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This summer, the Department of Interior’s Bureau of Land Management issued proposed rules relating to disclosure of the content of frac fluids and handling of frac fluids used in wells drilled on puclic lands managed by the BLM. Last week a group of Congressmen led by Congressman Edward J. Markey, D. Mass., head of the House Natural Resources Committtee, have submitted an extensive letter commenting on the proposed rules.

The letter criticizes BLM’s rules for (1) not requiring disclosure of chemicals in frac fluids prior to drilling of a well rather than after the fact, (2) proposing to use FracFocus as the method for disclosure of frac fluids, (3) allowing flowback fluids to be stored in earthen pits, (4) not imposing requirements for proper well construction, cement and casing design and installation, and (5) not establishing minimum setbacks between wells and public buildings to minimize harm from air emissions during well completions.

As I have reported earlier, the Texas Railroad Commission recently published proposed rules tightening regulations on well construction and cementing, as well as more stringent regulation of disposal wells, to better protect against contamination of groundwater.

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The 5th Circuit affirmed a judgment today against Chesapeake Exploration for $19,951,004 in favor of Peak Energy Corporation, for breach of a contract to purchase oil and gas leases in the Haynesville Shale area of Harrison County, Texas. Coe v. Chesapeake Exploration, No. 11-41003.  The Court’s summary of the case:

In July 2008 Chesapeake Exploration LLC entered into an agreement to purchase deep rights held by Peak Energy Corporation in certain oil and gas leases in the Haynesville Shale formation, for the hefty sum of $15,000 per acre. When the price of natural gas plummeted several months later, Chesapeake refused to honor its commitment. In response to the complaint filed by Peak it contended that the parties’ agreement was unenforceable under the Texas statute of frauds, fatally indefinite, and that the plaintiffs had failed to tender performance. The district court disagreed, rendering judgment in favor of Peak and its principals and awarding them damages in the amount of $19,951,004, prejudgment and post-judgment interest, and attorneys’ fees and costs. Finding no error, we affirm.

In 2008, gas prices were high and the boom was on in the Haynesville Shale. Chesapeake was buying all of the acreage it could find. Its brokers identified leases covering 5,405 acres in Harrison County, Texas owned by Peak Energy, and on July 2, Chesapeake sent Peak a letter offering to buy all rights in its leases below the base of the Cotton Valley formation for $15,000 per net acre, with Peak delivering a 75% net revenue interest and reserving an overriding royalty on any excess over 75%. A map generated by Chesapeake was attached to the letter agreement showing the tracts Chesapeake had identified in which Peak had leases. The letter said that it was a “valid and binding agreement,” and that the closing would occur on August 31. Peak signed and returned the letter.

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The Texas Supreme Court issued two important condemnation cases on the last day of its term, both reversing judgments after jury trials in condemnation suits.

In City of Austin v. Harry M. Whittington, the court resolved the Whittington’s ten-year battle with the City over condemnation of a city block adjacent to the City’s convention center. The jury found that the City’s determination that its condemnation of the property was for a “public use” was fraudulent, in bad faith, and arbitrary and capricious. The Court said that “the Whittingtons do not dispute the underlying facts on these issues; rather, they dispute the legal effect of those facts (e.g., whether those facts amount to fraud, bad faith, or arbitrariness and capriciousness). Because these issues are legal questions, we review them de novo.” In other words, the Court held that it was not bound to support the jury’s verdict, but could look at the evidence and decide for itself. It decided that the evidence did not show that the City was guilty of fraud, bad faith, or arbitrary or capricious behavior. The City condemned the block for a private developer to build a parking garage for the convention center. Two Justices dissented.  (My firm represented the Whittingtons in this case.)

In Enbridge Pipelines (East Texas) L.P. v. Avinger Timber, the jury awarded Avinger $20,955,000 for Enbridge’s condemnation of a site owned by Avinger on which a gas processing plant was located. The site was subject to a long-term lease that expired, and when the parties were unable to agree on terms for extension of the lease, Enbridge sued to condemn the property. The issue on appeal was whether the testimony of the valuation experts for Enbridge and Avinger was admissible. The Court held that both experts’ testimony was inadmissible and remanded the case to the trial court for a new trial. The Court held that the landowner’s appraiser violated the “value-to-the-taker” rule–meaning that he impermissibly took into account the unique value of the land to the condemning gas processing company (as opposed to considering the value to a hypothetical willing buyer, as the law requires). In particular, the appraiser had taken into account the cost to the company of removing the plant on the land if it were sold; the Court held that the appraiser should not have factored in those costs because that was a cost unique to the condemnor and not one that impacted the value of the land to a potential buyer.

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The Texas Railroad Commission has been issuing new rules and proposed rules affecting oil and gas exploration activities that landowners should know about.

New Penalty Guidelines

The RRC proposed new rules earlier this year establishing guidelines for penalties for violations of RRC rules. This month, the RRC adopted those proposed rules. In the last Texas legislative session, the RRC was criticized by the Sunset Advisory Commission for not enforcing its rules more vigorously. The Sunset Commission said that the RRC’s current “voluntary compliance” policy contributes to “a public perception that the Commission is not willing to take strong enforcement action.” It said that operators must have a reasonable incentive, a realistic threat of penalties that are greater than the savings achieved by violating the rules. The Legislature did not act on the Sunset Commission’s recommendations, but postponed consideration of the RRC’s report until the next legislative session.
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A new documentary by Scott Tinker and Harry Lynch is now being rolled out at select screenings. http://www.switchenergyproject.com/aboutfilm.php#about Dr. Tinker was Director of the Bureau of Economic Geology, a joint organization of the University of Texas and the State of Texas, and a professor at UT’s Jackson School of Geology, as well as the State Geologist of Texas. Their film has won the award as best film at the Colorado Environmental Film Festival, and other film recognition. It is now being screened at selected cities across the country, and in Canada and Australia. I have heard Dr. Tinker speak, and he has a wide knowledge of energy issues. The film took three years to make. There are other good films at the Switch Energy Project website: http://www.switchenergyproject.com/topics/alltopics

Be sure to see the film if you get a chance.

 

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I recently spoke at a Continuing Legal Education Program for Texas real estate attorneys about regulation of hydraulic fracturing. My job was to give a short overview of the development of fracing and horizontal drilling in the US and its impact on production and the economy. Here are some slides I used in the presentation.

Below is a photo of a well during the process of fracing. The trucks are big hydraulic pumps, all hooked up to a manifold that is hooked to the well. The earthen tank in the picture is filled with fresh water used in the fracing operation. The water is mixed with sand and chemicals and pumped into the well under high pressure to “frac” the formation. Note that these pad sites are larger than for conventionally drilled wells. One pad site may be used to drill three or six or more wells. The horizontal lateral of the well will be 5,000-8,000 feet.

Frac picture.jpg

 

Below is a schematic for a horizontal well, intended to show the distance horizontally between fresh water aquifers and the depth at which the well is completed, and the multiple layers of casing installed between the well and the aquifer to protect fresh water.  The distance between fresh water zones and the producing formations varies by field. For the Barnett Shale, fresh water is at about 1,200 feet, and the Barnett Shale is it about 6,500-8,000 feet. For the Haynesville Shale in Lousiana and East Texas, fresh water is at about 400 feet and the formation is at 10,500 to 13,500 feet. For the Marcellus Shale in Pennsylvanie, freshwater is at about 850 feet, and the formation is between 4,500 and 8,500 feet. Here is a video from Chesapeake showing how wells are drilled horizontally.

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Last year, researchers at Duke University published a controversial study of groundwater in Pennsylvania showing that water wells in close proximity to Marcellus Shale gas wells had higher concentrations of natural gas in the water than more-distant water wells in the same aquifer. (See my prior post here.) The same authors have now published a new study, “Geochemical evidence for possible natural migration of Marcellus Formation brine to shallow aquifers in Pennsylvania,” in the Proceedings of the National Academy of Sciences. The study concludes that the data “suggests conductive pathways and specific geostructural and/or hydrodynamic regimes in northeastern Pennsylvania that are at increased risk for contaminaion of shallow drinking water resources, particularly by fugitive gases, because of natural hydraulic connections to deeper formations.”  The authors suggest this as a reason that gas can be found more abundantly in water wells near recently completed Marcellus wells.

The study analyzed chemical content from 426 samples of groundwater and compared the salts present in those waters to the salts contained in brine water from the Marcellus formation. For some wells, they found that the salts in the groundwater had the same chemical composition as the salts in the Marcellus formation, indicating, they say, that the groundwater must be contaminated with saline water that migrated over time from the Marcellus. The authors suggest that, because there is no correlation between the salinity of these water wells and proximity to Marcellus gas wells, “it is unlikely that hydraulic fracturing for shale gas caused this salinization and that it is instead a naturally occurring phenomenon that occurs over longer timescales.” They conclude that, because of the “longer timescales” for migration of salt water into the aquifers, “the possibility of drilling and hydraulic fracturing causing rapid flow of brine to shallow groundwater in lower hydrodynamic pressure zones is unlikely but still unknown. By contrast, the time scale for fugitive gas contamination of shallow aquifers can be decoupled from natural brine movement specifically when gas concentrations exceed solubility … (i.e., bubbles).” The authors conclude: “the coincidence of elevated salinity in shallow groundwater with a geochemical signature similar to produced water from the Marcellus Formation suggests that these areas could be at greater risk of contamination from shale gas development because of a preexisting network of cross-formational pathways that has enhanced hydraulic connectivity to deeper geological formations.”

The authors cite two studies that they say document cross-formational pathways allowing deeper saline water to migrate into shallower aquifers in western Texas: Metha S, Fryare AE, Banner JL (2000 Controls on the regional-scale salinization of the Ogallala aquifer, Southern High Plains, Texas, USA. Appl Geochem 15:849-864; and Hogan JF, et al. (2007) Geologic origins of salinization in a semi-arid river: The role of sedimentary basin brines. Geology 35:1063-1066.

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A new industry has sprung up in the metropolis of Carrizo Springs, Texas, in the heart of the Eagle Ford Shale Play: lodging for oil field workers — and lodging in style. In an attempt to keep workers in the field, companies are putting up their workers in plush hotel-like “lodges.” Amenities include three meals a day, laundry and dining facilities, media and recreation rooms, 24-hour business centers, free Wi-Fi, Blu-ray players and flat-screen TVs in all rooms, microwaves and movie rentals. Operators of these facilities rent out blocks of rooms to operators and their vendors, sometimes keeping different companies’ employees together and away from their competition, to lessen the risk of raiding competitors. One facility has a 2,000-seat cafeteria, broken up into four separated dining areas with the kitchen in the middle, allowing one company to have a dining room all to itself, to keep out rival companies’ employees. Check out these new examples of “remote workforce housing”:

http://www.oasislodgetx.com/Accommodation.aspx 

http://www.remotelogisticsinternational.com/camps/carrizo-springs-lodge

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The fall of Aubrey McClendon, CEO of Chesapeake Energy, has been meteoric. He was forced to step down as Chairman of its board, and yesterday he was replaced as board chair by Archie Dunham, the 73-year-old former CEO of Conoco. Aubrey’s fall from grace started only a few months ago with articles in the business press about his deal with Chesapeake to own a small interest in every well Chesapeake drilled. Aubrey was borrowing heavily against his personal interests, to the tune of $1 billion, to keep his ship afloat. Then there were allegations about McClendon’s personal trading in futures that “could have been” opposed to the company’s interests, for which the he and the company are now under an SEC investigation. Chesapeake’s shares started falling, and shareholders began complaining about him and his board. At the company’s recent shareholder meeting four board members were forced out, and two who stood for election were soundly defeated. Carl Icahn smelled blood, bought 7.6% of the company, and installed one of his own as a board member. For now, McClendon remains CEO. Archie Dunham’s job is to sell some $7.4 billion of Chesapeake’s properties to get it out of its hole.

McClendon co-founded Chesapeake with Tom Ward in 1989, with $50,000 and 10 employees. He made the company into the nation’s largest domestic gas producer by investing heavily in shale gas plays across the country. In my opinion, he is responsible for the huge resurgence in domestic exploration, and in the rapid increase in gas production — and the precipitous decline in natural gas prices — over the past few years. McClendon and Boone Pickens were the promoters of natural gas, touted as the fuel of the future and the solution to global warming. McClendon is hated by other independents for sweeping into new shale plays with his pocketbook open and offering $25,000 per acre for leases.  

I’m no financial expert. But it seems clear to me that Chesapeake’s problems arise from the huge decline in oil and gas prices, and not from any sculduggery by McClendon. In all the press coverage, I have not read anything to indicate that McClendon actually did anything for his personal benefit and against the interests of his company. He may have had bad judgment in betting so big on natural gas, but that is his nature. He is a landman, a speculator, and a wildcatter.

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John McFarland
 Graves, Dougherty, Hearon & Moody, P.C.
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