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