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
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.
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.
13 Mar 2012, 7.06 pm GMT
New York, 13 March (Argus) — Chevron said its efforts to boost recoveries in the Lower Tertiary trend of the US Gulf of Mexico may double the amount of crude and natural gas extracted from its $7.5bn Jack/St Malo development.
The October 2010 decision to go forward with Jack/St Malo was predicated on recovering less than 10pc of the crude and gas in place, or about 500mn barrels of oil equivalent (boe) over the life of the deepwater development. Technological advances may drive recoveries to more than 20pc, or 1bn boe, Chevron North American upstream president Gary Luquette said today.
“We have effectively added a half billion barrels to Jack/St Malo, and we’re looking to apply what we’ve learned here to other Lower Tertiary developments,” Luquette said.
Deepwater projects will be key in Chevron’s plan to boost upstream production by 20pc, to 3.3mn boe/d, by 2017. The company aims to increase its global deepwater output to 470,000 boe/d from 375,000 boe/d. The Jack/St Malo platform, which will have a tieback to at least one other field, will have capacity to handle 170,000 b/d of oil and 42.5mn cubic feet/day of gas.
Lessons learned from early struggles with the Shell-operated Perdido development, which began production in March 2010, will help with other Lower Tertiary projects in the Gulf, Luquette said. Perdido was slower to ramp up than planned, but now is at more than 90,000 boe/d.
Chevron intervened to make design changes to the Hess-operated Tubular Bells project, also in the Lower Tertiary trend, increasing the major’s confidence that the development will be done on budget and on plan, Luquette said.
Jack/St Malo and Tubular Bells are both scheduled to commence production in 2014, as is the Chevron-operated Big Foot project in the Lower Tertiary.
Lower Tertiary oil deposits are beneath a thick salt canopy, making exploration more difficult, and are characterized by high pressure, high temperature and low porosity.
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By Jim Polson – Feb 27, 2012 7:49 AM CT
The financing is a “significant milestone” toward Cheniere’s plan to build the plant, Chairman and Chief Executive Officer Charif Souki said in a statement today. If built, the plant would be the first constructed in more than four decades to export U.S. natural gas by ship.
Cheniere Energy is seeking final approval from the Federal Energy Regulatory Commission for the plant, which would liquefy gas for export from its existing import terminal in Cameron Parish, Louisiana. The Houston-based company obtained Energy Department approval to export after U.S. production of the fuel surged from hydraulic fracturing.
“Obtaining this financing will be a significant milestone for the advancement of construction for the first two liquefaction units,” Charif Souki, chairman and chief executive officer of Cheniere Energy Partners and its parent, Cheniere Energy Inc. (LNG), said in today’s statement.
The Blackstone entities have agreed to buy 111 million new senior subordinated paid-in-kind units for $18 billion each, according to the statement. Final terms are contingent on Cheniere securing debt financing.
Cheniere expects to obtain the remaining financing by March 31 and to begin construction by June 30, according to the statement.
The units that Blackstone is buying will pay 4.2 percent interest quarterly and convert to partnership common units once the first two sections of the plant begin commercial operation. Cheniere Energy Partners will use cash from the sale to buy the pipeline that connects the terminal to the U.S. gas pipeline network from Cheniere Energy Inc., according to today’s statement.
The announcement was made before regular trading began on U.S. markets. Cheniere Energy Partners rose 6.7 percent to $22.30 at 8:46 a.m. in New York. Cheniere Energy Inc. rose 17 percent to $16.42.
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NEW YORK — A different kind of F-word is stirring a linguistic and political debate as controversial as what it defines.
The word is “fracking” — as in hydraulic fracturing, a technique long used by the oil and gas industry to free oil and gas from rock.
It’s not in the dictionary, the industry hates it, and President Barack Obama didn’t use it in his State of the Union speech — even as he praised federal subsidies for it.
The word sounds nasty, and environmental advocates have been able to use it to generate opposition — and revulsion — to what they say is a nasty process that threatens water supplies.
“It obviously calls to mind other less socially polite terms, and folks have been able to take advantage of that,” said Kate Sinding, a senior attorney at the Natural Resources Defense Council who works on drilling issues.
One of the chants at an anti-drilling rally in Albany earlier this month was “No fracking way!”
Industry executives argue that the word is deliberately misspelled by environmental activists and that it has become a slur that should not be used by media outlets that strive for objectivity.
“It’s a co-opted word and a co-opted spelling used to make it look as offensive as people can try to make it look,” said Michael Kehs, vice president for Strategic Affairs at Chesapeake Energy, the nation’s second-largest natural gas producer.
To the surviving humans of the sci-fi TV series “Battlestar Galactica,” it has nothing to do with oil and gas. It is used as a substitute for the very down-to-Earth curse word.
Michael Weiss, a professor of linguistics at Cornell University, says the word originated as simple industry jargon, but has taken on a negative meaning over time — much like the word “silly” once meant “holy.”
But “frack” also happens to sound like “smack” and “whack,” with more violent connotations.
“When you hear the word ‘fracking,’ what lights up your brain is the profanity,” says Deborah Mitchell, who teaches marketing at the University of Wisconsin’s School of Business. “Negative things come to mind.”
Obama did not use the word in his State of the Union address Tuesday night, when he said his administration will help ensure natural gas will be developed safely, suggesting it would support 600,000 jobs by the end of the decade.
In hydraulic fracturing, millions of gallons of water, sand and chemicals are pumped into wells to break up underground rock formations and create escape routes for the oil and gas. In recent years, the industry has learned to combine the practice with the ability to drill horizontally into beds of shale, layers of fine-grained rock that in some cases have trapped ancient organic matter that has cooked into oil and gas.
By doing so, drillers have unlocked natural gas deposits across the East, South and Midwest that are large enough to supply the U.S. for decades. Natural gas prices have dipped to decade-low levels, reducing customer bills and prompting manufacturers who depend on the fuel to expand operations in the U.S.
Environmentalists worry that the fluid could leak into water supplies from cracked casings in wells. They are also concerned that wastewater from the process could contaminate water supplies if not properly treated or disposed of. And they worry the method allows too much methane, the main component of natural gas and an extraordinarily potent greenhouse gas, to escape.
Some want to ban the practice altogether, while others want tighter regulations.
The Environmental Protection Agency is studying the issue and may propose federal regulations. The industry prefers that states regulate the process.
Some states have banned it. A New York proposal to lift its ban drew about 40,000 public comments — an unprecedented total — inspired in part by slogans such as “Don’t Frack With New York.”
The drilling industry has generally spelled the word without a “K,” using terms like “frac job” or “frac fluid.”
Energy historian Daniel Yergin spells it “fraccing” in his book, “The Quest: Energy, Security and the Remaking of the Modern World.” The glossary maintained by the oilfield services company Schlumberger includes only “frac” and “hydraulic fracturing.”
The spelling of “fracking” began appearing in the media and in oil and gas company materials long before the process became controversial. It first was used in an Associated Press story in 1981. That same year, an oil and gas company called Velvet Exploration, based in British Columbia, issued a press release that detailed its plans to complete “fracking” a well.
The word was used in trade journals throughout the 1980s. In 1990, Commerce Secretary Robert Mosbacher announced U.S. oil engineers would travel to the Soviet Union to share drilling technology, including fracking.
The word does not appear in The Associated Press Stylebook, a guide for news organizations. David Minthorn, deputy standards editor at the AP, says there are tentative plans to include an entry in the 2012 edition.
He said the current standard is to avoid using the word except in direct quotes, and to instead use “hydraulic fracturing.”
That won’t stop activists — sometimes called “fracktivists” — from repeating the word as often as possible.
“It was created by the industry, and the industry is going to have to live with it,” says the NRDC’s Sinding.
Jonathan Fahey can be reached at http://twitter.com/JonathanFahey.
- “Fracking”: Is it a dirty word? (cbsnews.com)
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Oil surged above $100 a barrel on speculation supplies will be disrupted after a report that Iran will hold drills to close the Strait of Hormuz and that the Federal Reserve may announce additional stimulus measures.
Crude advanced as much as 3.6 percent after the state-run Fars news agency reported the military maneuvers will be “soon,” citing Parvis Sorouri, a member of the parliament’s national security and foreign policy committee. The Strait of Hormuz is a bottleneck for oil exports from the Persian Gulf. The Fed is scheduled to release a statement on monitory policy later today.
“There have been a number of rumors floating around the market today,” said Tom Bentz, a director with BNP Paribas Prime Brokerage Inc. in New York. “I saw the Iran story yesterday but those headlines seem to have got traction this morning. There are also rumors for further action by the Fed, but where they come from I don’t know. In this electronic world things can jump quickly and trigger stops.”
Crude for January delivery gained $1.91, or 2 percent, to $99.68 a barrel at 11:07 a.m. on the New York Mercantile Exchange. Earlier, futures touched $101.25 a barrel. Prices have risen 9.1 percent this year.
Brent oil for January settlement increased $2.07, or 1.9 percent, to $109.33 a barrel on the London-based ICE Futures Europe exchange.
“There are no headlines to explain this move,” said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. “One has to look at the usual suspects. It was probably a fat-fingered mistake or a margin call.”
Crude pared gains after an Iranian Foreign Ministry spokesman said the Strait of Hormuz isn’t closed. The comments on the strait were made by people who don’t have an official title, said Ramin Mehmanparast, the spokesman.
Sorouri, in comments that first appeared yesterday on the website of the state-run Iranian Students News Agency, said “if the world wants to make the region insecure, we will make the world insecure.”
About 15.5 million barrels of oil a day, about a sixth of global consumption, flows through the Strait of Hormuz between Iran and Oman, according to the U.S. Department of Energy.
“This is the kind of story that sends a shock wave through the market,” said Richard Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago.
The market also rose on speculation that the Fed will announce a third round of bond purchases in a tactic that has been dubbed quantitative easing. The Fed bought a total of $2.3 trillion in bonds in two rounds of quantitative easing from December 2008 until June 2011.
Fed Chairman Ben S. Bernanke and his policy-making colleagues plan to meet today to discuss the outlook for an economy that has strengthened since their November meeting, lowering the jobless rate to 8.6 percent from 9.1 percent.
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By Mark Shenk
Nov. 16 (Bloomberg) — Oil in New York climbed above $100 a barrel to a five-month high as Enbridge Inc. said it would reverse the direction of the Seaway pipeline, opening an outlet for crude from the central U.S. and Canada.
Futures rose much as 2.7 percent after Enbridge agreed to acquire ConocoPhillips’s share of the pipeline that runs between Cushing, Oklahoma, and the Gulf Coast and announced the reversal. The change may alleviate a bottleneck at the Cushing storage hub that had lowered the price of West Texas Intermediate, the grade traded in New York, versus other oils.
“In the short term, this will definitely clear some of the crude out of Oklahoma,” said Francisco Blanch, head of commodities research at Bank of America Corp. in New York. “This may not be enough to eliminate the glut in the Midwest because output is growing by hundreds of thousands of barrels a year. We still need additional transportation capacity.”
Crude oil for December delivery rose $2.08, or 2.1 percent, to $101.45 a barrel on the New York Mercantile Exchange. Futures reached $102.06, the highest level since June 10. The contract traded at $99.70 before the Seaway announcement.
Brent oil for January settlement dropped $1.39, or 1.2 percent, to $110.79 a barrel on the ICE Futures Europe exchange in London. The European contract’s premium to West Texas crude narrowed to as little as $8.32 a barrel, the smallest spread since March 9. The spread surged to a record high of $27.88 on Oct. 14.
Initial Pipeline Capacity
The pipeline will operate with an initial capacity of 150,000 barrels a day by the second quarter of 2012, according to a statement from Enbridge. Enterprise Products Partners LP also owns a share of the link.
The pipeline will enable more oil from Canada and North Dakota to reach the Gulf Coast, home to about half of U.S. refining capacity.
The reversal “will definitely reduce the amount of rail and barge that is needed,” said Hussein Allidina, the head of commodity research at Morgan Stanley in New York. “You are still going to evacuate some crude via some of these higher costs transportation means” as Canadian and U.S. output rises.
An Energy Department report today may show U.S. crude oil stockpiles fell 1.2 million barrels last week, according to the median of 13 analyst responses in a Bloomberg News survey. Supplies increased 1.3 million barrels last week, the American Petroleum Institute said yesterday.
The industry-funded API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department for its weekly survey.
–With assistance from Aaron Clark in New York. Editors: Richard Stubbe, Charlotte Porter
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