Oil and Gas Lawyer Blog

Arthur Berman, a geological consultant, has once again blasted the economics of gas shale plays -- this time the Marcellus.  At the annual conference sponsored by the Association for the Study of Peak Oil & Gas - USA, held on October 7-9 in Washington, D.C., Mr. Berman made a presentation: "Shale Gas--Abundance or Mirage? Why the Marcellus Shale Will Disappoint Expectations."  His power-point from that presentation may be found here:  Arthur Berman on Marcellus.pdf  Mr. Berman argues that only a small percentage of the areas now being touted as productive in shale plays -- the "core areas" are economic at any price; that even within the core areas, performance is not uniform and the geology is complex; that the wells are very expensive and the break-even gas price is as high as $8-$12/mcf; that reserves have been overstated by the companies in the plays; that the industry is not properly estimating estimated ultimate recoveries from the wells; that changes in reporting rules recently adopted by the Securities and Exchange Commission allow companies to "book" estimated reserves prematurely; and that the economies of the plays will ultimately be reflected in lower share prices of the companies participating in the plays. 

For the Marcellus in particular, Mr. Berman asserts that infrastructure limitations -- lack of pipeline and gas processing capacity -- will slow development, that environmental issues -- fears about groundwater contamination, proximity to urban areas, and regulatory restraints -- will not go away, and that economics for drilling in the Marcellus Shale are no better than in the Barnett Shale. Mr. Berman says that shale gas is the nation's next speculative bubble likely to burst.

Mr. Berman created a stir just a year ago when he published a similar gloomy analysis of the Barnett Shale, at the ASPO conference in October 2009.  At that time he was a contributor to a trade publication called World Oil, which is sent free to top oil & gas E&P executives. In early November 2009, World Oil was about to publish another article by Mr. Berman critical of shale plays, but the president of the publication ordered that it not be published. Mr. Berman resigned, and his editor Perry Fischer, who insisted that the article be published, was fired. All of this created a stir in the blogosphere. Fischer contended that World Oil executives were pressured by CEOs of two public E&P companies not to publish any more of Mr. Berman's critiques. Tudor Holt & Pickering, who analyze the oil and gas industry, published a critique of Mr. Berman's analysis, and two oil executives from Devon and Chesapeake wrote newspaper op ed pieces critical of his work. Chesapeake CEO Aubrey McClendon said at the time that he expected gas prices to continue to rise, which would lead to an increase in drilling and production in the shale plays. "We think all of the elements are in place for gas prices to be higher in 2010 than they are today," McClendon said.

McClendon's predictions have not held true. Gas prices have continued to slide, although drilling in the shale plays has continued. Particularly in the Haynesville, wells are being drilled that are surely not economic at current prices. The only explanation I know of for this continued drilling is that the companies who paid $10,000 to $25,000 per acre for leases in the play must drill the wells to prevent the leases from expiring. The result is that gas production and drilling remains high despite lower prices, resulting in a continued glut in supply, further reducing prices.  In the meantime Mr. McClendon, always quick on his feet, has moved to the Eagle Ford Shale play, a "liquids-rich" play, because oil prices, unlike gas, have not declined. Chesapeake acquired a large position in the "oil window" of the Eagle Ford and quickly made a deal with China's national oil company to sell them one-third of its acreage for $10,000 an acre. If indeed, as Mr. Berman believes, the shale plays are the next speculative bubble, maybe it will be national oil companies like China's who are left holding the bag.

A royalty owner in the Barnett Shale has sued Chesapeake in Oklahoma federal court for failure to properly pay royalties. The suit, Robyn Coffey vs. Chesapeake Exploration, L.L.C. and Chesapeake Operating, Inc., Civil Action No. CIV-10-1054-C, was filed on September 27 in the U.S. District Court for the Western District of Oklahoma, in Oklahoma City. A copy of the complaint can be viewed here: Coffey v Chesapeake.pdf  The plaintiff seeks to bring the case on behalf of all royalty owners in the Barnett Shale formation, as a class action.

The plaintiff alleges that Chesapeake "employs a scheme" to reduce royalty payments by selling the gas to its wholly owned subsidiaries at a price "substantially less than either the market value at well or the amount actually received by Chesapeake Operating."

The royalty clause in the plaintiff''s oil and gas lease is unusual. It provides for payment of royalties based on the "market value at the point of sale," but not less than "the actual amount realized by the Lessee." The clause says that all royalty paid to the lessor "shall be free of all costs and expenses related to the exploration, production and marketing of oil and gas production from the lease including, but not limited to, costs of compression, dehydration, treatment and transportation." Most gas royalty clauses provide that gas royalties will be based on "the amount realized by Lessee, computed at the mouth of the well," or similar language.

The plaintiff's lease does not expressly address sales by a lessee to a company which is affiliated with the lessee. The plaintiff in this case will therefore have to prove in effect that the sale to Chesapeake's affiliate is a sham designed to cheat its royalty owners. It is possible to draft a royalty clause that would deal with sales to affiliates -- in effect providing that royalties shall be based on the proceeds received by the lessee or any affiliate of the lessee -- in other words, based on the price received in the first arms-length sale to an unrelated third party.

The case is obviously drafted to be a class action. The amount of the individual plaintiff's claim is not stated in the complaint, but the plaintiff owns royalties on only about 3 acres. If the plaintiff is able to get the case certified as a class action on behalf of all Chesapeake royalty owners in the Barnett Shale, millions of dollars of royalty will be at issue in the case.  It is evident that the lawyers elected to file in Oklahoma because the Texas Supreme Court has been very hostile to royalty owner class actions in Texas. In light of the unusual language in this royalty owner's lease, it will be interesting to see if the federal court in Oklahoma will be willing to certify this case as a class action.

Recent happenings in Pennsylvania:

• The controversy over natural gas in underground aquifers in Dimock Township, Pennsylvania continues. It was reported that private lab tests of contaminated water found chemicals used in hydraulic fracturing. Dimock resident Victoria Switzer said that the tests had found ethylene glycol, propylene glycol and toluene in her well water. The testing company said that the tests also found ethylbenzene and zylene in most of the affected water wells in the township. Read the Scranton Times-Tribune article here. The Pennsylvanie Department of Environmental Protection has fined Cabot Oil & Gas for improper casing and cementing that allegedly have caused natural gas to appear in Dimock's ground water.
• Cabot has denied that the tests show contamination of ground water by frac water from its wells. Cabot claims that it has not used xylene, ethyl benzene or toluene in its frac water. It said that the chemicals found in the ground water were present before Cabot ever drilled its wells, and Cabot notes that an automobile and truck repair garage is sited near the water wells tested and that these chemcials are primary constituents of car and truck fuel and are commonly found in gasoline spills.  See article here.
• The EPA hearing on its well frac'ing study finally took place in Binghamton, New York. After all of the concern about the crowd and security, about 700 people showed up for the hearing, while others chose to demonstrate outside the hearing. There were demonstrators on both sides, some holding signs saying "Kids can't dring gas" and "Protect our water. Stop fracking America." Other signs said "Yes to science, no to paranoia" and "Pass gas now!" See Philadephia Inquirer article here. 

Analyst Dave Pursell of Tudor, Pickering & Holt has addressed the frac'ing controversy tongue-in-cheek, inspired by Jack Nicholson's character in A Few Good Men:

You want the truth? You can't handle the truth! We live in a world that needs clean natural gas, and gas wells have to be frac'd by men with rigs and pumps. Who's gonna do it? Microsoft? Apple? The energy industry has greater responsibility than you could possibly fathom. You weep for your i-phone app, and you curse the frac crews. You have that luxury. You have the luxury of not knowing what we know. That fossil energy fuels economic growth. And the existence of frac'ing, while grotesque and incomprehensible to you, powers our economy. You don't want the truth because deep down in places you don't talk about on Facebook, you want them on that frac, you need them on that frac. We use words like pressure, proppant, conductivity. We use these words as the backbone of a life spent producing gas. You use them as a punchline. We have neither the time nor the inclination to explain ourselves to someone who takes a hot shower every morning using the natural gas that we provide, and then questions the manner in which we provide it. We would rather you just said thank you, and went on your way. Otherwise, we suggest you pick up a pipe wrench, and meet us on location. We have wells to frac!

 

T. Boone Pickens has filed a lawsuit to protect his water rights in Hemphill County, a suit that highlights the problems with Texas' attempt to regulate pumping from aquifers in the State. The suit, Mesa Water, L.P. and G&J Ranch, Inc. v. Texas Water Development Board, was filed in Travis County in April.  Water is a little outside the scope of my blog, but this fight concerns the Ogallala Aquifer in the Texas Panhandle, where I was born and grew up, and so is of special interest to me.

To understand the litigation, it is necessary to know something about the Ogallala and about Texas' efforts to regulate underground water resources.

Continue reading "Water Fight in the Texas Panhandle" »

A case now before the Texas Supreme Court that addresses issues important to Texas mineral owners. The case, BP America Production Company, et al., v. Stanley G. Marshall, Jr., et al., No. 09-0399, asks the Texas Supreme Court to address the applicability of the laws of adverse possession to mineral interests for the first time since the Court's decision in the Pool case, Natural Gas Pipeline Co. of America v. Pool, decided in 2003. To understand the importance of BP v. Marshall, it is necessary to first review the Pool case.

Continue reading "Texas Supreme Court Asked to Re-examine NGPL v. Pool" »

EIA Forecast of Energy Prices

   The Energy Information Administration has forecasted that oil and natural gas prices will rise slightly through 2011. It predicts oil to average $84/bbl in 2001, and that the Henry Hub spot price for natural gas will average $4.98/MMBtu in 2011, an incurease of 6% from 2010.  EIA forecasts that US natural gas consumption will increase 3.8% from 2009 levels in 2010, then remain flat in 2011. It predicts total natural gas production to increase by 1.1 Bcf/d in 2010, an increase of 1.9%.

Devon Energy CEO Says Low Prices Will Mean Lower Rig Counts

  John Richels, President of Devon Energy, said that the natural gas rig count will begin to fall by mid-2011 if prices continue to remain at $5/MMBtu or less.  Richels said in a speech at the Houston Petroleum Club that drilling has remained high to hold leases bought in 2007 and 2008, and once that acreage is drilled enough to prevent lease expirations there will be little reason to continue drilling unless prices rise to the $6 to $7 range. 

http://www.platts.com/RSSFeedDetailedNews/RSSFeed/HeadlineNews/NaturalGas/6297353/

Rig Count

  The US Baker Hughes rig count as of August 20 was 1,651 total rigs -- 655 oil and 985 gas. This is up 666 from a year ago, or 68%. The Texas rig count was 716, up 344 from last year's count of 372, or 92%. The state with the next highest rig count was Louisiana, with 184 rigs.

EOG Reports Results in Oil Window of Barnett Shale

   EOG Resources reports that it has had significant success with wells in the Eastern Barnett 'Combo Play.' EOG says it has about 150,000 net acres in the liquids-rich portion of the Barnett. It says its Settle #1H has an EUR of 260,000 bbls of oil, 412,000 bbls of natural gas liquids and 3 Bcf of natural gas based on the first three months of production. Its Richardson 3H in Cooke County came on production at 325 bbls/d, and in Montague County, its King 1H had initial rates of 344/bbls/d, while its Olden B-1H had initial rates of 323 bbls/d and 1/7 MMcf/d, and its Alamo B-6H came on at 500 bbls/d.

http://www.ogj.com/index/article-display/7019703212/articles/oil-gas-journal/drilling-production-2/2010/08/eastern-barnett_combo.html

EPA Postpones NY Meeting on Fracturing Study

  The Environmental Protection Agency has been holding public hearings across the country on its study of hydraulic fracturing, mandated by Congress. It was forced to postpone a hearing scheduled to take place on August 12 in the Syracuse convention center. Originally that hearing was to take place at Brighamton University, but was moved after Binghamton said it wanted $40,000 to cover costs of an overflow crowd expected to exceed 8,000 people. No new date has been set. The agency originally scheduled three four-hour sessions for the New York meeting in anticipation of the larger crowds.

http://yosemite.epa.gov/opa/admpress.nsf/0/EA536794EF7EFDFB8525777B00608470

Range Resources Plublishes Contents of Frac Fluids

  Range Resourcss has voluntarily published the chemicals used in its frac fluids in wells drilled in Pennsylvania. It has posted the information for three Marcellus wells on its website, and will publish the information for additional wells as they are drilled and completed.

Rosetta Resources Announces Results of Eagle Ford Shale Drilling

Rosetta Resources provided details of the results of its drilling in the Eagle Ford Shale in northern Webb County. In its Gates Ranch area, Rosetta has drilled 14 horizontal wells, and those wells have averaged 320 Bbl/d of condensate, 500 Bbl/d of natural gas liquids and 3.1 MMcf/d of gas for their first seven days of production. It said about 80% of the value from these wells is comprised of liquids. Wells costs are averaging $6.5-$7.5 million per well, with 13-15 frac stages per well. Rosetta expects to drill 30-35 Eagle Ford wells in 2010.

http://www.marketwatch.com/story/rosetta-resources-inc-announces-second-quarter-2010-results-provides-capital-program-update-and-announces-additional-asset-sales-2010-08-09?reflink=MW_news_stmp

EOG Announces Eagle Ford Plans

EOG Resources has announced that it plans to drill 111 Eagle Ford wells this year and 245 Eagle Ford wells in 2011. EOG has about 505,0000 acres mostly in the oil window of the play. EOG said its recent Eagle Ford wells have had initial completion rates of 1,033, 1,022 and 625 Bbls/d of oil and condensate, and that its first two wells in Wilson County came on at rates of 707 and 836 Bbls/d.

http://www.ogj.com/index/article-display/4882105480/articles/oil-gas-journal/exploration-development-2/2010/08/eog-to_quicken_its.html

A study group at the Massachusetts Institute of Technology has concluded that natural gas will play a leading role in the U.S. over the next several decades, both in providing fuel for the nation's energy needs and in reducing greenhous gas emissions. The study was conducted over two years by a group of thirty MIT faculty members, researchers and graduate students, assisted by an advisory committee of industry leaders and consultants. The study group has released an interim 80-page report summarizing its findings. A full report with additional analysis will follow later this year.

Among the study's findings:

Continue reading "MIT Releases Study on Future of Natural Gas" »

RigData has compiled the numbers of active drilling rigs by county for each of the major shale plays in Texas: Barnett, Haynesville and Eagle Ford. These serve as a good measure of the degree of activity in each of the counties within these plays.

The Barnett Shale rig count  shows a total of 81 rigs in July. The rig count has held steady around 80 for the last several months. Activity is concentrated in the core area, Tarrant and Johnson Counties.

The Haynesville Shale rig count  has a total of 184 rigs working in both Texas and Louisiana, with 56 of those rigs in Texas - 12 in San Augustine County, 11 in Harrison County, 10 in Shelby County, and 9 each in Nacogdoches and Panola Counties. This count also has remained steady at around 180 rigs over the last several months.

The Eagle Ford in South Texas has 84 rigs running , up from 49 rigs in April, including 22 rigs in Webb County, 12 in La Salle County, and 10 deach in Dimmit and De Witt Counties. Operators are clearly moving rigs into the oil-rich portions of the Eagle Ford, to take advantage of the oil and liquid-rich portions of that play in light of low gas prices.

A new report on the risks and advantages of hydraulic fracturing by Ann Davis Vaughan and David Pursell, "Frac Attack: Risks, Hype, and Financial Reality of Hydraulic Fracturing in the Shale Plays," provides a much-needed objective summary and analysis of the recent debate over the safety of hydraulic fracturing. Ann Davis Vaughan founded Reservoir Research Partners and is a former investigative journalist for the Wall Street Journal. David Pursell is an analyst with Tudor Pickering Holt & Co., an investment banking firm in Houston specializing in the energy industry.

Continue reading "New Report Provides Objective View of Debate Over Hydraulic Fracturing" »

EOG Resources has filed an application for designation of two new fields and for temporary field rules for oil wells in seven counties in South Texas (Eagle Ford proposed rules.pdf). Unlike its previous application, which sought to consolidate numerous Eagle Ford fields in Railroad Commission of Texas Districts 1, 2 and 4 and provide for temporary field rules for oil and gas, the new application seeks rules oil well rules only, for seven counties -- DeWitt, Karnes, Gonzales, Wilson, Atascosa, LaSalle and McMullen. EOG asks for expansion of the existing Eagleville (Eagle Ford) Field, renamed the Eagleville (Eagle Ford -2) Field for Karnes and DeWitt Counties, and a new Eagleville (Eagle Ford -2) Field for Gonzales, Wilson, Atascosa, LaSalle and McMullen Counties.

The proposed rules would provide for a minimum 330 feet from lease line spacing, no between-well spacing, and a minimum of 100 feet from lease line to the first and last take points in a horizontal well, a "box" rule, and a special rule for off-lease penetration of the producing formation.

The standard proration unit size for oil wells would be 80 acres, plus additional acreage for horizontal wells as allowed by RRC Rule 86. Under the proposed rules, an operator would be allowed to assign up to 360 acres to a horizontal well with a 5,000-foot lateral.

A major issue in shale plays is the use of underground supplies of fresh water to fracture-stimulate the well. Horizontal shale wells are fracture-treated with fresh water to which various chemicals are added, and huge volumes of fresh water are needed. A 5,000-foot lateral horizontal well will use up to seven million gallons of fresh water. Depending on the availability of underground water at the lease, the operator's use of that resource could have a substantial adverse impact on the landowner's subsurface water supply.

 

The impact of fracing in the Barnett Shale was a subject of study by the Texas Water Development Board in 2007. The TWDB concluded that 89% of the water supply for the region of the Barnett Shale field was supplied by surface water sources, and that groundwater used for Barnett Shale development accounted for only 3 percent of all groundwater used in the study area. In East Texas, underground water is more plentiful and using it to frac wells may not place a strain on aquifers. But the Eagle Ford Shale is generally in a more arid part of the state where surface water supplies are more scarce and underground water is a more precious resource. Where the mineral owner also owns the surface estate, attention needs to be paid to the impact of mineral development on underground water supplies.

Companies have developed recycling methods to re-use frac water, which have been tested on an experimental basis. Devon has reported that it has been able to recycle a small percentage of the frac water used in its Barnett Shale wells and in the last three years has recycled nearly 4 million gallons. One obstacle is cost. It was reported that it costs about 40 percent more to recycle the water than to dispose of it by underground injection. Devon has said that its cost of recycling water in Barnett Shale wells is $4.43 per barrel, vs. $2 to $2.50 per barrel for typical water disposal into an injection well. Devon said that less than 5% of Devon's revenue goes toward the cost of handling flow-back water. For a good article on recycling frac water, go to this link.

Continue reading "Use of Fresh Water for Fracture Treatment of Horizontal Wells in Shale Plays" »

John Hanger, head of the agency responsible for regulating the oil and gas industry in Pennsylvania, said in an interview by the Philadelphia Inquirer that the movie Gasland, by Josh Fox, was "fundamentally dishonest" and "a deliberately false presentation for dramatic effect," and called Fox a "propagandist." Hanger was interviewed by Fox in the movie, at the end of which Hanger walked out on the interview. Hanger was formerly head of the environmental group Citizens for Pennsylvania's Future (PennFuture). He has sought stricter regulation of the industry over its objections.

Fox's movie has come under criticism by others. Energy in Depth, an industry website, calls his movie "heay on hyperbole, light on facts." Fox blames much of the pollution depicted in the movie on hydraulic fracturing. The movie shows water coming out of a faucet charged with methane and lit on fire.

Richard Stoneburner, President of Petrohawk Energy, commenting on the environmental opposition to hydraulic fracturing, has written that natural gas often occurs naturally in fresh water sands.

America's Natural Gas Alliance, another industry group, has posted an entry on its website titled "The Truth About Gasland," rebutting allegations in the film:

In the film's signature moment Mike Markham, a landowner, ignites his tap water. The film leaves the viewer with the impression the flaming tap water is a result of natural gas drilling. However, according to the Colorado Oil and Gas Conservation Commission, which tested Markham's water in 2008, at his request, methane in his water supply had "no indications of oil & gas related impacts to water well." Instead the investigation found that the cause was "biogenic" in nature, meaning it was naturally occurring due to the fact that his water well had been drilled into a natural gas pocket.

Professor Don Siegel at Syracuse University  told reporters in an interview that anti-drilling activists like Fox are distorting the facts about natural gas drilling. "As a hydrogeologist, I really am almost offended by some of the opposition that's trying to paint a picture of what groundwater resources are like that is completely wrong." He proceeded to list the "not-truths" about hydraulic fracturing.

At the hearing today before the Texas Railroad Commission for consideration of EOG Resources' application for temporary field rules for a new field consolidating 27 existing fields in the Eagle Ford Shale in South Texas, the applicant EOG Resouces announced that it was withdrawing its application. (See my previous post on this application here.) EOG's lawyer said that the application was filed at the suggestion of Railroad Commission staff in order to have uniform rules for all wells drilled in the Eagle Ford, but because of the number of parties who had appeared in the hearing in opposition to the application, EOG would withdraw the application. He said that EOG plans to file a new application for temporary field rules for the Eagle Ford in eight counties where EOG has acreage: Gonzales, Wilson, Karnes, Atascosa, McMullen, La Salle, DeWitt, and Frio Counties. He said that the rules EOG would propose would apply to oil wells only, as EOG's acreage is in the oil window of the play. Other operators in the gas portion of the play are also expected to file additional applications for temporary field rules for gas wells.

Remarkably, three full-length documentaries are in circulation about the perils and benefits of the new shale drilling boom in the US. The first, Gasland, relates stories of the horrors caused by drilling in locations across the country. It won an award at the 2010 Sundance Film Festival, and is now showing on HBO. Its official website is a call for environmental action. The second documentary, Haynesville: A Nation's Hunt for Energy, has been shown at several film festivals and can be seen in Dallas, Houston and Forth Worth in July. The film critic for the Fort Worth Star Telegram calls Haynesville "fairer and smarter" than Gasland.  Watch the trailer at its website. The newest film is Gas Odyssey, which advocates development of the Marcellus shale in New York State. Its maker Aaron Price says that the issue of hydraulic fracturing "stopped being about science and facts a long time ago  It has become a political monster, and my hope is that this film will transcend politics and restore basic rights to New Yorkers - to develop their land through a tried and true, safe technology."  Watch all three and make your own conclusions.

Bryan Shaw, Chariman of the Texas Commission on Environmental Quality, published a letter in the Fort Worth Star Telegram assuring Fort Worth that there was no immediate health risk from contamination of air caused by oil and gas activities in the region. Shaw assured residents that "the TCEQ can state, without hesitation, that benzene levels in Fort Worth pose no immediate health risk."

The TCEQ has taken extraordinary measures over the past several months to test air quality in and around Fort Worth after Al Amendariz, then an engineering professor at Southern Methodist University and now regional administrator for the Environmental Protection Agency, published a report that air emissions from oil and gas activity in the Barnett Shale play were significantly contributing to reduced air quality in the DFW area. The concerns were exacerbated by reports from the town of DISH, in Denton County, that air emissions from oil and gas facilities were causing health problems in that community.

The TCEQ has also come under more general criticism and scrutiny by the EPA since Armendariz's appointment. The EPA has contended that the TCEQ's air-permitting program violates federal law, and the EPA has threatened to take over the program from the TCEQ. The Texas Attorney General has filed a legal challenge to the EPA's efforts to pre-empt the State's permitting program. The TCEQ and the EPA are in discussions to try to resolve the dispute.