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