Archive for the ‘Marcellus Shale’ Category

Do We Have Your Attention Now?

via WikiMedia Commons

via WikiMedia Commons

Depend upon it, sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully. – Samuel Johnson

Nobody ever said it would be easy. There’s lots of natural gas in the ground. We’ve been siphoning it up from the ground for years. But supplies dwindled as traditional fields yielded less and less gas. Fracking has brought a new production bonanza to states around the Union. Inevitably, protests have come hand in hand with increased production. This summer has been dubbed #FearlessSummer by environmentalists opposed to the extraction and carbon energy industries.

Fracking is dirty work. It can pollute ground water, endangering wells and agricultural water, and it produces a tremendous amount of waste. The byproduct of fracking is a wicked stew of proprietary chemicals and water used to force natural gas out of its ancient hiding places underground.

One of the sources of particular ire in the environmental circles is the seeming impunity with which energy companies have been able to pursue natural gas over hill and under dale. The companies rely on eminent domain to site their drilling rigs, and have been largely shielded from liability for environmental damage they have caused while feeding the country’s unquenchable demand for energy.

XTO Energy, a subsidiary of ExxonMobil settled with the Environmental Protection Agency over a 50 thousand gallon spill of fracking slurry at one of its storage tanks in Pennsylvania. Without admitting liability, it agreed to pay a $100,000 fine and implement a more rigorous waste water management regime. It also hauled away some 3,000 tons of contaminated soil.

All well and good as far as the Feds and XTO were concerned. Environmentalists,  not so much. Also not so pleased – the Pennsylvania state Attorney General. Last Tuesday, Attorney General Kathleen Kane filed criminal charges against XTO over the 2010 spill. Not civil. Criminal. That’s a first. No other Marcellus Shale production company has ever faced criminal charges.

Environmentalists are giddy over the prosecution, comparing it to the genteel supervision the company has received from state regulators. Energy industry representatives went ballistic, as well they might, accusing Kane of doing some polluting of her own – of the business environment – and sending a “chilling message” to the energy business.

But Kane’s office insists it wasn’t going off half-cocked. “The prosecutorial powers of this office are used carefully and with great consideration,” First Deputy Attorney General Adrian R. King Jr. said through a spokeswoman. “We closely examine the facts and the applicable law in each case and proceed accordingly.” And Kane’s office didn’t arrive at the charges by itself. It was a grand jury that handed down the charges.

Settlements like the one XTO reached with federal regulators are just a cost of doing business for an enormous company like ExxonMobil. Criminal charges, on the other hand, take the risk/benefit calculation to a whole new level. The Pennsylvania charges have ignited a furor and are sure to be fought by an industry red in tooth and claw. But as the good doctor observed to his friend Boswell, the gallows sharpens the mind. The prospect of standing in the dock is likely to do the same for the captains of the energy industry.



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.

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.

Responding to Emergencies at Marcellus Shale Sites

Photo by Steve Partridge. Some rights reserved.

The Pennsylvania legislature recently passed a short but sweet bill (SB 995) requiring emergency response information to be posted at the entrance to each “unconventional” well site in the area.

In this case, “unconventional” is a roundabout way of saying “fracking”. Or, more technically, as explained by Buchanan Ingersoll & Rooney in a related alert last week:

The term “unconventional well” is defined to mean a natural gas well for production of gas from an unconventional formation. An “unconventional formation” is one below the base of the Elk Sandstone formation, or its equivalent, where natural gas cannot generally be produced economically except when the well bores are stimulated by hydraulic fracturing, use of multilateral well bores, or other techniques to expose more of the formation of the well bore.

The bill, which was signed by PA Governor Tom Corbett on February 2, requires such well sites to develop an emergency response plan, register the unique GPS coordinate address of the site with the Dept of Environmental Protection, and post a reflective sign at the entrance to each site with its address, emergency contact number and “other such information” deemed “necessary.”

Marcellus Connection quotes State Rep. Brandon Neuman as saying, “It’s very important for our local first responders to know where the drilling is going on […] a lot of the wells are in uncharted territory.”

Marcellus Minerals: Is Marcellus Shale Gas a “Mineral” for the Purposes of Pennsylvania’s Dunham Rule?

Photo by Images_of_Money. Some rights reserved.

Two recent law firm memos (from Fulbright & Jaworski and Pepper Hamilton) tackled the subject when they covered a September 7th decision from the Pennsylvania Superior Court in Butler v. Powers.

The “Dunham Rule” refers to an assumption in Pennsylvania law, wherein a reservation or exception for “minerals” in a deed or lease that does not specifically mention natural gas or oil creates a “presumption that the grantor did not intend for ‘minerals’ to include natural gas or oil.” The Dunham Rule has been around since its namesake case – Dunham v. Kirkpatrick – was decided in 1882.

In Butler v. Powers, a trial court in Susquehanna County had previously found that, based on the application of the Dunham rule, the disputed deed in the case did not include Marcellus Shale gas. However, the Superior Court – without actually deciding on the Dunham Rule’s applicability – remanded the case back to the trial court for determination of the following three things:

(1) whether Marcellus shale constitutes a “mineral”; (2) whether Marcellus shale gas constitutes the type of conventional natural gas contemplated in Dunham and Highland; and (3) whether Marcellus shale is similar to coal to the extent that whoever owns the shale, owns the shale gas.

“Consequently,” the opinion goes on to say, “the parties should have the opportunity to obtain appropriate experts on whether Marcellus shale constitutes a type of mineral such that the gas in it falls within the deed’s reservation.”

But the decision made Pepper Hamilton nervous:

 “Potentially more troubling is the fact that although the dispute between the parties in Butler does not directly involve a deed that explicitly conveys or reserves natural gas rights (since the deed in question used only the terms “minerals” and “petroleum oils,”), the outcome of the case could establish precedent regarding whether a conveyance or lease of oil and gas rights, reserving all other minerals, reserves the unconventional gas trapped in the Marcellus Shale to the mineral title holder.”

Both Pepper Hamilton and Fulbright & Jaworski have pledged to keep a close eye on the case.

Public Company Disclosure of Fracking Activities

Photo by graphiclunarkid. Some rights reserved.

A recent article from Andrews Kurth suggests that the SEC may be paying extra special attention to disclosure relating to hydraulic fracturing in EDGAR filings.

According to Andrews Kurth, the SEC staff has recently issued comment letters “seeking detailed disclosures regarding hydraulic fracturing and shale industry risks and the amount and specific nature of the hydraulic fracturing chemicals used.”

Aside from the usual environmental risk disclosures, of particular interest to the SEC is the companies’ reported performance of their shale gas wells, and whether or not projected performance (and profitability) is overstated to investors. (These purported discrepancies also prompted NY Attorney General to subpoena several energy companies looking for similar disclosure – the topic of a Green Mien post late last month.)

While recent SEC comments cited by the article may not yet be publicly available (the full set of comments and responses is not typically released until the review of the target filings is complete), you can view similar correspondences between the SEC and public companies that have been released on knowledgemosaic’s SEC Filings search page.

Here is an example of an SEC-Company correspondence regarding reported reserves. (Note that SEC comments are filed in EDGAR under the form type “Upload” and company responses are filed under the form type “Corresp.”)

SWIFT ENERGY CO | Form UPLOAD | 2/16/2011

In your February 3, 2011 response to our January 6, 2011 comment, you stated that the shortage of hydraulic fracturing services was a primary cause of the delay in drilling proved undeveloped locations in your AWP field. Your statement, “During 2009 and throughout 2010, as the Company conducted vertical and horizontal drilling operations in this field, there was limited access to hydraulic fracturing equipment and other completion services, requiring the Company to delay and defer some development drilling.” seems to indicate that these shortages were a known factor and should have led to the removal from the proved category of those undeveloped AWP locations that were not scheduled to be drilled within five years of booking. Please remove such locations from your PUD reserves in future Exchange Act filings.


SWIFT ENERGY CO | Form CORRESP | 2/22/2011

Company Response:

As requested, in future Exchange Act filings with the Commission, the Company will not include in its proved reserves any undeveloped AWP locations that are not scheduled to be drilled within five years of booking. This necessarily means that those PUD reserves in the AWP field booked more than five years prior to year-end 2009 which were included in the Company’s proved reserves at year-end 2009, as reported in Swift Energy’s prior Form 10-K, which PUD reserves are the subject of this comment, have been removed from the Company’s proved reserves at year-end 2010.

So what’s a law-abiding company to do? Andrews Kurth offers this advice:

We recommend that public oil and gas companies and public oilfield services companies that provide hydraulic fracturing services review their current environmental disclosures as well as risk factors in light of the Staff’s comments and recent legislative and regulatory developments in the oil and gas and oilfield services industries to see if their disclosures could be enhanced to add more specificity about their hydraulic fracturing operations. Oil and gas companies should also review their reserve estimates and related public disclosures (including disclosures in investor presentations) to ensure that they are accurate and consistent with the SEC’s oil and gas reporting rules.

By revisiting the disclosure matters identified by the Staff during the comment letter process, including disclosures about the uncertainty of reserve estimates, companies may be able to identify and address hydraulic fracturing and reserve disclosure issues proactively in future filings and therefore potentially avoid Staff comments and subpoenas, possible future amendments to their SEC filings and the potential for successful stockholder claims of material misstatements or omissions relating to hydraulic fracturing or reserve estimates.

Be sure to read the whole Andrews Kurth article, which covers the full spectrum of hydraulic fracturing disclosure issues (including disclosures mandated by the EPA, under the Energy Policy Act of 2005, under local and state laws, and more).

Proving Natural Gas Reserves

Photo by todbaker. Some rights reserved.

A piece that ran in the New York Times this weekend covered some juicy leaked industry emails and internal documents that called into question the productivity and profitability of natural gas wells.

One focus of the article was public company forecasts of gas reserves as a metric for a company’s value. Covered by all the rules and regulations that lay the groundwork for registration statements and prospectuses (Regulation S-K, 17 CFR Part 229), any company to whose business operations oil and gas producing activities are material shall not make misleading statements about such reserves.

While the NYT points out that forecasting reserves can be a “tricky science,” at least 17 CFR 229.1202 helps spell out the rules for proper disclosure. If you’re looking for some real-life examples, check out this search on knowledgemosaic’s SEC Filings page. You can see there, for instance, that WPX Energy, Inc is reporting only an estimated 28 billion cubic feet of gas equivalent of proved reserves in the Marcellus Shale, but almost an estimated 3 trillion cubic feet of gas equivalent of proved reserves in the lesser known Piceance Basin.

Are these numbers, as the NYT piece suggests, potentially intentionally overstated? Only time and some tricky science will tell.

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