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Connect The Dots: Bailouts, Bankruptcy And Gold

Simon Black, Sovereign Man

June 29, 2012
Tel Aviv, Israel

This week may very well go down as ‘connect the dots’ week. Things have been moving so quickly, so let’s step back briefly and review the big picture from the week’s events:

1) After weeks… months… even years of posturing and denial, Spain and Cyprus became the fourth and fifth countries to formally request aid from Europe’s bailout funds on Monday.

In doing so, these governments have officially confessed to their own insolvency and the insolvency of their respective banking systems.

Meanwhile, Slovenia’s prime minister said that his country may soon ask for a bailout. (Humorously, Slovenia’s Finance Minister denied any such plans.)

Spain’s 10-year bond yield jumped to over 7% again in response, and many Spanish banks were downgraded to junk status by Moodys.

2) Over in the US, the city of Stockton, California filed for bankruptcy this week… the largest so far, but certainly a mere drop in the proverbial bucket.

3) JP Morgan, considered to be among the few ‘good’ banks remaining in the US, conceded that the $2 billion loss they announced several weeks ago might actually be more like $9 billion.

4) The Federal Reserve reported yesterday that foreigners are reducing their holdings of US Treasuries.

5) Countries from Ukraine to Kazakhstan to Turkey announced that they have purchased gold in recent months to bolster their growing reserves.

6) Chile has joined a growing list of countries that has agreed to bypass the US dollar and settle all of its trade with China in renminbi.

7) China has further announced plans to create a special zone in Shenzhen, one of its wealthiest cities, to allow full exchange and convertibility of the renminbi.

8) World banking regulators from the Bank of International Settlements to the FDIC are proposing that gold bullion be treated as a risk-free cash equivalent by commercial banks.

So… what we can see from this week’s events is:

- European governments are insolvent
- European banks are insolvent
- US governments are heading in that direction
- Even the best US banks are not as strong as believed
- Foreigners are abandoning the US dollar and seeking alternatives
- Gold is money

These events are all connected, and the trend is becoming so clear that even the most casual observers are starting to wake up.

When you connect the dots, the next steps lead to what may soon be regarded as an obvious conclusion: the system, as it exists right now, is crumbling.

No amount of self-delusion can make this go away.

Rational thinking and measured action, on the other hand, can make the consequences go away… turning people from victims into spectators of the greatest bubble burst in modern times.

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Shale Gas Boom: Hydraulic Fracturing and Potential Legal Claims

Joshua W. Mermis
Friday, June 22, 2012

A “gas rush” is revitalizing the domestic petroleum exploration industry, and the legal ramifications could be felt for decades. Through hydraulic fracturing (fracking), petroleum companies access once cost prohibitive shale gas formations by creating fractures in underground rock formations, thereby facilitating oil or gas production by providing pathways for oil or gas to flow to the well. These pathways are commonly referred to as the “fractures.” The legal consequences of fracking could impact more than half of the Lower 48 states.

Background of Hydraulic Fracturing

The basic technique of fracking is not new. In fact, fracking has been used in wells since the late 1940s. The first commercial fracking job took place in 1949 in Velma, Oklahoma, however, sequestered layers of shale gas were inaccessible until 1985, when pioneers such as Mitchell Energy and Development Corporation combined fracking with a newer technology called directional, or horizontal drilling in the Austin Chalk. Directional drilling gave producers access to the shale gas because it allowed them to turn a downward- plodding drill bit as much as 90 degrees and continue drilling within the layer for thousands of additional feet. The positive results were soon transferred to the Barnett Shale in North Texas. To date, more than one million wells have been fractured.
The “hottest” shale plays are as follows:

  • Bakken (Montana, South Dakota and North Dakota)
  • Barnett Shale (Texas)
  • Eagle Ford (Texas)
  • Haynesville (Arkansas, Louisiana, and Texas)
  • Marcellus Shale (New York, Ohio, Pennsylvania, and West Virginia)
  • Utica (Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Virginia)

Confirmed and/or prospective shale plays are also found in Alabama, California, Colorado, Illinois, Indiana, Kansas, Michigan, Mississippi, Missouri, Nebraska, Utah and Wyoming. Shale plays have been confirmed in countries around the world, but the US is the leader in shale gas exploration.

More Money, More Problems

The new application of an old technology made it possible to profitably produce oil and gas from shale formations. Domestic and international companies quickly rushed to capitalize on the large reservoirs of shale gas. But unlike the preceding decades, where new oil and gas exploration had occurred offshore and in deepwater, oil and gas drilling started to occur in areas that were not accustomed to oil and gas activity. Overnight ranchers became millionaires as landmen leased large swaths of property to drill. The media started reporting about enormous domestic supplies of oil and gas that could be profitably produced from shale formations and politicians touted energy independence that could alleviate the country’s demand for foreign reserves. But with the increased attention came increased scrutiny.

Environmental groups have criticized the industry for fracking. The chief concern is that fracking will contamination of drinking water. Movies such as “Gasland” and “Gasland 2″ fueled the public’s concerns that the drilling caused polluted water wells and flammable kitchen faucets. Additionally, the industry received criticism for the engineering process that involved high-rate, high-pressure injections of large volumes of water and some chemicals into a well to facilitate the fracking. The EPA and state regulatory bodies have become involved in the discussion and new regulations are likely to follow. In the meantime, some lawsuits have already been filed.

Pending Hydraulic Fracturing Litigation

Plaintiffs have filed approximately forty shale-related lawsuits across the country. These lawsuits include: (1) tort lawsuits; (2) environmental lawsuits; or (3) industry lawsuits. As the shale boom accelerates more suits are anticipated.

1. Tort Lawsuits

Tort lawsuits have been brought by individuals and as class actions. Typically the claimants assert claims for trespass, nuisance, negligence and strict liability. Their complaints involve excessive noise, increased seismic activity, environmental contamination (air, soil and groundwater), diminution in property value, death of livestock/animals, mental anguish and emotional distress. The plaintiffs seek actual damages and, in some instances, injunctive relief. A few parties have even sought the establishment of a medical monitoring fund. The majority of these lawsuits have been filed in Texas, Pennsylvania and Louisiana. The first wave of lawsuits has established new law in the respective jurisdictions as the appellate courts weigh in with published opinions on issues that range from oil and gas lease forfeiture, consequences of forged contracts and contract formation.

2. Environmental Lawsuits

Environmental organizations and some citizen groups are seeking to enforce environmental laws and regulations in an effort to protect the environment and the public from what the litigants perceive to be negative consequences of fracking. In some instances they are even seeking to restrict the use of hydraulic fracking until it is proven to be environmentally safe. A popular target among these litigants is federal and state regulatory bodies, such as the EPA, and federal statutes, such as the Clean Air Act.

3. Industry Lawsuits

The final category of lawsuits includes those brought by the industry against the government. Claimants have sought to challenge federal, state and local government actions that have impeded the industry’s ability to drill.

Fracking Lawsuits 2.0 – Transportation, Construction, Personal Injury and Beyond

The survey of current fracking lawsuits does not take into account the claims that will spin out of the new shale plays. In fact, the engineering and logistical side of the fracking process – not fracking itself – will lead to many more attendant claims.

  • Transportation: The survey of current fracking lawsuits does not take into account the claims that will spin out of the new shale plays. In fact, the engineering and logistical side of the fracking process – not fracking itself – will lead to many more attendant claims.
  • Commercial: Lessor involved in mineral disputes will lead to commercial claims. Many lessors will feel they were shorted, or want a better deal as those now positioned to lease their rights sign a more lucrative mineral-rights lease. Company-to-company disputes will also rise as the price of natural gas fluctuates.
  • Construction: The contractors and design professionals building the midstream facilities, among others, will lead to construction-defect and delay claims. Many states have recently adopted anti-indemnity statutes that will impact claims that arise during construction of midstream facilities, pipelines and other infrastructure-related construction projects.
  • Insurance: Coverage issues will arise as parties file first- and third-party claims for myriad reasons. Issues including comparative indemnity agreements, flow-through indemnity and additional insured endorsements, among others, will need to be analyzed.
  • Personal Injury: Additional workers drilling and working the wells will lead to an increase in personal injury and work-place accident claims. Many of the shale plays are located in what have traditionally been considered “plaintiff friendly” venues. A claim in Pennsylvania will have a different value than one located in Webb County, Texas.
  • Product Liability: The products and chemicals used to drill and extract the oil and gas will lead to product liability claims involving both personal and property damage. The BP Deep Water Horizon well-blowout in the Gulf of Mexico will not be lost on those involved in domestic oil and gas exploration.

How To Reduce Future Fracking Litigation Risk?

Parties can act now to discourage litigation or better position themselves in the event they are named in a suit.

1. Institute electronic records protocol

The proliferation of email and increased retention and archival capabilities means that emails never die. A potential defendant would be well served with a protocol in place that outlines to its employees what are acceptable electronic communications.

2. Strictly comply with fracking fluid disclosures

For those parties who could be exposed to claims regarding the fluids used during drilling, it is important that they minimize the public’s suspicion that they are withholding information about the fluids. The best way to neutralize that misconception is to strictly comply with the state-mandated disclosure rules where applicable. It may even behoove them to voluntarily disclose the fluids’ contents through the
companies’ websites.

3. Be prepared for a fire-drill

A party must be ready to quickly assert its position when a claim is brought. The best way to do so is to track current litigation. Following the cases will provide the company a preview as to what claims it may be subject to, and it also allows them to evaluate defenses. It may also enable the company to insulate itself from suit by avoiding certain actions. Along those same lines, knowing the facts, documents, emails, fact witnesses and expert witnesses will work to a party’s advantage. Some industry leaders have proactively retained experts even though they have not been sued.

4. Know your neighbors

Parties should view their neighbors as allies and potential jurors. To that end, it makes sense to open a dialogue about fracking with the regulators on a local, state and federal level. It would also benefit the parties to engage the community and publicize information about the benefits associated with fracking, e.g., jobs, lower energy prices, cleaner energy, energy independence, etc. Certain midstream players have rolled out a public education campaigns aimed at that very goal.

Conclusion

Articles on shale gas and fracking adorn the front pages of the Wall Street Journal and New York Times. 60 Minutes runs stories on shale-gas drilling and the faux pundit Stephen Colbert discusses fracking’s impact on his tongue-and-cheek news show. The promise of profits, domestic jobs and energy independence has the country talking about the gas shale plays that dot the landscape. Fracking and all that it encompasses will serve as the backdrop for a variety of legal issues during the foreseeable future.

Joshua W. Mermis is a partner at Johnson, Trent, West & Taylor in Houston, Texas, where he primarily practices in construction and energy litigation. He received his B.A. from the University of Kansas and J.D. from the University of Texas School of Law. This article previously appeared in the Spring/Summer 2012 issue of USLAW magazine.

Source

5 Ways Government Could Cut Gasoline Prices Quickly

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By JOHN MERLINE, INVESTOR’S BUSINESS DAILY 
Posted 03/08/2012 08:02 AM ET

When sky-high gasoline pricestalks about today’s sky-high gasoline prices, he almost always laments that there’s little anyone can do in the short term to bring them down.

“There is no silver bullet” is his common refrain, one he used again at his press conference on Tuesday.

But as gasoline prices reach historic highs — they’ve shot up more than 28 cents a gallon in just the past month — the government could make a dent.

That’s because, while the global price of oil determines most of the cost of gasoline, several federal and state government policies artificially add to the cost before it reaches the gas station.

Among them:

Taxes. The most obvious government-imposed costs are state and federal taxes and fees. Combined, these average 45.7 cents a gallon (the federal portion is 18.4 cents). New Yorkers pay the highest rate, at a combined 67.4 cents a gallon. California and Connecticut tie for second at 67 cents. Alaska is lowest at 26.4 cents, according to the Tax Foundation.

The weak dollar. Several analysts note that the Fed‘s devaluation of the dollar has led to higher oil prices, which in turn is adding as much as 56 cents per gallon, according to the congressional Joint Economic Committee.

“From the first day the Fed began engaging in quantitative easing back in early 2008, the impact on gas prices has been profound,” noted Eric Parnell, an economics professor at West Chester University, in a recent blog post. “What is even more irksome is that much of this rise in gasoline prices has occurred during a time when gasoline consumption has been falling. Have the laws of supply and demand been repealed? No, they’ve just been severely distorted by policy action.”

Boutique fuels. Thanks to federal and state rules, there are about 18 separate gasoline markets in the country, each with specific requirements about what can and can’t be in their gasoline, mainly to deal with local air quality issues. But the result is higher gasoline prices.

A Government Accountability Office report found that “the proliferation of special gasoline blends has made it more complicated to supply gasoline and has raised costs.” Refiners also have to switch each season between summer and winter blends, which boosts costs.

Sen. Roy Blunt, R-Mo., has offered up a Boutique Fuel Reduction Act that would give the EPA more flexibility to waive these local fuel rules.

Environmental rules. In addition to creating local blends, refiners must also meet a long list of costly environmental rules. In late 1999, for example, the EPA required refiners to drastically cut the amount of sulfur in gasoline and diesel, which cost the industry almost $5 billion upfront and $1.5 billion each year to meet, according to the agency.

Strict environmental rules also can drive smaller refiners out of business, resulting in less competition, tighter supplies and higher prices.

Four refineries recently closed on the East Coast, for example. “That’s going to make gasoline more expensive in the region,” said John Hofmeister, the former Shell Oil CEO who has since started Citizens for Affordable Energy.

And as early as next year, the EPA could add dramatically to refinery costs, requiring them to meet new standards to reduce greenhouse gas emissions. The petroleum industry figures this “regulatory tsunami” will add 25 cents to each gallon of gasoline and shutter seven more refineries.

Ethanol mandate. January marked the end of a 45-cent federal subsidy for each gallon of ethanol refiners added to gasoline. The subsidy cost taxpayers $6 billion a year, but ending it could end up adding as much as 4.5 cents a gallon, since gasoline now includes 10% ethanol.

Congress also left in place a 2007 law requiring increasing amounts of ethanol (including so-called advanced biofuels) in gasoline, rising to 36 billion gallons by 2022. The ethanol industry argues that expanded use of ethanol cuts pump prices, pointing to a study saying it’s lowered them 25 cents a gallon on average. Others argue that because ethanol provides 30% less energy than gasoline, it’s actually more expensive on a per-mile basis.

“Any time you force the industry to do something they wouldn’t do otherwise, by definition you must be increasing costs somewhere,” said Michigan State University economist Soren Anderson, who studies the fuel industry. “If ethanol really were cheaper, you wouldn’t need the mandate.”

In any case, the law has cost refiners almost $7 million in fines this year after they failed to add 6.6 million gallons of “advanced biofuels” as required. The problem is these advanced biofuels don’t exist commercially, and nobody’s sure when they will, which means even bigger industry fines going forward as the mandated use increases.

Over the long term, meanwhile, federal restrictions on access to domestic supplies of oil cut production and to some degree affect the price of oil down the road. According to the Institute for Energy Research, the U.S. has huge oil reserves, thanks to new finds and advances in drilling technology that let companies retrieve once-inaccessible deposits. The IER estimates that there are 1.4 trillion barrels of “technically recoverable” oil in the U.S., which is more than the proved reserves of all OPEC countries combined.

New pipelines — such as the Keystone XL line that President Obama recently blocked — could help get a glut of oil from the northern U.S. and Canada down to Gulf Coast refiners.

“We can’t fix the world price of oil today,” says Ken Green, an energy expert at the American Enterprise Institute, “but there are things the government does that it could stop doing to lower the cost of gasoline.”

EIA: U.S. Gas Pipeline Companies Added 2,400 Miles of New Pipe in 2011

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The U.S. Energy Information Administration said in a report that it estimates that U.S. natural gas pipeline companies added about 2,400 miles of new pipe to the grid as part of over 25 projects in 2011.

New pipeline projects entered service in parts of the U.S. natural gas grid that can be congested: California, Florida, and parts of the Northeast. Only a portion of this capacity serves incremental natural gas use; most of these projects facilitate better linkages across the existing natural gas grid, the EIA said.

By convention, the industry expresses annual capacity additions as the sum of the capacities of all the projects completed in that year. By this measure, the industry added 13.7 billion cubic feet per day (Bcf/d) of new capacity to the grid in 2011. The six largest projects put into service in 2011 added 1,553 miles and about 8.2 Bcf/d of new capacity to the system. Much of this new capacity is for transporting natural gas between states rather than within states. Golden Pass, Ruby Pipeline, FGT Phase VIII, Pascagoula Expansion, and Bison Pipeline projects added 6.1 Bcf/d, or about 80%, of new state-to-state capacity.

The EIA said that natural gas pipeline capacity additions in 2011 were well above the 10 Bcf/d levels typical from 2001-2006, roughly the same as additions in 2007 and 2010, but significantly below additions in 2008 and 2009. Capacity added in 2008 and 2009 reflected a mix of intrastate and interstate natural gas pipeline expansions, related mostly to shale production, liquefied natural gas (LNG) terminals, and storage facilities.

Articles

Solar Power on the Taxpayers’ Dime

Posted April 20th, 2011

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Someone should really tell the Department of Energy (DOE) about the federal government’s spending crisis.

On Monday, it granted a $2.1 billion loan guarantee to a German developer to help finance a 1,000 megawatt solar thermal power plant in Southern California. But wait, there’s more.

Add to that a $1.6 billion loan guarantee for another plant in California’s Mojave Desert, a $1.2 billion loan guarantee for one in San Luis Obispo County, Calif., and $967 million for a location in Arizona, all since February, according to a Forbes.com report. That’s nearly $6 billion in taxpayer dollars to back up private industry’s green energy ventures.

But that’s just the tip of the iceberg.

According to The Heritage Foundation’s Nicolas Loris, the DOE is one of the fastest growing federal agencies with a budget that grew from $15 billion in FY 2000 to $26.4 billion in FY 2010—a staggering 76 percent increase in only one decade.

Loris has identified $6 billion in possible cuts, among them, $3.2 billion for the Office of Energy Efficiency and Renewable Energy, which is tasked with funding the research and development of “clean energy technologies” — commercializing technologies, not promoting research. Loris writes:

It is neither the DOE’s responsibility nor the role of government to make projects cost-competitive. The company that can make biofuels or any of these other alternative technologies cost-effective and environmentally efficient will reap the rewards for doing so with high profits. Increased competition will directly benefit the consumer, and the DOE should not artificially prop up these technologies and energy sources.

It’s not news that the White House is dedicated to promoting alternative sources of energy as part of its green agenda. But government has a role, and its job is not to undertake tasks better left to the private sector. And that’s especially true in a time when government spending must be contracted, not expanded.

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Author: Mike Brownfield

Original Article

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