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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.

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Obama’s Interior Chokehold on America

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By Jim Adams

How could a bureaucratic bottleneck in the Gulf of Mexico cost the U.S. economy nearly $20 billion and wipe out hundreds of thousands of jobs as far away as Ohio, Pennsylvania and California? Unfortunately, with this White House administration, anything is possible.

President Obama recently announced yet another jobs initiative — knowing all the while that one very simple action on his part would indeed create new jobs, infuse federal and state budgets with billions of dollars, and make us less reliant on imports. But that didn’t happen.

On Oct. 12, 2010, Interior Secretary Ken Salazar said, “We’re open for business,” signaling that drilling for new oil in the Gulf of Mexico would resume. But, Mr. Salazar has an odd interpretation of the words “open for business.”

Eleven months after the Secretary’s announcement, drilling in the Gulf remains near a standstill. The government has used every stall tactic imaginable to delay permits and other administrative approvals that would help our economy and put hundreds of thousands back to work.

The Gulf Economic Survival Team (GEST) commissioned IHS Global Insight and IHS CERA Inc. to quantify the economic impacts of the government’s slow pace of permitting since lifting the moratorium. Their study revealed that the number of exploration plans and permit applications are on par with levels in 2009 through early 2010, clearly signaling the industry’s intent to return to full operations. Industry also has invested billions of dollars in well containment technology to stop a Macondo-size spill if it ever became necessary. So safety can no longer be blamed for permitting delays.

That leaves the Department of the Interior. The IHS study points to a backlog of project approvals. Despite their earnest efforts to process the growing stack of applications, regulators on the front line don’t appear to understand the new regulations that Washington D.C. has foisted upon them.  The blame for this falls squarely on the shoulders of this Administration’s politically appointed bureaucrats, who know nothing of the complexities involved in safe and environmentally sound deepwater drilling. Naturally, they don’t let expertise or experience get in the way, they just pile on more regulations.

This politically minded bureaucracy comes at tremendous cost.

The number of people who depend on a thriving oil and gas industry is staggering. Another research study, by Quest Offshore Resources, found that energy production in the Gulf of Mexico employed 240,000 Americans in 2010. And not all of them worked directly for the oil and natural gas industry, as oil rigs need everything from steel pipes to IT support.

What’s more, the effects of the government’s continued foot-dragging isn’t limited to the Gulf. The study’s authors found that for every industry job tied to operations in the Gulf, three non-industry jobs are reliant in sectors such as manufacturing, construction and real estate. And for every three Gulf Coast workers, there’s one American employed elsewhere — in New York, Michigan, California, Oklahoma, Colorado, Pennsylvania, Ohio, Illinois and nearly every other state.

The Quest study also came to a distressing conclusion: Had the Administration truly lifted the moratorium last October, the industry would have created nearly 190,000 more jobs in the U.S. over a three-year period. That would have meant 8,500 additional jobs in California, where unemployment currently flirts with 12 percent; 10,000 more jobs in Pennsylvania and Ohio, manufacturing-dependent states; and in the President’s home state of Illinois, a total of 3,000 jobs.

Keeping Americans out of work. Denying struggling state and local governments billions of dollars in additional revenue. Making us more dependent on energy imports. Is this the change Mr. Obama says we can believe in?

Or can we only believe in shovel-ready jobs if they’re created by the alternative energy industry? Would we even be having this yearlong debate if solar energy producers contributed more than $12 billion a year in tax and royalty revenues to state and federal treasuries? What if hydro energy producers accounted for $44 billion of GDP? The only thing separating 190,000 Americans from a paycheck and states from more than $7 billion in local taxes is obvious: Political will.

President Obama talks about job growth, stimulating the economy and investing in innovation that will lead the way forward, but turns a blind eye to an obvious, if not practical, solution. Mr President: Lift your de facto moratorium on energy exploration in the Gulf of Mexico; business will safely do the rest.

Jim Adams is president and CEO of Offshore Marine Service Association, which represents the owners and operators of U.S. flag offshore service vessels and the shipyards and other businesses that support that industry.

Original Article

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