Report may push EPA to move sooner on drilling regulations

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Latest Oil and Gas News: 
December 13, 2011

(Bloomberg; Dec. 12) - An EPA report linking hydraulic fracturing for natural gas to groundwater contamination for the first time puts pressure on the agency to move sooner on efforts to regulate drilling. The EPA is weighing three rules on fracking, the first of which is planned for April. Meanwhile, the agency is conducting an extensive study of fracking and its effect on drinking water, with plans to release an interim report next year and a final study in 2014.

The Dec. 8 report that chemicals consistent with those used in drilling were found in groundwater samples in west-central Wyoming may be used by the agency to accelerate action, according to Ken von Schaumburg, a Washington-based attorney and former EPA deputy general counsel who served in President George W. Bush's administration. "This may be a tool for EPA to speed up the process."

The first of three rules is scheduled to be issued in April, covering air emissions from new oil and gas wells of all types and requiring monitoring and performance testing. The EPA said the standards are intended to capture 95% of the smog-causing gases that escape in fracking operations. Second, the EPA is working on drilling water discharge standards, scheduled to be issued in 2014. Third, drillers may face new requirements to disclose substances used in fracking; no deadline has been set for a decision.

W.Va. legislature moves closer
to new drilling fees, regulations

(The Associated Press; Dec. 12) - The West Virginia Senate Judiciary and Finance committees endorsed new rules Dec. 12 for drilling in the Marcellus Shale, amid criticism that the legislation falls short of protecting land owners and the environment. Both panels advanced the measure on voice votes, two days into the special legislative session.

Environmental and surface owner groups condemned the 100-page plus measure, both during Senate Judiciary's nearly five-hour meeting and later at a House Chamber public hearing. They faulted Gov. Earl Ray Tomblin for removing provisions they favor from draft legislation approved last month by a special joint committee. The amended bill grants leeway to the Department of Environmental Protection instead of setting specific standards, critics said.

The industry took issue with parts of the bill as well, but ultimately supported passage. "Everything about this bill either adds expense or time or delays to our operations," said Mike McCown, vice president of Gastar Exploration. "But it's important to have some clarity moving forward." The bill sets fees of $10,000 for an initial well and $5,000 for each additional well at a site. The fee now is $400. The new fees would raise about $2.4 million a year, allowing the state to hire 14 more well inspectors and support staff.

Maryland commission recommends state
severance tax on gas

(Platts; Dec. 12) - The Maryland General Assembly should adopt a state severance tax on natural gas and use the money to address the affects of exploration and production on the environment, the state's Marcellus Shale Safe Drilling Commission said. The commission's study, released Dec. 9, said severance tax revenues should be used to pay the costs of monitoring drilling activities and addressing "negative impacts [of drilling] that are not attributable to a specific company or permittee."

The report estimated each 1% of a fee on Marcellus Shale production could generate between $27.9 million and $93.7 million over a 50-year period. The draft report also recommended the legislature create "a rebuttable presumption" that certain damages occurring "close in space and time" to drilling operations are caused by those activities. It recommended a new administrative process requiring drillers to remediate damage, pay compensation, or both.

The commission also recommended the state enact a Surface Owners Protection Act, which would require drillers to notify surface owners of any pending drilling operations near their property. The final draft of the report should be released by the end of the year.

Fracking debate could lead to higher gas prices

(Toronto Globe and Mail; Dec. 12) - A battle between Encana and the EPA threatens to lead to higher costs and regulatory hurdles for the natural gas industry, as companies and regulators face off over the environmental impact of hydraulic fracturing. Calgary-based Encana has criticized as flawed last week's EPA report that found natural gas drilling techniques contaminated water at a company property in Wyoming.

With North America's second-largest gas producer pitted against the regulator, the industry will likely face even greater scrutiny and red tape, which will lead to increased expenses for energy companies, industry experts said. Any move to ban fracking - not seen as a possibility any time soon - would threaten those supplies. "If they ban fracturing, energy prices will go through the roof," said Kevin Lo, an analyst at First Energy Capital Corp.

"It would be good for energy companies. It would be terrible and devastating for the consumer." North Americans could pay as much as three times more for natural gas, Lo said. While some areas are increasingly scrutinizing fracking, states such as Texas, which is swimming in natural gas, are more welcoming and unlikely to clamp down on industry, Lo noted.

Corporate responsibility groups target
environmental risks of fracking

(Bloomberg; Dec. 13) - Natural gas producers must do more to reduce environmental harm from hydraulic fracturing and disclose drilling risks, said two groups representing investors with more than $130 billion in assets. Companies should identify the chemicals used and consume less water in fracking, according to a report released Dec. 13 from the Investor Environmental Health Network and the Interfaith Center on Corporate Responsibility.

"Many companies are moving on their own, but how much they're moving and how they compare with other companies is difficult to tell right now because disclosure is inadequate," said Richard Liroff, executive director of the Falls Church, Virginia-based health network and prime writer of the report. "There's really nobody who is doing it uniformly well." The New York-based Interfaith Center also backs corporate efforts to improve the environment.

In the past two years, 21 shareholder resolutions on fracking have been submitted at annual meetings, according to Liroff's group. One proposal by the Park Foundation, an Ithaca, N.Y., group that supports education and public broadcasting, urged ExxonMobil to analyze the potential impacts of fracking and policy options to reduce environmental risks. The proposal, submitted for Exxon's May 25 shareholders' meeting, was rejected with 72% in opposition, according to the company.

Gas drilling, water quality debate heats up in Ohio

(The Associated Press; Dec. 11) - Patti Gorcheff says wastewater disposal from an oil and gas drilling frenzy that's hit Ohio and other states has pushed her and her husband to sell the family home and flee with their daughter before the drinking water becomes contaminated. Gorcheff, 56, of rural North Lima, said she's heard the accounts from neighboring Pennsylvania of contaminant-laced water being discharged into rivers.

"I've never been so afraid," she said. "They're taking advantage of us because we're one of the poorest areas in the country. We have to move out of this area, we just have to. ... I just don't trust these people." Some people are trying to form a group they'll call Mothers Against Drilling in Our Neighborhoods to organize protests and raise awareness

The drilling activity promises huge opportunity for eager energy companies and Ohio's struggling economy. The vast Marcellus and Utica shale formations are already paying off in thousands of wells in Pennsylvania and West Virginia, bringing great wealth to landowners and jobs throughout the region. "We're talking about a generation who have lived in poverty and this is an opportunity to pull them out," Ohio Gov. John Kasich said.

Industry critic says drillers fail to warn
landowners of fracking risks

(The Los Angeles Times; Dec. 12) - Natural gas companies disclose hydraulic fracturing risks to shareholders (because of federal securities laws) but not always to landowners, according to a report released Dec. 12. Oil and gas companies and the land acquisition companies working for them did not always mention to landowners the potential safety and environmental risks of fracking, according to the report by the Environmental Working Group, a Washington-based organization that has been critical of the industry.

Craig Sautner and his wife, Julie, said they were never told of any risks when they leased about 3.5 acres of their land in Dimock, Pa., to Cabot Oil & Gas in 2008, the report said. After Cabot began drilling in the area in 2009, state officials determined that Cabot's operations had contaminated well water used by the Sautners and 18 other Dimock families. Cabot disputed the finding.

The report's authors said "drilling companies clearly have a double standard" when discussing risk. "Shareholders are warned, but many landowners are not. This means that thousands of landowners may be signing legally binding contracts without understanding that their property, their health, their finances and their communities could suffer serious harm."

N.Y. Times editorial supports state oversight of fracking

(New York Times editorial; Dec. 11) - After several crowded and often raucous hearings, New York Gov. Andrew Cuomo agreed to give the public until Jan. 11 to comment on 2,000 pages of environmental analysis and proposed regulations designed to govern natural gas drilling in deep shale formations. The extension makes sense. The drilling decision is a momentous one, for the environment and the economy, and it is vitally important to get it right.

There is little doubt in our minds that natural gas, which is cheap, plentiful and cleaner than coal, could help greatly with the country's energy and climate problems. The question is whether it can be safely extracted by hydraulic fracturing. Done carelessly, the technique poses threats to water quality, local landscapes and the atmosphere that other states, including Pennsylvania, have failed to address adequately.

That's where the state rules come in. They must establish detailed safeguards for hydraulic fracturing and ensure regulatory oversight. The proposed rules have been months in the making but still need to be improved to better protect the environment and public health. There is no reason to hurry the rule-making or the drilling. The only way New York can safely move ahead with hydrofracturing is by designing and executing a tough regulatory program that could also serve as a model for the rest of the nation.

Maine city votes down tax break for natural gas pipeline

(Kennebec Journal, Augusta, Maine; Dec. 11) - Voters at a special Farmingdale (Maine) town meeting Dec. 10 spoke loud and clear: There will be no tax break given to Kennebec Valley Gas Co. for a proposed natural gas line that will run through town, even though the line would reduce residents' heating costs by getting them off diesel.

Board of Selectmen Chairman David Sirois spoke in favor the tax break, saying it would bring economic development to town. Other residents, however, saw it differently. About 100 people showed up for the meeting. David Cyr said he's in favor of gas coming to Farmingdale but is dead set against the town giving Kennebec Valley Gas a tax break for 15 years. "If they want to do this, then they should get the capital to do so," Cyr said.

Kennebec Valley Gas is requesting a tax break from the 12 communities affected by the project. Cities and towns in the proposed gas line corridor are being asked to return 80% of property taxes to the company the first 10 years and 60% the next five years. Company officials have said the project is dependent on the communities approving the tax assistance. Farmingdale is just the second city to vote against it. Resident Bill Crowley said other businesses pay taxes, and so should the gas company.

Pennsylvania dealing with unregulated
gathering pipelines

(Philadelphia Inquirer; Dec. 10) - Like many other natural gas pipelines crisscrossing Pennsylvania's Marcellus Shale region, one of this year's new lines is big - high-pressure steel pipe, 20 inches in diameter. Plenty big enough to set off a sizable explosion if something goes wrong. There was trouble on the job. Far too many of the welds that tied the pipe together were failing inspection and had to be done over.

A veteran welder, now an organizer for a national pipeline union, happened upon the line and tried to blow the whistle on what he considered substandard work. But there was no one to call. Pennsylvania's regulators don't handle gathering pipelines, and acknowledge they don't even know where they are. And when he reported what he saw to a federal oversight agency, an inspector told him there was nothing he could do, either. Because the line was in a rural area, no safety rules applied.

Belatedly, the state's elected officials and regulators are trying to catch up. The legislature is poised to give the state Public Utility Commission authority to enforce federal safety rules, as in other gas-producing states. Still, because of a long-standing gap in the federal rules, the new state law would leave many gas lines unregulated over vast swaths of rural Pennsylvania. These new gathering pipelines that connect to the wells are going unregulated, even though they are large-diameter, high-pressure pipes.

Cheniere signs up India utility for LNG export project

(Business Standard, New Delhi; Dec. 11) - State-owned gas utility GAIL India Dec. 11 said it has signed an agreement to buy 170 billion cubic feet of gas a year (450 million cubic feet per day) for 20 years from a U.S. firm to meet India's growing energy needs. GAIL signed the deal with Cheniere Energy, which is trying to develop an LNG export terminal on the Gulf Coast.

Supplies could start as early as 2016, dependent on Cheniere obtaining all of its required permits and financing and deciding to commit to construction. GAIL's cost of the LNG will be linked to the U.S. gas benchmark price (Henry Hub), plus a charge for liquefaction and loading.

The LNG would be supplied from train four of the proposed Sabine Pass LNG export terminal located on the Louisiana coast. The project would be developed in four phases, with each LNG train commencing operations approximately six to nine months after the previous train.

Sinopec takes 25% stake in LNG project
and most of its output

(Bloomberg; Dec. 11) - China Petrochemical Corp., Asia's biggest refiner, has agreed to buy an additional 10% stake in a $20 billion Australia LNG project, taking its ownership to 25%. The company, known as Sinopec Group, signed the preliminary accord to buy the stake from ConocoPhillips and Origin Energy, Sydney-based Origin said Dec. 11. The venture is developing the Asia Pacific LNG project in Queensland state, Australia.

Sinopec, which agreed to pay $1.5 billion for its original 15% stake in the venture in April, also will buy an additional 160 billion cubic feet of gas a year (400 million a day, on average) from the plant through 2035. The first phase of the project is scheduled to come online in mid-2015.

Full production is expected at 1.2 billion cubic feet of gas per day; Sinopec contracted for almost 600 million cubic feet a day when it agreed to buy a 15% stake in the project. The additional gas purchase will commit about three-quarters of the plant's output to Sinopec. Terms for the gas were not disclosed.

LNG tanker charter rates hit record at $140,000 a day

(Bloomberg; Dec. 12) - One-year charter rates to ship LNG have surged to a record, Morgan Stanley said. Moller-Maersk has hired out an LNG carrier to BP for three years at $140,000 a day, Ole Storer, a Morgan Stanley analyst, said Dec. 12. And Nigeria LNG hired a tanker owned by Sweden-based Stena Bulk in a four-year deal worth $130,000 daily. That's almost four times the daily rate during an industry slump of 2009.

Higher Asian demand for LNG shipped from farther-away Atlantic Ocean-based countries has boosted distances traveled, lengthening voyage times and exacerbated a shortage of available ships, according to Braemar Seascope Ltd., a London-based shipbroker. Countries like Nigeria are also raising LNG output, requiring additional ships for export shipments, said Debbie Turner, director of the shipbroker's LNG division."This is the highest-ever sustained rate paid for an LNG carrier," she said.

Contracts for 51 of 59 LNG carriers on order at shipbuilding yards worldwide were signed in 2011, data from Clarkson Research Services, a unit of the world's largest shipbroker, shows. Up to 15% of the fleet was potentially available for short-term hire of up to five years' duration, with the remainder employed for terms of around 20 years serving dedicated projects, Turner said.

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