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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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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.

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EPA Dismisses Suit Against Range

The Environmental Protection Agency has thrown in the towel. It dismissed its suit against Range Resources that sought to enforce its emergency order claiming that Range was responsible for contamination of water wells in Parker County. See Bloomberg’s article here.

I have previously written about this controversy. See my previous posts here and here and here and here and here. The EPA alleged that the water well belonging to the Lipskys had been contaminated with methane by Range’s fracing of wells in the area. Range called a hearing at the Railroad Commission and invited the EPA and the Lipskys to attend, but they declined. The RRC found that Range’s well was not the cause of the water well contamination; it concluded that the methane was naturally occurring and was caused when the water well was drilled too deep, into a shallow gas formation. Range fought the EPA’s allegations vigorously. So far, the EPA has been unable to link any groundwater contamination to hydraulic fracturing.

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I love graphs. The Energy Information Administration, the guys that crunch numbers on all things energy-related, have come up with a new way to let us graph-lovers play with their data. The new interface is in its beta testing version, and you can play with it here. The site allows you to create your own graphs by selecting the data you want to depict. This allows you to compare two or more sets of data in graphic form. Here are some examples:

Well Head vs Res Price.jpg

 

Consumption by sector.jpg

production vs consumption.jpg 

 

Imports vs exports.jpg 

 

 

Gasoline price vs stocks - Texas.jpg 

Try it for yourself. It’s fun, and you may learn something in the process.

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Rolling Stone magazine’s Jeff Goodell has weighed in on the debate over natural gas reserves, the safety of hydraulic fracturing, global warming, methane groundwater contamination, and Chesapeake Energy’s controversial finances, in an article titled “The Big Fracking Bubble: The Scam Behind the Gas Boom.” Goodell pulled no punches. He calls Aubrey McClendon, Chesapeake’s CEO, “an influential right-wing power broker.” He says that “Fracking, it turns out, is about producing cheap energy the same way the mortgage crisis was about helping realize the dreams of middle-class homeowners.” He claims that “for Chesapeake, the primary profit in fracking comes not from selling the gas itself, but from buying and flipping the land that contains the gas,” and that Chesapeake “has more in common with Enron than ExxonMobil.”

Goodell’s article covers ground that is not new in the debate over the safety, ecology and economics of hydraulic fracturing. He touches on the study by Anthony Engraffea at Cornell University on whether natural gas has less global-warming effect than coal. He discusses the Duke University study of methane in water wells in Pennsylvania. He quotes Arthur Berman (Berman says miss-quoted), a long-time critic of the industry’s estimates of shale gas reserves.

McClendon says he agreed to talk to Goodell after he was told that the magazine would publish an article on Chesapeake whether it cooperated or not. Chesapeake has issued a rebuttal to the article (“Although our expectations for honesty and fairness were quite low, the writer failed to reach even that low bar.”), and Goodell has responded to Chesapeake’s rebuttal (“The company entirely dodges the article’s central point: that Chesapeake is a highly-leveraged firm operated by a corporate gambler who engaged in complex scheme to profit off the illusion that America has a virtually unlimited supply of cheap natural gas.”). (Isn’t the internet amazing?) 

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This week, the Texas Supreme Court denied Denbury Green Pipeline’s motion for rehearing in Texas Rice Land Partners v. Denbury, leaving essentially untouched its conclusion that pipelines must prove that they serve the public in order to exercise eminent domain power.

I wrote about this case a couple of weeks ago. See my prior discussion here. Pipeline companies had deluged the Court with briefs after its initial opinion, claiming that the Court’s decision will halt pipeline construction across the state.

While denying Denbury’s motion for rehearing, the Court did issue a revised opinion that made some changes to its language. The Court’s opinion adds language responding to some of the arguments of the friend-of-the-court briefs filed by other pipeline companies; and the revised opinion changes the holding as follows:

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The Texas Supreme Court issued its opinion today in Edwards Aquifer Authority v. Day, more than a year after it was argued and some thirteen years after the controversy began. It has been eagerly awaited as the court’s ruling on whether a landowner has a “vested” right in groundwater under his/her land. The Court held that groundwater, like oil and gas, is “an exclusive and private property right … inhering in virtue of [the landowner’s] proprietorship of the land, and of which he may not be deprived without a taking of private property.” The case is being heralded by property rights advocates as a victory for private property rights. The court’s decision, in an opinion by Justice Nathan Hecht, was unanimous.

The opinion is certainly not surprising. It would have been a surprise to most people to learn that they do not have ownership rights in groundwater under their property. But I question whether it is such a victory for property owners and whether it will materially change the current regulatory scheme for groundwater in Texas.

Justice Hecht’s opinion, 49 pages, includes a good summary of the history of groundwater regulation and litigation in Texas over the last 100 years. Remarkably, in all that time the Court had never ruled on the question of whether landowners have a property right in groundwater. The court held that the same rules should apply to groundwater as apply to oil and gas – in both, the landowner has an ownership right in the substance under his/her land, subject to being divested of that ownership by drainage from wells on adjacent lands, and subject to reasonable regulation by the state.

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Because of the Texas Supreme Court’s recent opinion in Texas Rice Land Partners v. Denbury Pipeline, Texas landowners across the state are questioning the right of pipeline companies to exercise the right of eminent domain to condemn easements over their land, including the right of Keystone Pipeline to condemn easements for its pipeline from Canada and through East Texas to the Texas Gulf Coast.

In the Denbury case, the Supreme Court held that a pipeline does not acquire condemnation authority merely by obtaining a permit from the Railroad Commission and subjecting itself to that agency’s jurisdiction as a common carrier. The Commission makes no determination whether the intended use of the pipeline is in fact “public.” The court then held that in order for a pipeline to serve a public purpose and thus have condemnation power, “a reasonable probability must exist, at or before the time common-carrier status is challenged, that the pipeline will serve the public by transporting gas for customers who will either retain ownership of their gas or sell it to parties other than the carrier.” Once a landowner challenges its status as a common carrier, “the burden falls upon the pipeline company to establish its common-carrier bona fides if it wishes to exercise the power of eminent domain.”  The court also held that one affiliated company transporting gas solely for the benefit of another affiliate is not a public use of the pipeline. The court said that the question of whether the pipeline is dedicated to a “public use” is ultimately a judicial question.

The court’s opinion has caused a firestorm in the pipeline industry, which claims that the case will halt construction of pipelines across the state. Denbury has asked the court to re-hear the case, and at least sixteen amicus briefs have been filed. One of the most interesting is from ETC NGL Transport LLC, which is in the process of condemning a 125-mile pipeline route to transport natural gas liquids from the Eagle Ford shale to facilites in Mont Belvieu, Texas. ETC claims that a county court at law in Harris County has enjoined ETC from “taking possession of the easement [that ETC has condemned] based on an implied finding that ETC is not a common carrier.” ETC claims that, “due to this Court’s Denbury opinion, landowners were able to convince a county court at law that ETC, which is clearly a common carrier, is not a common carrier.”

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Texas is in the middle of one of the most severe droughts in recorded history. The population of the state is growing rapidly, and projections are that such growth will continue. Much of Texas is arid semi-desert, with limited rainfall in normal years. Will water become the limiting factor in Texas’ growth?

With water so much on everyone’s minds, I thought it would be a good idea to review some basic facts about water. The following information is from a presentation made by Tom Mason, former General Manager of the Lower Colorado River Authority, who is now a shareholder at my firm, Graves Dougherty Hearon & Moody.

Water on earth:

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The law school at Texas Wesleyan is hosting a two-day conference on oil and gas law that is packed with good speakers and very inexpensive – $140 for both days.

TWU 2012 Energy Symposium.pdf

There is a lot on the program about the Marcellus Shale. To see the program, go here: 

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