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.

December 31, 2010

Plaintiffs' Attorney Windle Turley Enters Fray on Barnett Shale Groundwater Contamination

Dallas attorney Windle Turley has filed three lawsuits in federal court in Dallas on behalf of landowners alleging contamination of their groundwater by Barnett Shale Wells: one on behalf of Jim and Linda Scoma of Johnson County, against Chesapeake, filed last June; one on behalf of Doug and Diana Harris, against Devon Energy, and one on behalf of Grace Mitchell against Chesapeake and Encana. The suits contend that plaintiffs' groundwater has been contaminated by drilling and hydraulic fracturing operations. A copy of the Harrises' suit can be viewed here.  Turley says more such suits will follow. Turley's website has a page dedicated to such suits, which says that, "when hydro-fracking occurs, it is possible for the property owner's groundwater to become contaminated and/or for gases to be forced into the groundwater. When this happens, the oil company may be liable to the property owner for property damages and injuries. ... The Turley Law Firm is very concerned over the damage done and future risk to property and individuals in the Barnett Shale area, and is filing damage suits on behalf of property owners." Groundwater contamination lawsuits may become new fertile ground for plaintiffs' attorneys.
December 29, 2010

Range Letter to EPA Denies Responsibility for Parker County Pollution

Range Resources has written to Al Armendariz in EPA's Dallas office again asserting that it is not responsible for the groundwater contamination in Parker County.  Range's letter can be viewed here:  12-27 Armendariz letter.pdf  For my previous posts on this controversy, go here and here.

Range met with EPA staff on December 15, and it says that, as a result of the meeting, Range and EPA agree that "hydraulic fracturing in the Barnett Shale cannot be the cause of natural gas occurring in the domestic water wells identified by the EPA."  Range also made clear in the letter that, while it was complying with the requirements of EPA's order, it did not believe that the EPA had authority to issue its order, since Range was not responsible for the pollution and the order was issued "without any prior notice or opportunity for Range to present important objective facts."

December 28, 2010

Brownlow Article on Eagle Ford Shale Play and the Carrizo Aquifer

Darell T. Brownlow, Ph.D, has published an article giving his analysis and opinion of the ability of the Carrizo Aquifer to supply water demands caused by fracing of wells in the Eagle Ford play.  The article was published in the newsletter of the Texas Ground Water Association, Fountainhead, and can be found here: Brownlow Article.pdf

Dr. Brownlow, a hydrologist, concludes that there is plenty of water in the Carrizo, in most places, to meet the demands for frac water. His estimates:

  • There are about 6 million acres in the Eagle Ford play, and a possible 20,000 oil and gas wells (one well per 300 acres).
  • An average frac job uses 15 acre-feet of water (4,887,765 gallons, or 115,375.5 42-gallon barrels).
  • So, the frac jobs on those 20,000 wells would use about 300,000 acre-feet of water over the life of the play.
  • Current withdrawals from the Carrizo Aquifer are about 275,000 acre-feet per year; so the entire demand for frac water from Eagle Ford wells would equal about one year's withdrawal of water from the aquifer.  At a rate of withdrawal of 275,000 acre-feet per year, groundwater management studies estimate that the Carrizo water table will drop an average of 30 to 35 feet by 2060.

Dr. Brownlow says that, if a successful Eagle Ford well makes 300,000 to 400,000 barrels of oil at $80/bbl, the return to the landowner would be $520,000 per acre-foot ($1.60 per gallon). In contrast, the return to a farmer using  the same acre-foot of water to irrigate corn, peanuts or coastal hay would be $500 to $1,000 per acre, or about $250 per acre-foot of irrigation water. "The point here is that using groundwater from the Carrizo for hydraulic fracturing in the Eagle Ford Shale has enormous economic potential for landowners, oil production companies and the entire region. Moreover, from a geologic and water planning perspective, additional impact on the aquifer appears minimal."

Dr. Brownlow is a resident of Wilson County, a cattle rancher in LaSalle County, serves on the South Central Texas Regional Water Planning Group (Region L), and was the governor's appointee to the Evergreen Underground Water Conservation District from 2000-2010.

December 23, 2010

Update on EPA Order Against Range Resources, Parker County

EPA's order against Range Resources for allegedly charging groundwater with gas from its Barnett Shale wells has caused quite a stir.

The Texas Railroad Commission has issued two news releases, one on December 7 and one on December 8.  Commission Chairman Victor Carrillo said that he has told EPA Regions 6 Administrator Al Armendariz that "EPA's actions are premature as the Railroad Commission continues to actively investigate this issue and has not yet determined the cause of the gas. This EPA action is unprecedented in Texas, and commissioners will consider all options as we move forward." Commissioner Michael Williams said "this is Washington politics of the worst kind.  The EPA's act is nothing more than grandstanding in an effort to interject the federal government into Texas business." The December 8 press release said that the Commission has called a hearing for January 10 and "expects both parties, the EPA as well as Range Resources representatives, to appear before Hearings Examiners and testify as to the allegations made yesterday." Range has said it will attend the hearing, but it understands that the EPA will not.

Continue reading "Update on EPA Order Against Range Resources, Parker County" »

December 17, 2010

News Around the Oil Patch

Recent news items of interest:

Southwest Energy and Environmental Defense Fund Developing Best Practices for Hydraulic Fracturing.

         Scott Anderson, senior policy advisor for the Environmental Defense Fund, and Mark Boling, Executive Vice President of Southwestern Energy, have begun talks to bring together representatives of energy and environmental groups to propose uniform standards for best practices for hydraulic fracturing, in hopes that such standards will be adopted by states and give the public assurance of the safety of the completion technique.    The talks have resulted in a 40-page draft of proposed model regulations to be presented to state officials, covering public disclosure of frac fluid additivies, standards for casing and cementing wells, and pressure monitoring.  An inverview of Scott Anderson on the efforts can be found here.  "It is our obligation as an industry to let [the public] know what the issues and obstacles are and show them we are willing to work with environmental groups and state regulators to come up with solutions," said Boling.

Dr. John Baen Paper on Estate Planning Opportunities for Mineral Owners.

     Dr. John Baen, a professor of real estate at the University of North Texas, has written a paper, "Contemporary Land, Oil and Gas Valuations, Estate Planning Opportunities, and Possible Strategies in the New Estate and Tax Environment," presented at the recent meeting of Texas Land & Mineral Owners' Association in San Antonio.  The paper can be found here:  John Baen Article.pdf

EPA Subpoenas Halliburton for Data on Hydraulic Fracturing

    The EPA has issued a subpoena to Halliburton to obtain a description of the additives used in its frac fluids.  Halliburton was the only one of nine oilfield services firms to refuse EPA's request for information on the content of their frac fluids. Halliburton posted a response on its website, here. Halliburton has also announced an "eco-friendly" frac fluid that has additives "sourced entirely from the food industry."

State Senator Wendy Davis Introduces Barnett Shale-Related Bills

     Senator Davis, D-Fort Worth, has introduced several bills for the 2001 legislative session aimed at issues in the Barnett Shale:

  • SB 102 - allocation of funds to monitor air quality in the region
  • SB 103 - to allow saltwater pipelines to be placed in state rights-of-way
  • SB 104 - to require operators to capture natural gas produced in testing the well instead of flaring it - "green completions"
  • SB 105 - to require that commercial salt water disposal wells be drilled to the Ellenburger formation or below
  • SB 106 - regulation of the condemnation of municipal property for pipelines, and municipal regulation of such pipelines
  • SB 107 - regarding Railroad Commission inspection of pipeline leaks and reporting results to municipal authorities

NY AG-Elect Opposes Hydraulic Fracturing

     The Attorney General-Elect of New York, Eric Schneiderman, has announced that he will oppose hydraulic fracturing in his state until it has been determined that it is a safe practice. See story here.

PA Board Approves Water Line, PA DEP Says Cabot to Pay For It

     A Pennsylvania board has voted to approve a six-mile water line costing about $12 million to provide water to residents of Dimock Township, PA.  The Pennsylvania Department of Environmental Protection blames wells drilled by Cabot Oil & Gas for contaminating the residents' groundwater, and has ordered Cabot to pay for the water line. Cabod denies that its wells are the cause of the contamination. See article here.

December 10, 2010

James Fallows on the Future of Coal

James Fallows is a national correspondent for Atlantic Monthly. ( jamesfallows.theatlantic.com )  In the last few years he has lived in and written about China. He has written the cover article for Atlantic's December issue, "Dirty Coal, Clean Future." I am a big fan of James Fallows; he writes clearly about big-picture issues, is a deep thinker, and does not talk down to his readers. Mr. Fallows' article is about the future of coal as a source of energy in the world, and how China is developing "clean coal" technology.

Much has been made recently of new discoveries of natural gas in the U.S.; it has been touted as a solution to our dependence on foreign oil and as a way to reduce emission of greenhouse gases, by replacing coal-powered electric generating plants. Mr. Fallows does not write about new gas discoveries, but his discussion of the future of coal puts our domestic natural gas discoveries in perspective. Below are some excerpts from and summaries of Mr. Fallows' discussion. I recommend that you read his article in full.

Continue reading "James Fallows on the Future of Coal" »

December 7, 2010

EPA Orders Range Resources to Investigate Drinking Water Contamination in Parker County

The Dallas Office of the Environmental Protection Agency issued the following press release today:

The U.S. Environmental Protection Agency (EPA) has ordered a natural gas company in Forth Worth Texas to take immediate action to protect homeowners living near one of their drilling operations who have complained about flammable and bubbling drinking water coming out of their tap. EPA testing has confirmed that extremely high levels of methane in their water pose an imminent and substantial risk of explosion or fire. EPA has also found other contaminants including benzene, which can cause cancer, in their drinking water.

EPA has determined that natural gas drilling near the homes by Range Resources in Parker County, Texas has caused or contributed to the contamination of at least two residential drinking water wells. Therefore, today, EPA has ordered the company to step in immediately to stop the contamination, provide drinking water and provide methane gas monitors to the homeowners. EPA has issued an imminent and substantial endangerment order under Section 1431 of the Safe Drinking Water Act. Parker County is located west of Fort Worth, Texas.

In late August, EPA received a citizen's complaint regarding concerns with a private drinking water well. During the inspector's follow-up inquiry, EPA learned that the homeowner had previously complained to the Texas Railroad Commission as well as the company, but their concerns were not adequately addressed by the State or the company. EPA then conducted an on-site inspection of the private drinking water well with the homeowner and a neighboring residence, and returned to collect both water and gas samples. These samples were sent to an EPA certified laboratory for analysis. The data was received in late November 2010 and was carefully reviewed by EPA scientists. The EPA scientists have conducted isotopic fingerprint analysis and concluded the source of the drinking water well contamination to closely match that from Range Resources' natural gas production well.

EPA has asked the company to conduct a full scale investigation. EPA is requiring Range Resources under this order to:

  • Immediately deliver potable water to the two residences;
  • Immediately sample soil gas around the residences;
  • Immediately sample all nearby drinking water wells to determine the extent of aquifer contamination; and
  • Provide methane gas monitors to alert homeowners of dangerous conditions in their houses.
  • Develop a plan to remediate areas of the aquifer that have been contaminated.
  • And, to investigate the structural integrity of its nearby natural gas well to determine if it is the source of contamination.

EPA has data showing the presence of natural gas at two wells. EPA is ordering Range to investigate other nearby properties to determine if their drinking water is at risk. EPA has been in contact with a rural water system operator approximately 1 mile away, and they are taking steps to test their water for natural gas constituents. Residents of other homes are advised to contact EPA immediately if their wells seize up or if their water begins to effervesce. EPA will contact nearby private well home owners to advise them of our actions and to let them know that we've required the company to test their wells.

The uncontrolled release of natural gas can be dangerous since it is odorless and flammable and it escapes facilities. Uncontrolled release of natural gas inside a building or home can cause a fire or explosion. Drinking water contaminated with natural gas impurities such as benzene is unhealthy.

EPA believes that natural gas plays a key role in our nation's clean energy future and the process known as hydraulic fracturing is one way of accessing that vital resource. However, we want to make sure natural gas development is safe. As we announced earlier this year, we are in the process of conducting a comprehensive study on the potential impact of hydraulic fracturing on drinking water.

In the meantime, EPA has made energy extraction sector compliance with environmental laws one of EPA's National Enforcement Initiatives for 2011 to 2013. The initiative focuses on areas of the country where energy extraction activities such as hydraulic fracturing are concentrated, and EPA's enforcement activities will vary with the type of activity and pollution problem presented.

To my knowledge, this is the first time the EPA has directly intervened in response to a complaint by landowners of groundwater contamination from horizontal shale wells. The EPA's press release emphasizes that the Texas Railroad Commission did "not adequately address" the landowners' complaints.

The EPA's letter to Plains Resources may be found here:  http://www.epa.gov/region6/6xa/pdf/range_letter.pdf 

The EPA's emergency order may be found here: http://www.epa.gov/region6/6xa/pdf/range_order.pdf 

The two Range wells are the Butler Unit 1H and the Teal Unit 1H, both Barnett Shale wells drilled in 2009. The owner of one water well first noticed gas in his water in late December 2009, about four months after the Range wells began producing.  One of the water wells lies about 120 feet in horizontal distance from the track of the Butler well bore, and the other about 470 feet from the Butler well bore.  The EPA did a chemical analysis of the gas found in one domestic water well and found that it was substantially likely that it came from one of the Range wells.

The EPA order says that it consulted with the Railroad Commission and shared its findings with the Commission, and that "appropriate State and local authorities have not taken sufficient action to address the endagerment described herein and do not intend to take such action at this time."  The EPA ordered Range to (1) provide replacement potable water supplies for the owners of the affected water wells, (2) install meters in the landowners' dwellings to detect gas, (3) provide EPA a list of all private water wells within 3,000 feet of the two Range wells along with a plan to sample the water in those wells, (4) submit a plan to conduct testing of soils and indoor air around the dwellings served by the water wells, and (5) submit a plan to identify the gas flow pathways to the aquifer, eliminate such flows, and remediate areas of the aquifer impacted by the gas flows into the aquifer.

Update:  Range Resources has denied that its wells have contaminated groundwater in Parker County.  "The investigation has revealed that methane in the water aquifer existed long before our activity and likely is naturally occurring migration from several shallow zones immediately below the water aquifer," the company said. Two producing Range natural gas wells in the area "are completed in the Barnett Shale formation, which is over a mile below the water zone." The Texas Railroad Commission has scheduled a hearing on the matter for January 10.  http://www.star-telegram.com/2010/12/08/2690723/range-resources-denies-epa-allegation.html 

 

November 27, 2010

Texas Sunset Commission Makes Recommendations on Review of Railroad Commission

Texas' Sunset Advisory Commission has issued its Staff Reports on review of three of the state's most important regulatory agencies: the Texas Railroad Commission (RRC), the Texas Commission on Environmental Quality (TCEQ), and the Public Utility Commission (PUC). These reports will frame the debate on legislation to renew the mandates of these regulatory bodies in the coming legislative session. Landowners should be aware of the Sunset Commission's recommendations and be prepared to weigh in on those issues that affect landowners' interests. Links to the full staff reports of the Sunset Commission can be found on the Commission's website at http://www.sunset.state.tx.us/ . Below is a summary of some key facts and recommendations on the RRC.

Continue reading "Texas Sunset Commission Makes Recommendations on Review of Railroad Commission" »

November 17, 2010

Oil Patch News

Recent news items of interest:

Barnett Shale Well Reaches 5 Bcf

The XTO Energy - TRWD #H2H Well in Tarrant County has produced more than 5 Bcf of gas, the first Barnett Shale well to reach that milestone.  The well was completed in June 2005 with a 3,500-foot lateral. The well was drilled under a reservoir operated by the Tarrant Regional Water District, Eagle Mountain Lake, in northwest Tarrant County.  It still produces more than 1 mmcf per day. The well highlights the difference between community acceptance of horizontal drilling and fracing technology in Texas compared to fears that the technology will cause water contamination in New York State, which so far has banned such wells. The newly elected Attorney General for New York, Eric Schneiderman, has recently said he opposes use of hydraulic fracturing until he is convinced that it is safe: "Neither the state nor the federal government has determined that hydrofracking is a safe practice, and I will sue to make sure that no drilling takes place until those determinations have been made."

TCEQ Air Monitor Installed in Decatur

The Texas Commission on Environmental Quality has installed a continuous air monitoring device in Decatur, Texas to continuously sample and report air quality and measure 46 volatile organic compounds. It is one of five such devices sited in the Barnett Shale area. Each monitor costs up to $250,000, plus $100,000 per year to operate.  The data can be viewed on the TCEQ website, here: 

http://www.tceq.state.tx.us/compliance/monitoring/air/monops/agc/agc_barnett.html 

A map showing the locations of TCEQ air quality sampling locations may be found here:

http://www.tceq.state.tx.us/implementation/barnettshale/bshale-viewer

Chevron Buys into Marcellus Shale

Chevron Corporation announced that it has agreed to acquire Atlas Energy, which controlls 486,000 net acres in the Marcellus and 623,000 net acres in the Utica Shale. Atlas had previously made a joint venture with Reliance Industries Limited of India to develop its Marcellus leases. Chevron thereby joins Exxon Mobil (XTO acquisition) in buying into the domestic shale plays.

Halliburton Subpoenaed for Contents of Frac Fluid

The Environmental Protection Agency has issued a subpoena to Halliburton to obtain information on the chemical additives it uses in hydraulic fracturing fluids after Halliburton refused to voluntarily disclose the data.  EPA has asked nine oilfield service firms to disclose data on frac fluid, and only Halliburton refused to respond.

http://www.star-telegram.com/2010/11/09/2617267/epa-issues-subpoena-to-halliburton.html

Natural Gas In Storage Reaches Record

The U.S. Energy Information Administration has reported that natural gas in underground storage has reached 3.84 trillion cubic feet, a new record.  The EIA forecasts that gas production in the U.S. will reach 61.49 Bcf per day in 2010, the highest level since 1973.

Texas Crude Oil Production on the Rise

Texas oil production in September rose to 32.7 million barrels, an increase of 1.1 percent over September 2009. Oil production in Texas peaked at 3.4 million barrels per day in 1973, and declined to 979,000 barrels per day in 2003, where it has leveled off in recent years. Because of higher oil prices in relation to natural gas, companies have been switching from drilling gas wells to oil wells. Rigs drilling oil wells now account for 43% of the 1683 active rigs in the U.S., up from 33% a year ago.

Fort Worth City Council Increases Budget for Air Quality Study

Fort Worth will spend an additional $250,000, for a total of $900,000, on an air quality study to be conducted by Eastern Research Group, testing 75 percent of the wells in the city. ERG told the city council that 68 percent of the approximately 200 sites it has tested so far have shown detectable emissions that require further study.

http://www.star-telegram.com/2010/11/09/2619036/fort-worth-backs-extra-spending.html

Chesapeake Threatens Colleyville Council with Suit over Attempt to Regulate Pipelines

The Colleyville City Council has revised its drilling ordinance to give it authority over pipeline routes in the city limits. An attorney representing Texas Midstream Gas Services, a Chesapeake subsidiary, told the council that the ordinance conflicts with state and federal law governing pipeline safety issues. The issue of municipal regulation of oil and gas activity will be a topic for the upcoming Texas legislative session.

Dimock to Get Water Line

The village of Dimock in Pennsylvania has been much in the news since residents found their water wells charged with natural gas. Cabot Oil & Gas, which has been drilling wells in the area, has denied responsibility, but the Pennsylvania Department of Environmental Protection has concluded that Cabot's wells have charged the community's aquifer. Now Pennsylvania authorities have approved a project to construct a $12 million, six-mile municipal water line to supply drinking water to Dimock residents. The Pennsylvanid DEP has said it will sue Cabot if it refuses to pay for the water line.

 

November 3, 2010

Arthur Berman Does It Again

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.

October 15, 2010

Chesapeake Sued in Oklahoma For Underpayment of Royalties in Barnett Shale Wells

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.

October 1, 2010

More On the Frac'ing Controversy

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!

 

September 18, 2010

Water Fight in the Texas Panhandle

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" »