Here are some interesting articles I have found:
On Texas’ drought, from the PBS News Hour:
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Good Reading/Watching
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Goodbye to Aubrey McClendon?
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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Another Hydraulic Fracturing Study
The Pacific Institute has issued a study of issues related to hydraulic fracturing and water resources: Hydraulic Fracturing and Water Resources: Separating the Frack from the Fiction. The Pacific Institute is a non-profit research and policy organization based in Oakland, California. The study is largely a summary of interviews of environmental and industry experts and of research in the area; it provides a good summary of the present issues surrounding fracing and the literature on the subject.
The authors comment on the debate of whether hydraulic fracturing is the cause of any groundwater contamination by characterizing it as an issue of definition: those in the industry, they say, define the term narrowly as including only the actual process by which fluids are injected into the wellbore under pressure to fracture the formation. The authors elect to define the term more broadly, “to include impacts associated with well construction and completion, the hydraulic fracturing process itself, and well production and closure.” It is true that people outside the industry have tended to use the term “fracing” to include anything that can go wrong in the process of drilling, completing and producing a well and cause contamination. It is a mistake, however, to use the term to include risks of contamination from well construction, production and closure; those risks occur with all wells, whether they are vertical or horizontal and whether they are completed in shale or conventional formations.
The authors discuss the following issues surrounding “fracing,” as they broadly define it:
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Lease Ratifications
I have recently been asked to review requests for lease ratifications sent to my clients, and I thought that ratifications would be a good topic for this site.
Companies generally ask owners of royalty and non-executive mineral interests to ratify oil and gas leases covering the lands in which they own an interest. The companies ask for the ratification because they want the right to pool the royalty or non-executive mineral interest covered by the lease. In Texas, even though the holder of the executive right (the right to lease) has the right to negotiate and grant leases covering the interests of royalty and non-executive mineral owners, the holder of the leasing right does not have the right to grant the lessee the right to pool those interests (unless that right was expressly granted or reserved in the instrument creating the royalty or non-executive interest). In order for a pooled unit to be effective as to a royalty or non-executive mineral owner’s interest, the owner must either agree to the pooled unit or grant the lessee the right to pool his/her interest.
A non-executive mineral owner is the owner of a mineral interest who has given up the right (by conveyance or reservation) to lease his/her interest. The non-executive mineral owner has the right to receive his/her share of any bonus and royalty paid pursuant to the lease granted by the holder of the leasing right.
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News Around the Oil Patch
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MIT Study of Relationship Between Oil and Gas Prices
One of the remarkable aspects of the oil and gas markets over the last few years has been the rapid decline of natural gas prices despite the continuing high price of crude oil. Historically, analysists have assumed that there is a relationship between the price of the two commodities. After all, both are basically sources of stored energy, which can be measured in British Thermal Units, or Btus. One barrel of crude oil has about the same energy as six million Btu of natural gas, so it has been assumed that one barrel of crude should have about the same value as six MMBtu of gas. When companies report their reserves, they often use the term BOE, or “barrels of oil equivalent,” meaning that they convert their gas reserves to oil barrels using this 6-to-1 ratio. But at today’s prices, the ratio on a Btu basis is closer to 12-to-1; it has been as low as 2.5-to-1 and as high as 19-to-1. So why is there now such a de-coupling of oil and gas prices?
I recently ran across a paper published by two MIT professors titled “The Weak Tie Between Natural Gas and Oil Prices,” by David J. Ramberg and John E. Parsons. You can find it here. The authors ask the question: Is there a relationship between the price of oil and the price of natural gas? If there was formerly such a relationship, has it been broken? They use historical data and analysis to answer these questions. Their conclusion:
despite large temporary deviations, natural gas prices continue to exhibit evidence of a cointegrating relationship with crude oil prices, and gas prices consistently return to a long-run relationship. However, this relationship has apparently shifted at least once over a 12-year period to a new equilibrium. There is no statistical evidence to support the claim that a relationship between the two price series has been completely severed.
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Groundwater Districts’ Regulation of Water Supply Wells – What Landowners Should Know
A lot has been written lately about the amount of groundwater being used for hydraulic fracturing in shale plays – particularly in the Eagle Ford Shale, and more recently in the Permian Basin. This raises the question whether — and to what extent — exploration companies’ water wells used in fracing are subject to regulation by groundwater districts in Texas. It turns out that this is not an easy question to answer.
I am indebted to Mary K. Sahs (Carls, McDonald & Dalrymple, LLP), an Austin attorney who specializes in water law and who has written an excellent paper, Frac Water – Regulation of Quantity and Quality, and Reporting by Texas Groundater Conservation Districts, for the State Bar conference “The Changing Face of Water Rights” held on February 23 of this year in San Antonio, for a thorough explanation of this subject. I have borrowed liberally from her work.
Groundwater conservation districts are governed by the Texas Water Code, Chapter 36, and by any special provision in the law that authorized creation of each district. Section 36.117 (b) (2) of the Water Code provides that the following are exempt from regulation: “drilling a water well used solely to supply water for a rig that is actively engaged in drilling or exploration operations for an oil or gas well … located on the same lease or field associated with the drilling rig.” This has been referred to as the exemption for “rig supply wells.” Rig supply wells are still subject to any water well spacing rules imposed by the water district, and the district may require the well to be registered and may require it to be properly equipped and completed.
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EPA Region 6 Administrator Al Armendariz Resigned
Controversial EPA Administrator Al Armendariz has resigned his post as Administrator of Region 6, which includes Texas, after Senator James Inhofe (R-Okla.) called for an investigation of the EPA’s actions related to oil and gas exploration. Armendariz was previously a professor at Southern Methodist University in Dallas. Prior to his appointment by the Obama administration he published a highly criticized study of air quality in the DFW area that found that oil and gas exploration in the Barnett Shale is a significant contributor to air pollution in that region. Since his appointment Armendariz has been a lightening rod for the exploration industry’s criticism of the EPA.
In his remarks on the Senate floor, Senator Inhofe highlighted a talk given by Armendariz that was captured on video and recently posted to YouTube, in which he says that, because of the limited number of staff in his office, his approach is to act like the Romans: “They’d go into a little Turkish town somewhere, they’d find the first five guys they saw and they would crucify them. And then you know that town was really easy to manage for the next few years.”. Inhofe also wrote a letter (Inhofe letter 04-26-12.pdf) to EPA Administrator Lisa Jackson, highly critical of Armendariz’s actions.
Armendariz was also responsible for the “emergency order” issued by his office against Range Resources for allegedly contaminating groundwater in Parker County — an allegation since disproven. Recently, EPA voluntarily dismissed its suit seeking to enforce the emergency order, after the Texas Railroad Commission found that Range was not responsible for the methane in the contaminated water well.
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Exxon, XTO and Shale Plays
Fortune Magazine’s April issue has three good articles on the resurgence of oil and gas exploration and production activity US onshore. The lead article, “Exxon’s Big Bet on Shale Gas,” provides a good summary of the growth and success of unconventional shale plays in the US in the last 8-10 years. A second article chronicles the revival of the North American oil and gas industry and its effects on the US economy. The third article is an interview with Daniel Yergin, author of The Prize: the Epic Quest for Oil, and most recently The Quest: Energy, Security, and the Remaking of the Mordern World.
In 2010 Exxon purchased XTO Energy for $35 billion in stock, Exxon’s largest acquisition since its merger with Mobil in 1999. Exxon’s acquisition was an effort to get in on the shale gas revolution by buying XTO, one of the biggest holders of shale gas reserves. Exxon has (wisely in my view) kept XTO as a separate entity, in what Rex Tillerson, Exxon’s CEO, calls “reverse integration.” Since Exxon acquired XTO, XTO’s gas reserves have increased 81% to 82 Tcf. Fifty percent of Exxon’s total reserves are now in natural gas. XTO is Exxon’s big bet on the long-term success of domestic natural gas as the preferred energy source for the US.
US natural gas production has increased 28% since 2005, and about one-third of that production is from shale gas. By 2035 it is estimated that shale gas will make up about 60% of US production. Rex Tillerson believes that natural gas will be the fuel of choice for electricity generation. Exxon estimates that world demand for electricity will grow 80% by 2040 and that natural gas will pass coal as the world’s second-largest fuel source (behind crude oil) by 2025. Daniel Yergin: “I believe natural gas in the years ahead is going to be the default fuel for new electrical generation. Power demand is going to go up 15% to 20% in the US over this decade because of the increasing electrification of our society — everything from iPads to electric Nissan Leafs. Utilities will need a predicable source of fuel in volume to meet that demand, and natural gas best fits that description.”
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Report Card on HB 2259 – Inactive Wells
In its 2009 Legislative Session, the Texas Legislature passed House Bill 2259, whose stated purpose is to ensure that inactive oil and gas wells get plugged and that surface equipment associated with those wells gets removed. I provided a summary of the bill’s terms in a post on this site. A summary of the bill’s requirements from the Texas Railroad Commission may be found here. The Texas Land and Mineral Owners Association, which lobbied for the bill, has now issued its report card: the Railroad Commission is not doing its job.
HB 2259 does not actually require that inactive wells be plugged. It imposes requirements on operators of inactive wells, depending on how long the wells have been inactive, to: disconnect the wells from electricity; post additional bonds to assure that the wells will eventually be plugged; and remove surface equipment from the wells. These provisions are phased in over a 10-year period. HB 2259 provides that an operator who does not comply with the new requirements will lose its operating permit (known as a P-5) — meaning that it will not have the right to continue to operate any wells in the State.
Recently, TLMA asked the RRC how many P-5 permits have been denied because of failure to comply with HB 2259. The answer: none. Even though, according to TLMA, almost 1,500 operators failed to comply with the statute.