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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March 28, 2011

News Around the Oil Patch

Items of interest recently in the news:

On March 25, the Texas Railroad Commission adopted its examiners' recommended decision finding that Range Resources was not responsible for water-well contamination in Parker County, Texas.  (For my previous posts on this controversy, go here and here.)  The U.S. Environmental Protection Agency, which had previously entered a cease-and-desist order against Range based on its investigation of the water well contamination, issued a statement standing by its findings:  "The decision by the Texas Railroad Commission is not supported by EPA's independent, scientific investigation, which concluded that Range Rsources Corporation and Range Production Company have contributed to the contamination of homeowners' drinking water wells."  EPA has posted the full record of its investigation of Range on its website.  EPA has filed a federal suit against Range to enforce its order. "EPA stands by the order issued to Range Resources and seeks to secure Range's full compliance," said EPA's statement.  Range has filed a motion in that suit to dismiss the case, based on the Railroad Commission's findings. Railroad Commissioner Michael Williams said that "I see this as sort of a cavalier attempt by the federal government to reach its arms into our state's jurisdictions." Commissioner Elizabeth Jones said after the RRC hearing that Range's operations "have not contaminated and will not contaminate" the water wells in question. Steven Lipsky, one of the water well owners who believes that Range is responsible for the contamination, said: "It's a corrupt system. It's kind of sad."

Chesapeake Energy has entered into two more agreements to shed part of its acreage positions, one in Texas and one in Arkansas.  Chesapeake agreed to sell all of its Fayetteville Shale leases in Arkansas to mining giant BHP Billiton for $4.75 billion cash. Chesapeake entered into an agreement with Clayton Williams Energy to transfer 75% of its 75,000 acres of leases in the Wolfbone play in Reeves County to Williams, in exchange for Williams' agreement to drill at least 20 wells in the first year, with an option to drill 20 more earning wells every year over the next four years.

Investment firm Harrington Investments, Inc., a firm specializing in socially responsible investing, announced that it is divesting its entire holding in Chesapeake Energy because of (1) 109 citations against Chesapeake by the Pennsylvanie Environmenta Protection Department for "environmental health and safety" violations, and (2) The poor record of Chesapeake in executive compensation.  In 2008, Chesapeake CEO Aubrey McClendon was paid a $77 million bonus in a year when the stock price fell 60 percent. Harrington also noted that "McClendon funneled $450,000 to [Pennsylvania] gubernatorial candidate Tom Corbett via the State Republican Leadership Committee. Since Corbett's victory, Chesapeake has obtained 839 Marcellus Shale drilling permits in Pennsylvania, more than any other company, and has drilled at 126 sites, making it the second-biggest operator in the region."

A report issued by the Bipartisan Policy Center and the American Clean Skies Foundation has recommended that electric utilities enter into more long-term contracts for the purchase of natural gas.  Prior to natural gas shortages in the 1980's, utilities traditionally entered into long-term gas purchase contracts with producers with fixed prices, or prices that were adjusted periodically. Because of gas price volatility, state regulators of electric utilities discouraged the utilities from entering into such long-term contracts and encouraged purchases on month-to-month contracts based on market or spot prices. Today, most gas is sold on mont-to-month contracts. The report, from a task force including executives from Dow Chemical, The Willliams Companies, Spectra Energy, the American Gas Association, the Natural Resources Defense Council, Southern Company, ConocoPhillips, and Pacific Gas & Electric Company, concludes that because of a near 50% increase in gas reserves and and an increase of nearly 700 billion cubic feet of new gas storage capacity in the past decade, utilities are shifting their emphasis to gas-fired generation instead of building new coal-fired generation or retrofitting coal plants to cut emissions.  The reports says that utilities should include long-term gas contracts in their portfolio of energy supplies, and it encourages state utility regulators to emplement policies that encourage such long-term contracts. "Realizing and maximizing these benefits [of greater gas supply], however, will require that investors have confidence in the mid- to long-term stability of natural gas prices," says the report.  The complete report can be found here.

March 17, 2011

Texas Supreme Court Rules Against Citizens Complaining of Injection Well

The Texas Supreme Court has reversed a decision of the Austin Court of Appeals holding that the Texas Railroad Commission must consider traffic issues in deciding whether to issue a permit for an injection well to Pioneer Exploration, Ltd. in Wise County. In its decision, the Court held that, in considering whether issuance of the permit was "in the public interest," the RRC need not consider the adverse impact on roads and traffic caused by truck traffic to and from the injection well.

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March 10, 2011

More About Hydraulic Fracturing in the News

The EPA has issued its draft plan to study the impacts of hydraulic fracturing on drinking water in the U.S. Two state regulatory authorities have absolved frac'ed wells from responsibility for contaminating drinking water in Colorado and Texas. Maryland's top einvornmental regulator urged lawmakers to impose a two-year moratorium on frac'ing, as Maryland's legislature considers additional laws to regulate the practice. Meanwhile, the boom in shale gas drilling continues.

 

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February 22, 2011

Class Action to Force Companies to Reimburse Royalty Owners for Severance Tax Refunds - Coll v. Abaco

Recently some of my clients have received notices of class action settlements in Coll v. Abaco Operating, LLC, et al., in the U.S. District Court for the Eastern District of Texas, Marshall Division, C.A. No. 2:08-CV-345 TJW. The case reveals a little-known aspect of royalty payments: many companies never reimburse their royalty owners for refunds of severance taxes.

Most royalty owners know little about severance taxes except that they are a deduction that regularly appears on their royalty check stubs. Texas imposes a tax on the value of all oil and gas produced in the state: 7.5% for gas and 4.6% for oil. Most producing states impose similar severance taxes. Pennsylvania has been debating whether to pass a severance tax in light of its budget problems and recent development of the Marcellus Shale in that state. Texas' severance taxes are paid into its "rainy day fund" that has been much in the news of late.

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February 17, 2011

Range Resources RRC Closing Statement In Parker County Water Well Contamination Investigation

Here is the closing statement of Range Resources filed with the Texas Railroad Commission after its hearing on complaints that Range's Barnett Shale wells in Parker County have contaminated groundwater.  It provides a good summary of the events to date and the evidence produced at the hearing.  Range Production Company Closing Statement.pdf

Here is a link to a summary of the Range dispute prepared by Gene Powell, Editor of the Powell Barnett Shale Newsletter.

February 8, 2011

Hydraulic Fracturing Makes the Oscars

Josh Fox's movie Gasland has been nominated for an academy award for best documentary. Gasland, widely criticized by the oil and gas industry, alleges that hydraulic fracturing is the cause of contamination of underground water resources across the country. (See my previous post about controversy surrounding the movie here.) The nomination, and the Fox's movie about the alleged dangers of frac'ing, have made him into a celebrity.

In response to the Oscar nomination, Energy in Depth, a website sponsored by oil and gas associations including the Independent Petroleum Association, Texas Independent Producers and Royalty Owners' Association, the Independent Oil & Gas Association, and Colorado OIl and Gas Association, has published a letter (Energy In Depth letter.pdf) addressed to the Academy of Motion Picture Arts and Sciences. In the letter, Energy in Depth calls the film an "expression of stylized fiction" not meeting the Academy's criteria for a documentary. The letter says that the movie misstates the law and the rules, mischaracterizes the frac'ing process, and "flat-out makes stuff up."

Josh Fox does not take this lying down. He has published a detailed rebuttal of Energy in Depth's letter.  Josh has own his own website, www.gaslandthemovie.com, and his own facebook page about the movie and the frac'ing debate, and he was even awarded the Yoko Ono "Grant for Peace." Clearly, he is enjoying his celebrity. Josh's rebuttal is no small refutation. It runs to 38 pages and contains responses from his "amazing team of experts," including Ron Bishop, PhD, lecturer in chemistry and biochemistry at SUNY Oneonta, Anthony Ingraffea, PhD, the D.C. Baum professor of engineering at Cornell,and Weston Wilson, a retired EPA engineer.  Energy in Depth's letter to the Academy is not likely to lessen Josh's time in the limelight and may actually increase his chances of grabbing that Oscar.

Clearly, the controversy over frac'ing is not going away soon. The Washington Post reported on Monday that the county commissioners of Garrett County, Maryland, denied a permit to Carrizo Marcellus Inc. to drill a well in the county, citing concerns about pollution from frac'ing, and the State of Maryland recenlty declined to issue permits to Chief Oil & Gas and Samson Resources to drill in Garrett County, opting to wait for improved drilling technology to protect the environment, even though, according to a spokesman for the Maryland energy department, 1800 gas wells have been frac'ed in neighboring Virginia with no reports of well water contamination.  The controversy has even reached Texas, where Range Resources is in the middle of a fight with the EPA over alleged contamination of groundwater in the Barnett Shale. If the industry wants to fight with Hollywood, it will have to do better than Energy in Depth's effort.

 

January 28, 2011

The Importance of Audit Rights in Oil and Gas Leases: Shell v. Ross

I always counsel my clients to provide in their oil and gas leases that they have the right to inspect and copy all documents of the lessee necessary to determine whether royalties have been paid correctly, and to audit the records of the lessee to confirm accurate payment of royalties. Royalty owners generally assume that the royalty payments they received have been calculated and paid as required by their leases. This is not always the case, as illustrated by a recent case, Shell Oil Company SWEPI LP v. Ross, 2010 WL 670549 (Tex.App.-Houston [1st Dist.], decided February 25, 2010. The case illustrates typical schemes used by producers to underpay royalty owners, and their efforts to prevent royalty owners from knowing how royalties are calculated and, when the royalty owners discover the underpayment, to prevent royalty owners from recovering the underpayment. 

In Shell v. Ross, the trial court and Houston Court of Appeals held that Shell had underpaid royalties due to Ross.  Shell has appealed to the Texas Supreme Court.  The Texas Supreme Court refused to consider the case, but Shell has filed a motion for re hearing that is still pending. Other producers are very interested in the case:  friend-of-the-court briefs have been filed by Chesapeake, Texas Oil & Gas Association, and the American Petroleum Institute asking the Court to reverse the Court of Appeals.

The facts of the case require some explanation but illustrate well the importance of verifying the correct calculation of royalties.

 

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January 24, 2011

Railroad Commission Holds Hearing on EPA Allegations Against Range Resources

Last week, a hearing was held before examiners at the Texas Railroad Commission to determine the source of water well contamination in Parker County. The Environmental Protection Agency had previously entered an emergency order finding that Range Resources was responsible for charging rural water wells with natural gas in Parker County, a finding that Range has vehemently denied. The Railroad Commission called the hearing after the EPA issued its order, to receive facts and testimony on the source of the contamination.

I have posted previously about this controversy, here, here, and here.

Range contends that the water wells are contaminated from gas migrating from a shallow gas-bearing formation just below the water table, the Strawn formation.  The EPA's order says that it did an isotopic fingerprint analysis of the gas found in the water wells matched the gas from Range's nearby wells producing from the Barnett Shale.

Range hired its own experts to do an analysis of gas from the water wells. They concluded that the gas came from the shallow Strawn sands, and that the "fingerprint" of the gas was inconsistent with gas produced from the Barnett Shale. They said the Strawn gas contains high levels of nitrogen not found in the Barnett Shale gas. Nitrogen levels of the gases were apparently not tested by the EPA. Range's expert report can be found here.

EPA representatives declined to attend the hearing. Instead, EPA filed suit in federal district court in Dallas seeking to enforce its emergency order. See copy of complaint here: Range complaint.pdf 

Range sought to depose EPA personnel involved in the investigation for the RRC hearing, but EPA has opposed Range's effort. It removed the motion for subpoena to federal district court in Austin. Last week, Judge Lee Yeakel ordered EPA to produce a representative to answer questions about the investigation. "I think we're dealing with parallel proceedings here [of the EPA and Railroad Commission] that are of extreme significance and will be significant around the country, based on the amount of publicity that [natural] gas and groundwater is getting in virtually every publication and every media outlet that there is," Yeakel said. "This has become a hot-button issue in the country." The RRC has held the record open in its hearing so that the EPA witness's testimony can be included in the record.

Range has also filed an appeal of the EPA emergency order with the U.S. Fifth Circuit Court of Appeals in New Orleans.

In light of the rash of cases being filed by landowners in the Barnett Shale alleging groundwater contamination, the Range-EPA fight may have significance well beyond the water wells involved in the case. Range appears resolved to prove that it is not responsible for the contamination. The case could be the first in Texas, and maybe the first in the nation, to finally have a court determine whether there is any merit to allegations of groundwater contamination being caused by fracing of wells.

January 7, 2011

Railroad Commissioners Defend Themselves Before Texas Sunset Advisory Commission

The three current Texas Railroad Commissioners and the new incoming Commissioner David Porter all testified before the Texas Sunset Advisory Commission earlier this month, defending the RRC against criticism in the Sunset Commission staff report. The three commissioners are elected by Texas voters, and a position on the commission is often viewed as a steping-stone to higher office.  Two current commission members, Michael Williams and Elizabeth Ames Jones, both considered running for U.S. Senate when Kay Bailey Hutchinson indicated she would step down to run for Texas Governor. State Senator John Whitmire, a member of the Sunset Commission, said that their running for U.S. Senate conflicted with their duties to the Railroad Commission. "You're running for office, but while you're doing that and regulating and making decisions, you're running and actually raising money from the folks that you are regulating." The criticism mirrors the Sunset staff report, which recommends changing the law to have the RRC run by a five-member appointed board. (For my summary of the Sunset staff report recommendations, go here.) Commissioners Victor Carrillo and Michael Williams said they would support a single elected RRC to replace the three-member commission but would oppose a five-member appointed board. Commissioner Jones said she supported the current three-commissioner governance structure.

The Sunset Advisory Commission is composed of ten members: four members of the Texas House of Representatives, four Texas senators, and two private citizens:

Senate Members:

  • Glenn Hegar, Jr., Chair
  • Juan "Chuy" Hinojosa
  • Joan Huffman
  • Robert Nichols
  • John Whitmire
  • Charles McMahen, Public Member

House Members:

  • Dennis Bonnen, Vice Chair
  • Rafael Anchia
  • Byron Cook
  • Linda Harper-Brown
  • Larry Taylor
  • Lamont Jefferson, Public Member

The Sunset Commission will vote on recommendations for legislation to continue and reform the Railroad Commission at its next meeting on Wednesday, January 12.