Archive for the ‘Gas and Oil Leases’ Category

Is U.S. Natural Gas Boom Due to Good Government?

Photo by Dru Bloomfield, some rights reserved.

The economics of the energy industry are perennially unstable due to resource availability and regulatory uncertainty, and we are barraged with data about the latest developments every week. Haynes and Boone just released a memo detailing that oil and gas companies paid landowners $21 billion in 2010, and we have written about the average cost of producing oil in the Arctic versus in the Gulf of Mexico and West Africa. Often it is useful to look at all these developments with a different perspective in mind.

Today’s post looks further at the reasons for the U.S.-led surge in shale drilling, considering the arguments of BP’s chief economist that stable property rights in addition to “open access and sound government” – as opposed to dumb luck and fortunate geology – unleashed the recent boom in natural gas extraction. Evidence he offers to support this claim is that natural gas drilling has not taken off outside North America. India and parts of Latin America and Africa also have generous supplies of accessible shale gas, but the market pricing of energy and private-sector drive in the U.S. have enabled natural gas development to become a natural gas boom unlikely to be copied elsewhere anytime soon.

The answers to the questions these politically-driven tidbits touch on will require some serious economic analysis, but still they are a useful reminder that geology is not the only factor in the cost of energy extraction. While production costs in the Arctic may be so much higher than in West Africa for reasons of the physical difficulty of drilling, Canadian and American market pricing, infrastructure, and private property rights certainly drive some of the natural gas industry’s ability to expand so quickly.

Salazar Departs Interior, Remembered for Advancing Renewables

Photo by Bob Johnson, USFWS Mountain Prairie, some rights reserved.

Photo by Bob Johnson, USFWS Mountain Prairie, some rights reserved.

One of the stars of the Green Mien since its inception has been Ken Salazar, Obama’s Secretary of the Interior, who announced he would be leaving Washington to return to his home in Colorado in March. He focused Interior on renewable energy and reorganized the formerly scandal-ridden agency into three agencies with clear and separate functions. We have written about his hand in the Extractive Industries Transparency Initiative, in developing oil drilling plans in Alaska, in offshore oil and gas oversight, and much more.

The White House has given no indication as to who might succeed him, and combined with the departure of EPA’s administrator Lisa Jackson and DOE’s Steven Chu, continuity of the Obama Administration’s policies toward energy development and climate change is in question. As these vacancies are filled, expect to read about expectations for the new administrators’ goals and policies here.

Salazar has broadened the scope of Interior’s activities from its traditional focus on mining, forestry, and oil and gas development to an emphasis on renewable energy. Since 2009, the department has authorized 34 solar, wind, and geothermal energy projects, settled a 15-year legal battle with American Indian tribes, and established seven new national parks. His handling of contentious oil and gas issues, like the Deepwater Horizon spill and allowing Shell begin exploration for oil in the Arctic, drew the most headlines.

President Obama once rebuked the famously blunt former lawyer for using cowboy language. “We have our boot on their neck to make sure they got the job done,” Salazar explained, referring to Interior’s oversight of BP officials in the Deepwater Horizon spill cleanup. Hopefully we’ll be able to find another character to replace him.

Fracking in California and Moviemaking in Pennsylvania

The Promised Land? Photo by Alan Bowring, some rights reserved.

In July, we wrote about the scramble to regulate fracking. Last month, California entered the fray, releasing a “discussion draft” of hydraulic fracturing regulations and seeking comments from interested parties ahead of the formal rulemaking process set to begin in February.

California’s Department of Conservation’s Oil, Gas, and Geothermal Division released the draft, detailing testing, monitoring, operating, and disclosure requirements (thanks to Arnold Porter for their advisory). The Division will operate a chemical disclosure directory to which operators will have to disclose information about the chemicals and concentrations used as well as data on the amount of fluid recovered. There is a trade secret exemption, but in the case of an operator withholding information, they must submit documentation of the type of information withheld, why it was withheld, and that the proprietary information could not be gathered through testing. However, operators would have to be able to provide the information immediately if necessary to investigate a release of fracking fluid or to a doctor to treat an individual exposed to fracking fluid.

Information from required pre-fracking testing would be available to the public before fracking at a particular well begins, and operators would be required to monitor certain variables in and around a well during fracking and for thirty days after.

A personal tidbit of my own says something on the topic as well.

I just saw Matt Damon and John Krasinski’s Promised Land, which seems to encourage viewers to focus on its exploration of selling mineral rights leases to gas companies rather than its characters and story, so I will do just that. Centered on a Pennsylvania town whose struggling farms are sitting on millions of dollars of natural gas, Matt Damon’s character as a representative of Global Crosspower Solutions claims to be offering the town its last chance to fund and prolong the myth of the small town of family-run farms. At a town meeting, an influential local science teacher raises questions about the risks surrounding the type of drilling Global plans to do – fracking – leaving some of the community hesitant to join farmers promised a big payout in their enthusiasm for the gas company’s drilling plans.

And though the appearance of a fake environmental advocate employed by Global to discredit environmental concerns portrays townspeople as uncritical pawns of interest groups, the point that such tactics may not be far from the truth is certainly taken. The questions Promised Land raises are as much emotional and cultural as scientific and political, but maybe with the information gathered through California’s regulations the debate in the future can be informed by a more measured understanding of its risks.

EPA Struggling to Keep Pace with Fracking

Photo care of geograph. Some rights reserved.

Two reports were released by the Government Accountability Office this week detail challenges facing the EPA in overseeing the oil and gas drilling boom in the U.S. The growth of the dispersed and hard-to-follow fracking industry is the focus of the first report, while the second addresses the public health and environmental impacts of oil and gas development.

EPA officials report that inspection and enforcement of fracking sites is challenging due to limited information on many aspects of the industry. The EPA doesn’t receive information about new well sites in Ohio, for example, and their sheer number makes tracking them difficult. Baseline water-quality data are unavailable in most areas, so assessing groundwater contamination is difficult.

In addition, legal limits on EPA’s authority affects their ability to regulate some aspects of the fracking process. Exploration and production waste, for example, are not regulated under hazardous waste provisions in the Resource Conservation and Recovery Act. The Hill, with more details on the reports (here and here) notes that attempts to increase regulation of the industry have not advanced in Congress.

The second report notes that though all oil and gas development poses environmental and public health risks, the risks from shale gas development are particularly poorly understood. Studies the GAO reviewed, according to the report, “do not generally take into account the potential long-term, cumulative effects” so the extent and longevity of risks is unknown.

Arctic Drilling: What’s it Worth?

Beaufort Sea, Alaska, one of Shell’s drill sites. Photo by NASA/Kathryn Hansen, some rights reserved.

Last week, Shell called off its plans to drill in the Arctic until next summer after part of its spill-containment system was damaged. Earlier, encroaching sea ice forced the company to abandon its drill site in the Chukchi Sea off Alaska just a day after it started drilling. Now that Shell has spent $4.5 billion on its Arctic drilling sites since 2005, we might ask, is it worth the money?

Geologists from the United States Geological Service sparked a discussion on the costs of drilling in the Arctic this week, including a succinct piece in Grist. Their research suggests that the amount of oil that can be pumped out of accessible fields in the Arctic is significantly lower than previously thought, requiring huge exploration budgets to even access the oil (this considering Arctic oil in Greenland and Russia as well). They estimate that prices of $100 to $300 a barrel would be necessary for Arctic drilling to be economically feasible.

Right now, we know little about the average cost of producing oil in the Arctic besides that it is high. It is worth noting that in the 1970s, Canadian companies ended a decade of exploration projects by sealing off drilling sites because commercial production was too expensive. We do know, however, that in the oil boom in Mozambique, French Guiana, and Angola, marginal costs are less than $70 a barrel, and that plans for drilling there go through the 2020s.

Where does that leave us? Well, with 7,000 blocks of drilling leases over 38 million acres of the Gulf of Mexico up for auction in 2013. Sure seems like there are easier places to get your oil than the Beaufort Sea.

SEC Requires Disclosure of Energy Company Payments to Foreign Governments

The Securities and Exchange Commission on Wednesday approved rules requiring oil and mining companies to disclose payments made to foreign governments. The rule, under Section 1504 of the Dodd-Frank financial reform law (see the full text here through our Dodd-Frank Tracker), requires SEC-listed oil, natural gas, and mining companies to reveal payments to governments related to projects in their countries, including the type and amount of each payment and their totals every year. Money for production licenses, taxes, royalties, among other payments, fall under the rules.

The SEC vote was 2-1 for the rule, but a two-year battle has been raging behind the scenes. Human-rights groups and the oil industry threw their efforts at influencing the final rule. Groups like Oxfam American and the Revenue Watch Institute joined with other anti-poverty and human rights groups to build public pressure on the SEC to approve the draft rules proposed in 2010. They argued that greater disclosure helps ensure that revenues from energy and mining provide public benefit. Secretary of State Hillary Clinton, noting that the EU is considering similar provisions because of Section 1504, lent her weight toward strong rules.

Oil companies, through the influential American Petroleum Institute, demanded that the SEC scale back the rules from their draft phase. They said the rules would make them less competitive, especially when competing with state-owned firms like Russia’s Gazprom and the China National Petroleum Company. They sought provisions such as allowing aggregate payment information by country, and exemption if host countries prohibited such disclosure.

Both sides agree that the goal of the rules is worthy: The “resource curse,” leaving many energy-rich countries in Africa impoverished by corruption and conflict, must be addressed. In favor of the rule, Luis Aguilar, Democratic SEC member, called on the late Supreme Court Justice Louis Brandeis’s saying that “sunlight is the best disinfectant.” But Republican member Daniel Gallagher argued that an SEC rule is a strange way to achieve social and foreign-policy goals.

The rules don’t leave much middle ground, and the SEC estimates that the rule will carry industry-wide compliance costs of up to $1 billion initially, with annual costs between $200 million and $400 million. The only bone thrown to energy companies is a small one: By leaving out any specific definition of the word “project” (emphasized in the section of the rule entitled ‘Definition of the word “project”’), companies have some discretion in applying the rule to their business.

Local Zoning and Natural Gas in Pennsylvania: Court Rules on Act 13

Klingerstown, Pennsylvania. Photo by Scott Bauer, U.S. Department of Agriculture. Some rights reserved.

In February, the Pennsylvania General Assembly passed the Oil and Gas Act, revising the state’s regulation of oil and gas operations. Among other changes, “Act 13” required uniformity of local ordinances and granted the Pennsylvania Department of Environmental Protection the right to use its discretion in granting variances for distance restrictions from water and wetlands. The natural gas industry saw the legislation as a vital antidote to the maze of constantly changing local zoning ordinances in the gas-rich Marcellus region that leads to expensive litigation and increased production and development costs, but not everyone was cheering for Act 13.

Six townships, several individuals, and an environmental group joined Robinson Township in challenging the Act, and the Commonwealth Court issued their decision declaring the sections described above unconstitutional. The Court’s rationale for overturning the uniform zoning provision was that zoning is a police power of local districts and allowing nonconforming use in zoning districts violates substantive due process. In addition, the provision allowing Pennsylvania’s DEP to grant waivers for setback requirements from water and wetlands was declared null because the law offered insufficient guidance to the DEP regarding waiver standards.

Local zoning and setback issues affect the cost, timing, and even feasibility of natural gas production, so the day after the Court’s decision, Pennsylvania Governor Tom Corbett announced an appeal directly to the Pennsylvania Supreme Court. The dissenting opinion, which according to Reed Smith’s Alert  on the ruling could offer suggestions for the appeal, argued that “incompatible uses” can be allowed in a comprehensive zoning framework, and attacked the majority’s attempt to call on substantive due process protections. It noted that most substantive due process cases regarding zoning challenge the ordinances as too restrictive, while the petitioners in this case do the opposite, which is inconsistent with constitutional zoning precedent. Furthermore, the shortcoming the Court sees in DEP guidance regarding setback waivers appears to be something the legislature could rectify easily, according to a Buchanan, Ingersoll & Rooney memo. Finally, the natural gas industry – barred from intervening in the case at the lower level – will be able to participate in the Supreme Court appeal process by filing amicus briefs.

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