Articles Posted in Energy Policy

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An article by Jim Malewitz in The Texas Tribune, “As Oil Prices Plunge, Questions about Big Tax Credit,” sheds light on an arcane and technical issue not well understood even by most oil and gas lawyers – classification of wells as “oil wells” or “gas wells” by the Texas Railroad Commission. While most wells produce both oil and gas, under RRC rules a well must be either one or the other. Different rules apply depending on well classification. Why does it matter?

For one thing, oil and gas leases traditionally have allowed larger pooled units for gas wells than oil wells – allowing operators to hold more acreage with a single well. This distinction is based on the theory that gas wells drain a larger area than oil wells – probably true in most conventional reservoirs, where oil and gas migrate through the formation as wells withdraw production. Not so true for new unconventional shale formations, which have very low permeability and porosity, and where oil and gas don’t “flow” through the formation but are produced through artificially induced fractures.

But operators recently are rushing to “reclassify” wells as gas wells that were originally classified as oil wells. According to Malewitz, the RRC granted operator applications to reclassify 844 wells from oil to gas this year – nearly six times the number reclassified in 2013. And Devon Energy has asked the RRC to reclassify more than 200 of its wells from oil to gas. The reason? Tax credits. Continue reading →

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The rights of local municipalities to regulate or ban drilling activity within their jurisdictions has been a hot topic over the last few years in several states, especially Pennsylvania, Texas and Colorado. Shale development has been intense in all three states, but their reactions to urban drilling regulation have differed markedly.

In Colorado, voters threatened to force a ballot initiative to ban hydraulic fracturing in the state. In response, the governor cobbled together a compromise that included the appointment of a task force to examine the impact of drilling on urban environments and make recommendations. That task force, the Colorado Oil and Gas Task Force, issued nine recommendations in February of this year. They make for interesting reading.

The Colorado Oil and Gas Conservation Commission has been conducting hearings across the state on two of the Task Force recommendations, both of which would require the COGCC to implement regulations. Both of the recommendations would increase municipalities’ participation in the permitting process for wells within their jurisdictions. Recommendation #17 would require companies planning “Large Scale Oil and Gas Facilities” to consult with local governments to try to reach agreement on the siting of those facilities and to engage in mediation if the parties are unable to reach agreement. Recommendation #20 would require companies to provide local governments a five-year plan for their drilling and development within their jurisdictions, to allow the municipalities to include those plans in the municipalities’ own long-range plans.

Compare Colorado’s efforts to the Texas legislature’s response when Denton, Texas voted to ban hydraulic fracturing within its boundaries. The Legislature passed House Bill 40. That bill not only barred municipalities from banning fracking, it also significantly limited the authority of cities to regulate drilling within their jurisdictions.

With the exception of Denton, exploration companies and municipalities have managed to get along with each other in Texas, and urban drilling has become a common occurrence in cities like Fort Worth. Fort Worth worked with the industry to craft regulations on siting, noise, safety, emissions, light, traffic, and pipelines that all stakeholders were willing to live with and that have become a model for other cities to follow. But with House Bill 40, all of that work is called into question. Instead of engaging with municipalities to find solutions, in my view the legislature bowed to the interests of industry and gave them a tool with which to threaten cities if operators felt that cities’ regulations were too heavy-handed.

It remains to be seen whether the industry and municipalities will make peace in Colorado. But I think it is inevitable that House Bill 40 will result in expensive litigation between cities and industry in Texas.

 

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When exploration began in the Marcellus Shale in Pennsylvania, it was the wild west transported to the east. Speculators sprung up and bought oil and gas leases with the expectation of selling them for a profit. The forms of oil and gas leases I saw being used in Pennsylvania were the worst I have seen in my career. Speculators paid for leases with 90-day drafts, hoping they could find a buyer for the leases in time to pay the bonuses.

But landowners soon caught on. They organized themselves, creating informal associations in geographic areas to negotiate leases as a group. The associations hired competent counsel. Large blocks of land were offered to multiple companies, forcing companies to bid against each other. Landowners educated themselves and realized that there was power in numbers.

Texas landowners, on the other hand, are an independent lot. They don’t like to give up their autonomy. They don’t like sharing their lease terms with other landowners. Every landowner thinks his lease form is the best. Landowners don’t like regulatory authorities telling them what they can and can’t do. One riot, one ranger.

In Texas’ last legislative session, three organizations representing land and mineral owners opposed legislation seeking to legalize allocation wells, House Bill 1552: Texas Land and Mineral Owners’ Association, the National Association of Royalty Owners-Texas, and Texas Cattle Raisers’ Association. Representatives and members of those associations testified and lobbied against the bill, and it did not make it out of committee. It is my opinion that the bill would have severely eroded mineral owners’ bargaining power with exploration companies. I testified against the bill.

Texas Land and Mineral Owners’ Association and NARO-Texas also filed an amicus brief this year in Chesapeake v. Hyder, a case dealing with the ability of lessees to deduct post-production costs from royalties. TLMA and NARO-Texas hired our firm and Raul Gonzalez, retired Supreme Court Justice, to file the brief on their behalf. The Texas Supreme Court recently ruled, 5 to 4, in favor of the royalty owners in that case.

TLMA and NARO-Texas both have conventions and provide educational opportunities to their members. Their boards are volunteers who work hard to protect and advance the interests of mineral owners. The organizations have relatively small membership compared to the number of mineral and royalty owners in Texas. Their budgets are small.

Texas mineral owners could learn from Pennsylvanians. Knowledge is power. There is strength in numbers. Texas mineral owners should join and support efforts of organizations like TLMA and NARO-Texas. What happens in the courts and legislature matters. There is such a thing as good government, good regulatory policy. The exploration industry in Texas has created wealth for thousands of Texans, but the interests of oil companies are not always aligned with the interests of land and mineral owners. Oil companies in Texas have powerful lobbies – witness the recent passage of House Bill 40, severely limiting the ability of municipalities to regulate oil and gas exploration in their jurisdictions. The efforts of TLMA and NARO-Texas remind legislators that oil companies don’t vote – people do. Legislators pay attention when members of those organizations engage in letter-writing campaigns to oppose or support legislation. Mineral owners in Texas should join one or both of these organizations, and get involved. It will be time and money well spent.

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Here is an excellent article by Michael Levy, senior fellow for energy and the environment at the Council on Foreign Relations: “Fracking and the Climate Debate,” published in the journal Democracy. A well-reasoned and balanced summary of the debates over the role of natural gas in our energy future and its potential impact on our climate. Lengthy, but well worth reading.

Levy gives a good history of recent remarkable changes in the roles of coal and natural gas in US energy:

Between 1999 and 2005, the United States had added the equivalent of 200 nuclear power plants’ worth of natural gas-fueled electricity plants, even as U.S. coal-fired capacity actually fell. But by 2007, with natural gas prices rising, the U.S. government predicted a reversal: Over the next two decades, coal-fired power plants would be built at a furious pace, while natural gas would stagnate. This would be disastrous for U.S. greenhouse gas emissions: By 2030, it was predicted, the fleet of coal-fired power plants would belch three billion tons of carbon dioxide into the atmosphere each year, massively raising U.S. greenhouse gas emissions. …

But the EIA’s predictions were proven false by the shale gas revolution:

Between 2005 and 2014, annual U.S. natural gas production increased by 36 percent, with shale gas production rising even more than total U.S. natural gas output did (other sources of U.S. gas continued to decline). In large part as a result, from 2008 to 2012, the price of natural gas dropped by a whopping 62 percent. Since the dawn of electric power, coal has been the largest source of U.S. electricity, with natural gas coming in a distant second beginning around 1960. But by April 2012, with natural gas prices at rock bottom, gas-fired power came within a hair of topping coal.

American carbon dioxide emissions simultaneously plummeted. U.S. emissions had risen nearly every year for decades, and few expected the pattern to change. But in 2007, emissions peaked. By 2012, U.S. emissions were 13 percent below their 2007 high, and at their lowest level since 1994. Emissions rebounded slightly through 2014 but remained 9 percent below their high-water mark. …

In 2014, coal provided 39 percent of total U.S. electricity to natural gas’s 27 percent. The U.S. Energy Information Administration, an independent agency of the U.S. government, projects that without new policies, it will take until 2035 for natural gas to pass coal as the top source of U.S. electricity. It also projects that U.S. energy-related carbon dioxide emissions, instead of decreasing, will edge up by nearly 2 percent over the next decade.

The New York Times reported yesterday that, in fact,

Natural gas overtook coal as the top source of United States electric power generation for the first time ever this spring, a milestone that has been in the making for years as the price of gas slides and new regulations make coal riskier for power generators. About 31 percent of electric power generation in April came from natural gas, and 30 percent from coal, according to a recently released report from the research company SNL Energy, which used data from the Energy Department. Nuclear power came in third at 20 percent. A drilling boom that started in 2008 has increased United States natural gas production by 30 percent and made the United States the world’s biggest combined producer of oil and natural gas. Federal data shows that in April, the amount of electricity generated with natural gas climbed 21 percent compared with April 2014, and the amount generated with coal fell 19 percent. In April 2010, 44 percent of electric power generation came from coal and 22 percent from gas, according to SNL Energy.

This is a remarkable statistic: In April 2015, US generation of electricity from gas increased 21%, and electricity from coal fell 19%.

The debate over fracking will continue, but the world’s insatiable appetite for energy will not abate, and natural gas will continue to increase as a share of our energy supply. The industry would do well to consider Levy’s caution that it act responsibly by reducing emissions and pay attention to the environmental impacts caused by its activities.

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Energywire has been following the political implications of the University of Oklahoma’s study of the causes behind the huge increase in earthquakes in Oklahoma, and OU’s relationship with Harold Hamm, CEO of Continental Resources. In a recent investigative article, Energywire reported that “University of Oklahoma officials were seeking a $25 million donation from billionaire oilman Harold Hamm last year, records show, at a time when scientists at the school were formulating the state’s position on oil drilling and earthquakes.” OU initially “came up with a position that squared with Hamm’s, saying most of the hundreds of earthquakes rattling the state are natural and not caused by the oil industry.” Hamm turned down the donation request, and OU’s Geological Survey subsequently changed its position and now says that most earthquakes in Oklahoma are “very likely” triggered by oil and gas activities.

Earthquakes in Oklahoma have increased from 20 with a magnitude of 3.0 or greater in 2009 to 585 in 2014, and Oklahoma is now expected to have more than 800 such quakes this year.

OU’s president, David Boren, a former senator, serves with Hamm on Continental’s board of directors and according to Energywire has received $1.6 million from the company since 2009. Hamm has pressured OU to avoid linking quakes to injection of produced water in Oklahoma.

Meanwhile, here in Texas, scientists from Southern Methodist University issued a peer-reviewed study of quakes around the town of Azle in the Barnett Shale, concluding that quakes there were probably caused by two salt water disposal wells near the town. Those scientists recently participated in a panel discussion about earthquake activity in Texas organized by Railroad Commissioner Ryan Sitton. In response to the SMU study, the RRC scheduled two hearings, requiring the operators of those SWD wells, Enervest and XTO, to appear and show cause why their disposal wells should not be shut down.

RRC show-cause hearings are conducted before hearings examiners, who act as administrative law judges and make recommended decisions to the commissioners. At the Enervest and XTO hearings, the companies offered sworn testimony and arguments that SMU’s study was flawed and that their disposal wells did not cause the Azle quakes. The examiners admitted the SMU study as evidence over the objections of the companies’ attorneys. No SMU scientist appeared at the hearings. The examiners have not yet issued their proposal for decision.

Separately, the RRC concluded that disposal wells in Johnson County, also in the Barnett Shale, were not the cause of a 4.0 magnitude quake in that county on May 7. After the quake, the RRC ordered five disposal wells in the area shut down for testing. After analysis of the tests, the RRC issued a statement, concluding: “At this time, there is no conclusive evidence the disposal wells tested were a causal factor in the May 7 seismic event. The tests were conducted to help determine the effect of injection operations on pressures within subsurface rock formations.”

Science and politics do not make good bedfellows.

 

 

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Christi Craddick, Chairman of the Texas Railroad Commission, testified in Washington yesterday before the House Science and Technology Committee, chaired by Lamar Smith, as part of a panel addressing environmental effects of hydraulic fracturing and wastewater disposal.  Introductory remarks and testimony can be viewed here.  The testimony reflects, I think, the political polarization in Washington. Because of recent reports about earthquakes in North Texas and Oklahoma, a lot of the testimony related to those issues, as well as the ability of local municipalities to regulate drilling in their jurisdictions – an issue now before the Texas Legislature.

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In a special section of the January 17 edition of The Economist, Edward Lucas gives a broad overview of the world energy outlook and the future for renewable energy. His is an optimistic forecast for cleaner, cheaper and more plentiful energy. His article can be found online here.

First, the article provides this view of current world energy production and consumption:

economist.pngThis picture doesn’t present a very optimistic view. Almost 60% of energy production is “wasted energy.” Oil still provides 33% of all energy consumed, while wind supplies only 1.1%, and solar only 0.2%. And the EIA projects that global demand for energy will increase by 37% in the next 25 years.

But Lucas says things are changing. Solar electricity, and ways of storing it, are becoming cheaper and better. China invested $56 billion in renewable energy in 2013, and it installed 13 gigawatts of solar, more than its new fossil-fuel and nuclear capacity combined. Wind now provides a third of Denmark’s energy supply and a fifth of Spain’s. Solar is becoming competitive with traditional fossil fuels, and costs are continuing to decline.

Lucas says solar is pulling ahead of wind. In 2013, additions of solar electricity generation exceeded that in wind for the first time. The cost of solar panels has reduced by a factor of five in the past six years. EIA predicts that solar will provide 16% of world electric power by 2050.

Lucas also describes “distributed generation” – domestic fuel cells, rooftop solar generation, “net metering rules” — and breakthroughs in electricity storage, up to now the stumbling block for wind and solar generation, which is intermittent and unreliable. And he recounts breakthroughs in reducing energy consumption, including better building insulation and more efficient vehicles. Lucas mentions Austin, Texas, where “7,000 households have signed up for a scheme in which they get an $85 rebate on an internet-enabled thermostat.” With those thermostats, “Austin Energy can shave 10 MW from its summer peak demand.”

Lucas’s five keys for the future of energy: (1) abundant energy, largely from the growth of cheap solar; (2) development of storage technologies; (3) growth of distributive energy – making consumers small producers and storers of energy; (4) intelligent use of energy – smart meters, better management of electricity distribution, “smart grids”; and (5) new business models to finance these new energy systems.

A good read.

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The State of Texas and the EPA have been at loggerheads on energy policy and federal regulation for some time. The latest blast from Texas comes in response to the EPA’s new proposed regulations to limit carbon emissions from power plants.  On June 2, the EPA published proposed rules that would require states to develop a program to reduce their carbon emissions. Under the proposed rules, each state is given a target for emissions reductions by 2030. Texas’ target: to reduce carbon emissions from power plants by 38 percent by 2030. States are given broad flexibility in how to achieve their assigned target.

Texas emitted 656 million metric tons of carbon dioxide in 2011, nearly twice as much as California, and about 12 percent of the nation’s total. Power plants in Texas emit about 40 percent of Texas’ carbon dioxide. Texas generates more electricity than any other state, and a large portion of that comes from coal plants.

EPA measures states’ emissions of carbon dioxide in pounds of carbon dioxide per megawatt-hour of electricity produced. Texas emits about 1,284 pounds of carbon dioxide per megawatt-hour of electricity produced. More than 30 other states emit more carbon per megawatt-hour than Texas. Under EPA’s proposal, 13 other states must make a larger percentage reduction in emissions per megawatt-hour than Texas, including Washington, Oregon and New York.

Governor Perry called the proposed regulations a part of the Obama administration’s “war on coal,” and said that the new regulations would devastate an important industry and “only further stifle our economy’s sluggish recovery and increase energy costs for American families.”  But in an Austin American Statesman article, Asher Price quotes Michael Webber, deputy director of UT’s Energy Institute, as calling the EPA proposal a “hug to Texas from Obama.” Texas has abundant natural gas, wind and solar resources, which could easily replace coal-fired power plants, resulting in a boon to Texas’ economy, according to Weber. Asher quotes Jim Marston, head of Texas’ office of the Environmental Defense Fund, as saying: “If Rick Perry were governor of West Virginia,” a coal-dependent state, “I could see why he might say this could harm the state’s economy some. The fact he’s from Texas and criticizes this rule is simply crazy.”

A New York Times article, “Taking Oil Industry Cue, Environmentalists Drew Emissions Blueprint,” says that the proposed EPA regulation is based largely on a proposal drawn up by the Natural Resources Defense Council.

The proposal is highly innovative in leaving details to the states, but also more vulnerable to legal attack. Asher Price’s article quotes Scott Tinker, head of the University of Texas Bureau of Economic Geology, as saying that top-down regulation like that proposed by the EPA has not significantly reduce carbon emissions in other parts of the world. At the end of the day, Tinker said, “Will (the EPA regulations) even matter?”

An op ed piece in the American Statesman by Roger Meiners, a professor of economics at the University of Texas at Arlington, criticizes the EPA proposal, saying that Obama’s “war on coal” will only harm the economy and that carbon emissions from coal will increase in other countries and increase fuel prices. He advocates government programs to encourage carbon capture projects.

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In November, Texas Monthly hosted a panel discussion at Rice University’s Baker Institute for public policy about the boom in shale oil development in the US. The panel members: Arthur E. Berman, a Sugar Land-based geologist; Scott W. Tinker, the director of the Bureau of Economic Geology at the University of Texas at Austin; and Kenneth Medlock III, an energy fellow at the Baker Institute. You can watch the panel discussion on Texas Monthly’s website, here. It’s worth an hour of your time. 

These guys know a lot about energy in general and oil and gas in particular. I have previously written about Arthur Berman, a “shale skeptic,” who has never believed that the shale boom would last. Scott Tinker is the narrator of the documentary “Switch,” an examination of the modern world’s thirst for and sources of energy.  In addition to the film, Dr. Tinker has created a website, http://www.switchenergyproject.com/, that provides additional short videos and other resources to further explore questions surrounding energy, including carbon capture, global warming, hydraulic fracturing, and alternative energy technologies. He interviews many world experts on global energy issues.  He is to my mind one of the most even-handed and level-headed thinkers and explainers of the complex issues surrounding energy issues.

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Texans for Public Justice, www.tpj.org, issued its report on 2012 Election Cycle Spending by Texas political action committees.  You can see it here. Some highlights:

Of the $70 million spent by Texas business PACs in 2011-12, $11.9 million, or 9%, was spent by PACs devoted to energy and natural resources issues/candidates. Here are the top spenders:

Energy PACs.JPG

The above figures represent spending by these PACs both in-state and out-of-state.

Energy Future Holdings is the successor to TXU Corp., acquired by EFH in a $45 billion leveraged buyout. EFH, now threatened with bankruptcy, is one of the state’s largest electricity generators. The five EFH PACs spent more than $750,000. 

Valero Energy’s PAC spent $729,000 of its $2 million in Texas and was a larger supporter of Senator Ted Cruz. ConocoPhillips’ PAC spent $221,000 in Texas and gave large sums to Texas Railroad Commissioners.

Lawyer and lobbyist PACs were also big spenders:

Lawyer PACs.JPG

In 2010, Public Citizen issued a report on political contributions to Texas Railroad Commissioners. It found that total funds raised by commissioners increased from $511,000 in 2000 to $3.5 million in 2007-2008. Industry donors increased from $230,000 in 2000 to more than $2.1 million in 2008:

RRC contributions.JPG

Contributions to sitting commissioners increased substantially in 2006 and 2008 election cycles:

contributions to sitting commissioners.JPG

Public Citizens’ conclusions:

  • Most of the increase in funding of commission races is driven by industry and those who have an economic interest in the decisions made by the commission.
  • Increased spending by large donors is likely putting pressure on smaller, independent operators to contribute.
  • Fundraising rarely ceases, except just after an election.

The Railroad Commission has been up for review by the Texas Sunset Commission in the last two sessions of the Texas Legislature, and both times the legislature failed to enact any of the recommendations of the Sunset Commission — save one. In 2012, the legislature passed a bill requiring commissioners to resign if they decide to run for another elective office.  Governor Rick Perry vetoed that bill.  Among the Sunset Commission’s recommendations was that the commission should levy more fines for violation of commission rules.  In the first quarter of 2013, the commission issued almost 14,000 notices of violations; it collected less than $200,000 in fines.

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