of the proposed rule estimates that 13,000 wells undergo frac treatment in Texas each year -- 85% of all wells drilled in Texas.

A supplier, service company or operator is entitled under the draft rule to claim trade-secret protection for a chemical additive. If such protection is claimed, the particular chemical and its concentration need not be provided, but the operator must disclose the chemical family of the ingrediant and the properties and effects of the chemical. The claim of trade-secret protection may be challenged by the landowner on whose property the well is drilled or any adjacent landowner, or by any state department or agency with jurisdiction over issues related to health and safety. Any such challenge must be filed within 2 years after the claim of trade-secret protection was filed. If a challenge is filed (with the RRC), the RRC refers the matter to the Texas Attorney General who makes a determination, based on evidence submitted by the person claiming trade-secret protection, of whether the identity of the chemical is in fact a trade secret under Texas law. The AG's determination may be appealed to a state district court. If a trade-secret exemption is claimed, a health professional or emergency responder may still obtain the information but must keep it confidential except to the extent it must be disclosed to protect health and safety.

An operator who fails to disclose as required by the rule may have its operating permit revoked.


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August 27, 2011

Three Important Texas Supreme Court Opinions Issued

The Texas Supreme Court issued three opinions last week of interest to Texas land and mineral owners: one dealing with the duties of holders of executive rights, one limiting the condemnation powers of pipelines, and one addressing whether injection well operators can be held liable for trespass if the injected substances migrate onto adjacent lands.

Leslie v. Veteran's Land Board - The duty of the executive rights holder

The Supreme Court again considered what duty the holder of the right to lease ("executive right") minerals owned by another has to the non-executive mineral interest owner. The court significantly weakened its prior decision in In re: Bass, and increased the duties of the holder of the executive right. The right to lease is often separated from the mineral interest. For example, if I sell a tract to a developer, but want to keep part of the mineral interest, the developer may object, worried that I, as a mineral interest owner, might lease my interest and allow a company to drill wells on the property he intends to develop for a residential subdivision. A common solution to this problem is for me to retain a part of the mineral interest (or a part of the royalty interest) but convey to the developer the exclusive right to lease the minerals. The developer is then protected, because no mineral development can take place without his consent. Whenever the right to lease is separated from the mineral or royalty interest, the holder of the leasing right is called the holder of the "executive right," and the other mineral or royalty owner without any leasing right is called the owner of the "non-executive" interest.

In the Leslie case, a developer named Bluegreen purchased 4,100 acres of land in southwest Tarrant County, outside of Fort Worth, to develop a large residential subdivision, Mountain Lakes, of over 1700 lots. Bluegreen acquired some of the minerals in the 4,100 acres and all of the executive rights to the minerals. Bluegreen then imposed restrictive covenants on its development to govern what kinds of homes could be built, what uses of the property could be made, etc. One of those restrictive covenants prohibited "commercial oil drilling, oil development operations, oil refining, quarrying or mining operation." Later, development of the Barnett Shale formation in Tarrant County occurred, and companies sought to lease the 4,100 acres to drill Barnett wells, but found that the restrictive covenant prohibited development. Evidence in the case showed that "Mountain Lakes is sitting on $610 million worth of minerals that, in large part, cannot be reached from outside the subdivision." So the non-executive mineral owners sued, seeking to have the restrictive covenants declared void. Their theory was that, by imposing the restrictive covenant prohibiting mineral development, Bluegreen had breached its duty as the holder of the executive rights. The trial court declared the restrictive covenant void, but the Eastland Court of Appeals upheld it. The Supreme Court agreed with the trial court, holding that "Bluegreen breached its duty to [the non-executive mineral owners] by filing the restrictive covenants. The remedy, we think, should be the ... cancellation of the restrictive covenants."

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August 19, 2011

Supreme Court Overrules Motions for Rehearing in BP v. Marshall

The Texas Supreme Court on August 19 overruled the royalty owners' motions for rehearing of their decision in BP v. Marshall. For my prior discussion of this case, go here. To see the Court's original opinion, go here.
July 28, 2011

EPA Issues Proposed Rules to Reduce Emissions from Well Drilling and Production

The U.S. Environmental Protection Agency has issued proposed rules to cut down on emissions of volatile organic compounds (VOCs) and methane from well drilling and production sites. The rules were issued pursuant to a settlement of a suit by environmental groups alleging that EPA was not enforcing air emissions laws against the E&P industry.

Among other things, the proposed rules would require installation of vapor recovery units on storage tanks at wellsites and other E&P facilities to prevent emission of VOCs. The EPA has calculated that the rules would cost the industry $754 million, but that the gas and condensate captured by the vapor recovery units would be sold for $783 million. The rules would apply to oil and gas wells, natural gas processing plants, compressor stations and pipelines.  Similar emissions control requirements have been recommended by the New York Department of Environmental Protection in its study of the impact of Marcellus Shale drilling in New York.

For more information about the proposal on EPA's website, go here.

July 27, 2011

New York Issues Revised Study of Fracing in the Marcellus

The New York State Department of Environmental Conservation (DEC) has been engaged in a comprehensive review of the potential environmental impacts of development of the Marcellus Shale in New York since 2008. The DEC is the regulatory agency in New York responsible for issuing drilling permits and regulating oil and gas exploration and production. The DEC had previously studied the environmental impacts of hydraulic fracturing in 1992, at which time it issued a Generic Environmental Impact Statement recommending certain safeguards in that practice. In 2009, the DEC issued for public comment a "Draft Supplemental Generic Impact Statement" analyzing the impact of hydraulic fracturing of horizontal Marcellus wells. As a result of comments received, the DEC has issued a revision of that draft report, which will be finalized later this year and again issued for public comment. During this study, New York has imposed a moratorium on issuance of any permits for horizontal wells in the Marcellus Shale.

The Marcellus extends over a huge area from West Virginia through Pennsylvania and covers a substantial part of New York State. Potential Marcellus reserves in New York are huge, and exploration companies have leased huge areas in New York for exploration. New York landowners have watched impatiently as wells have been drilled in Pennsylvania, while environmental activists in New York have opposed any drilling in that state.

The most recent version of the New York DEC's study and recommendations is several hundred pages and provides a thorough study of the potential impacts of drilling Marcellus wells on the environment, including impacts on groundwater, surface water, air quality and wildlife. The report proposes many revisions to DEC's existing regulations concerning the construction of well pads, the drilling and casing of horizontal wells, the handling and disposal of frac fluids and chemicals, the disposal of returned frac water and drill cuttings, the use of best available technology to reduce emissions from equipment during drilling and completion operations, and the protection of groundwater and surface water. The report discusses the current state of technologies for use of fluids other than fresh water for hydraulic fracturing and for the recycling of frac water. The authors also discuss recent incidents in Pennsylvania of groundwater and surface water contamination from drillsites and their cause. There is a comprehensive summary of the geology of shale formations and water resources in New York.

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July 13, 2011

Recent News: EPA Fracing Study, Report on Eagle Ford, Frac Water Recycling, Range v. EPA,

WSJ Weighs In On Fracing Controversy

The Wall Street Journal gives its opinion on the dangers of hydraulic fracturing, siding with the industry: "The shale gas and oil boom is the result of U.S. business innovation and risk-taking. If we let the fear of undocumented pollution kill this boom, we will deserve our fate as a second-class industrial power."

Powell Shale Digest Issues Report on Eagle Ford

The Digest reported on wells drilled so far in Eagle Ford fields in Texas. Enough information is now publicly available to begin to see where the play is headed, and where it's most successful.

Powell Eagle Ford Map.jpg

The counties with highest oil and gas production are Dimmit, Karnes, Webb and La Salle. The counties with the best results per well are Karnes and DeWitt:

Powell Oil Prod.jpg

Powell Gas Prod.jpg

Baker Hughes' oil rig count reached 1,000 for the first time since it began tracking oil and gas rigs separately in 1987. 843 oil and gas rigs are currently located in Texas. 

 

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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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May 14, 2011

Texas Supreme Court Again Reverses Jury Verdict Favoring Royalty Owners

The Texas Supreme Court has once again overturned a jury verdict in favor of royalty owners, finding "no evidence" to support the jury's finding. The court's opinion in the case, BP America Production Company, Atlantic Richfield Company and Vastar Resources, Inc. v. Stanley G. Marshall, Jr., et al., No. 09-0399, was issued last week. The case evidences the Court's continued hostility to royalty owners' claims of lease termination.

The important facts are as follows:

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May 11, 2011

Duke University Researchers Find Correlation Between Marcellus Shale Drilling and Methane-Contaminated Drinking Water

Researchers at the Nicholas School of the Environment at Duke University have written an article published in the Proceedings of the National Academy of Sciences titled "Methane contamination of drinking water accompanying gas-well drilling and hydraulic fracturing," which finds "systematic evidence for methane contamination of drinking water associated with shale-gas extraction" in the Marcellus Shale in Pennsylvania and New York. The article has already elicited a strong response from the industry. To my knowledge, this is the first scientifically based study finding a correllation between the drilling of shale wells and the contamination of aquifers.

 

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April 30, 2011

DIVISION ORDERS: WHAT YOU NEED TO KNOW

Other than the oil and gas lease itself, the division order is undoubtedly the most common legal instrument mineral owners are asked to sign. Mineral owners should know the purpose of a division order, what rights and obligations it imposes on them, and the division order's relation to the oil and gas lease.

First, I should say that the law and practice regarding division orders varies from state to state. I practice in Texas, so what follows relates only to the use of division orders in Texas.

Historically, there has been much controversy and litigation in Texas about division orders and their effect. As a result, in 1991 the Legislature passed a statute governing the use of division orders. The statute was amended in 1995, 1997 and 1999. It is now Chapter 91, subchapter J of the Texas Natural Resources Code, commonly called the Division Order Statute. So the law applicable to division orders in Texas is the court-made law plus the division order statute.

The main purpose of a division order is to protect the payor of the proceeds of production from double liability. The company issuing the division order is requiring the royalty owner to (1) verify that the royalty owner's decimal interest set out on the division order is correct and (2) agree that the company can make payments based on that decimal interest until notified by the royalty owner that the ownership has been changed. By the division order, the royalty owner indemnifies the payor against liability to third parties who claim to own the interest being paid to the royalty owner.

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April 11, 2011

Hydraulic Fracturing Controversy Makes Discover Magazine

The April issue of Discover, published by Kalmbach Publishing Co., contains an article on the potential environmental effects of hydraulic fracturing in gas shales, "Fracking Nation," by Linda Marsa. Much of the article simply repeats allegations being made by environmental groups and landowners of alleged groundwater contamination by shale wells. But the article mentions four newer topics and recent allegations being made by opponents of shale gas development:

 

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