February 2020 Industry Digest

WASHINGTON–The U.S. Environmental Protection Agency and the Department of the Army have delivered on another of President’s Trump’s regulatory promises by releasing a new definition of “waters of the United States” to replace the Obama administration’s 2015 Clean Water Rule.

EPA Administrator Andrew Wheeler announced the final Navigable Waters Protection Rule Jan. 23 at the National Association of Home Builders’ International Builders’ Show in Las Vegas. He said, “After decades of landowners relying on expensive attorneys to determine what water on their land may or may not fall under federal regulations, our new rule strikes the proper balance between Washington and the states in managing land and water resources while protecting our nation’s navigable waters.”

The Navigable Waters Protection Rule is to become effective 60 days after its publication in the Federal Register. The rule, fact sheets and other information are available at https://www.epa.gov/nwpr.

According to EPA, categories of waters considered to be a WOTUS under the new rule are:

• Territorial seas and traditional navigable waters;
• Perennial and intermittent tributaries that contribute flow to traditional navigable waters in a typical year;
• Lakes, ponds and impoundments of jurisdictional waters that contribute surface water flow to a traditional navigable water or territorial sea; and
• Adjacent wetlands inundated by flooding from a WOTUS in a typical year, as well as adjacent wetlands separated from a WOTUS by a natural berm, bank or dune, and adjacent wetlands separated from a jurisdictional water by an artificial dike, barrier, road or similar structure as long as the structure allows for a direct hydrologic surface connection in a typical year.

To provide clarity, EPA emphasizes, water bodies not included in the four WOTUS categories will not be jurisdictional waters under the Clean Water Act. Among those, the agency says, are:

Features that contain water only in direct response to rainfall;

• Groundwater;
• Many ditches, including most farm and roadside ditches;
• Prior converted cropland;
• Farm and stock watering ponds;
• Waste treatment systems;
• Stormwater control features excavated or constructed in upland or in nonjurisdictional waters; and
• Groundwater recharge, water reuse and wastewater recycling structures in upland or nonjurisdictional waters.

“Protecting water resources is very important to independent producers, but the overly-broad power grab under the previous administration would have had a negative impact on domestic oil and gas production,” Texas Independent Producers & Royalty Owners Association President Ed Longanecker assesses. “EPA and Department of Army have formulated a new water rule that strikes an appropriate regulatory balance protecting the nation’s water sources while respecting private property rights and state authority over land and water use.”

The Independent Petroleum Association of America says the Navigable Waters Production Rule “ends decades of uncertainty over where federal jurisdiction begins and ends,” adding: “For years, IPAA has maintained the definition of WOTUS under the Obama administration rule hurt all landowners, including U.S. energy producers.”

WASHINGTON–The Keystone XL Pipeline has received another federal go-ahead, although further permitting and legal challenges remain.

On Jan. 22, the U.S. Bureau of Land Management reports, Interior Secretary David Bernhardt signed a record of decision allowing BLM to grant TC Energy a right of way to construct the pipeline across 44 miles of federally managed lands in Montana.

“Today’s decision is an important milestone in constructing the Keystone XL Pipeline and a great day for common sense infrastructure improvement in our country,” Bernhardt says.

Adds DOI Acting Assistant Secretary for Land and Minerals Management Casey Hammond, “Along with sustainable and responsible development of our energy resources, this pipeline will provide jobs and opportunity, and ensure reliable and affordable energy supplies are transported safely to power our nation’s economy.”

Then-TransCanada Corp. initially applied for a border-crossing permit in 2008 for the 1,187-mile Keystone XL Pipeline, intended to carry 800,000 barrels a day of crude oil from Hardisty, Alberta, to Steele City, Ne., for eventual shipment to Gulf Coast refineries. President Barack Obama eventually denied that application in November 2015, but President Donald Trump reversed that decision in March 2017 (AOGR, April 2017, pg. 28).

However, the U.S. District Court for the District of Montana in November 2018 permanently enjoined construction in a lawsuit brought by the Indigenous Environmental Network and the North Coast River Alliance, so in March 2019, President Trump revoked his 2017 permit and issued a second (AOGR, May 2019, pg. 28). Meanwhile, the U.S. Court of Appeals vacated the Montana court’s injunction in June 2019 (AOGR, July 2019, pg. 14).

Trump’s second presidential permit for Keystone XL also was challenged by the Indigenous Environmental Network, and according to attorney Steve Weiler, a partner with the international law firm Dorsey & Whitney in Washington, on Dec. 20, U.S. District Judge Brian Morris in Montana denied injunctive relief, but allowed the lawsuit to continue by also denying the government’s motion to dismiss the lawsuit.

In addition to the legal challenges, BLM mentions, construction and operation of the pipeline also requires permission from the U.S. Army Corps of Engineers to alter public works at Ft. Peck, Mt., and the Department of Energy’s Western Area Power Administration and the Department of Agriculture’s Rural Utilities Service also must make decisions relating to providing rights of way, expanding substations, and interconnecting with the electrical grid and/or financing the construction and operation of power lines.

BALTIMORE–Maryland Attorney General Brian Frosh is leading 15 states and the District of Columbia in asking the Trump administration to withdraw a proposal to allow bulk transportation of liquefied natural gas along rail corridors without additional safety measures.

Trump signed an executive order in April 2019 directing the U.S. Department of Transportation to propose a rule allowing rail transportation of LNG in approved rail cars, with a final rule to be issued by May 2020 (AOGR, May 2019, pg. 28). In December, the Pipeline and Hazardous Materials Safety Administration approved rail transport of LNG from northeastern Pennsylvania to southwestern New Jersey for export.

In response to the notice of proposed rule making issued by PHMSA, the 16 attorneys general urged the agency to withdraw that proposed rule pending completion of federal safety studies, and the development of a full environmental impact statement that would consider both public safety and the climate change implications of LNG rail transport.

“The administration is bending to the will of the fossil fuel industry again, and it puts at risk neighborhoods, towns and cities across our nation,” Frosh argues.

The proposal would allow LNG to be transported thought densely populated areas on rail lines used by high-speed passenger trains, the attorneys general say. PHMSA also requires a specifically designed car, the DOT-113, to transport the super-cooled liquid, but the attorneys general point out safety testing for those cars has not been completed.

The attorneys general allege PHMSA’s proposed rule lacks basic safety precautions to mitigate the risk of catastrophic accidents, and fails to adequately evaluate the environmental and climate impacts of expanding domestic and global access to natural gas.

In addition to Maryland, the PHMSA proposal is opposed by attorneys general from California, Delaware, Illinois, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Washington and the District of Columbia.

DENVER–Colorado voters rejected a proposed initiative in 2018 that would have made 94% of private lands in the state’s top five oil and gas producing counties off limits to new development, but a group wants to get similar restrictions on the ballot this year.

Voters rejected Proposition 112 by a 10-point margin in 2018 (AOGR, November 2018, pg. 22).

According to the Common-Sense Policy Roundtable, by 2030 the measure would have eliminated more than 147,000 jobs in Colorado, with the state’s gross domestic product losing $218 billion.

Colorado Rising, the group responsible for Proposition 112, has submitted six proposed ballot initiatives to the Colorado secretary of state’s office. One proposal is identical to its 2018 submission while others add Superfund sites to vulnerable areas, allow homeowners the right to waiver for their primary residences, and lowers the setback distance to 2,000 feet.

The sixth proposal seeks to increase bonding requirements for new wells, with a minimum of $270,000 a well. The group says revenues raised would be used for well reclamation and remediation.

The Colorado Oil & Gas Association notes that Governor Jared Polis as well as Democratic and Republican political leaders opposed Proposition 112 in 2018.

“Now, keep-it-in-the-ground activists are back, pushing the same extreme measure and a few ‘112 lites.’ I am confident Coloradoans will again stand with working families and decline to sign these disastrous petitions,” says COGA President Dan Haley.

He adds that he expects both political parties again will vote against Colorado Rising’s proposals, especially since nearly every aspect of the oil and gas industry is under an intense regulatory microscope as state officials move to implement SB 181, which legislators approved in 2019. The new law gives local governments more regulatory authority over drilling activities and changes the mission of the Colorado Oil & Gas Conservation Commission from “fostering the responsible, balanced” development of oil and gas resources to regulating the industry in a way that protects public health and the environment (AOGR, June 2019, pg. 35).

“Colorado’s oil and natural gas industry creates good jobs, produces affordable and reliable energy that we all need and use, and we are doing it cleaner, safer and smarter than anywhere else,” Haley says. “The technology and innovation taking place out in the field are impressive, with geologists, engineers and environmental managers overseeing projects that protect our water and improve our air quality. And the data supports our successes.”

HARRISBURG, PA.–The Pennsylvania Department of Environmental Protection plans to more than double drilling permit fees–from $5,000 to $12,500–for new Marcellus and Utica shale wells, although local press accounts point out the rule change DEP announced Jan. 21 cannot take effect until it is approved by the environmental committees of both the Pennsylvania Senate and House of Representatives as well as the state’s Independent Regulatory Review Commission.

Permit fees, along with fines and penalties, are the primary source of funding for DEP’s oil and gas program, and the reports say DEP has received far fewer permits than the 2,600 a year it anticipated getting the last time it raised fees in 2014. After processing 2,531 APDs in fiscal 2015, the reports indicate, DEP received only 1,693 applications in FY 2019 and is on pace to receive fewer than 1,600 this year.

Scott Perry, DEP secretary for the Office of Oil and Gas Management, says the oil and gas program has shrunk from 226 to 190 employees since 2014 and its operating costs have been reduced by 38%. Nevertheless, Perry maintains the fee increase is necessary to maintain the program in its current, reduced state.

“We are failing to meet many of our goals–our inspection goals, our permit review time frame goals, and our policy and program development goals,” Perry is quoted. “We have information technology projects that are going unmet, often because we cannot fund the positions necessary to do that work.”

The Pennsylvania Independent Oil & Gas Association, which emphasizes that permit fees for conventional wells will remain unchanged, says it objects to the size of the increase, but agrees with DEP that a legislative solution is needed to provide more stable funding to the oil and gas program through the annual state budget process.

WASHINGTON–Although extensive details remained elusive, a few more specifics came to light when President Donald Trump signed a “phase one” trade deal with China in mid-January. Those provisions include a pledge from China to purchase at least $52.4 billion more in U.S. energy products, media reports note, but no move from the Chinese government to remove tariffs on U.S. crude oil and natural gas.

Press accounts site Goldman Sachs’ estimates that China may boost its consumption of U.S. crude by 500,000 barrels a day in 2020 and by 800,000 bbl/d in 2021, while increasing its liquefied natural gas imports to 10 million tonnes this year and 15 million in 2021. U.S. LNG and crude exports to China have fallen sharply since the onset of the trade war.

Wood Mackenzie Asia Pacific Vice Chair Gavin Thompson says China’s promised purchases are noteworthy, but so are the enduring tariffs. “Let us be clear: $52.4 billion over two years is a lot of energy. But neither the 5% tariff on U.S. crude oil nor the 25% tariff on U.S. LNG is to be reduced or removed by China under the phase one deal. For China to massively increase imports of oil and LNG from the United States while tariffs remain in place is going to be challenging.

“Consider LNG,” Thompson continues. “In 2017, Chinese imports from the United States were approximately 1.5 MMt, worth around $600 million. If China is to increase the value of U.S. LNG imports considerably as part of this agreement, let us say to around 10 MMt in 2021, then the 25% tariff would need to be either absorbed by the importing company or passed through to the consumer.”

According to published reports, IHS analyst Jenny Yang concurs. “We expect the Chinese government to remove, reduce or approve tariff exemptions before incremental LNG imports from the United States can be meaningful,” she is quoted.

Press accounts note that Chinese officials say the energy purchases will be “market driven.”

In other trade news, Trump signed the U.S.-Mexico-Canada Agreement in late January after the Senate passed the deal a couple weeks earlier. The deal will take effect after all three countries ratify it. The United States and Mexico have done so and, published reports indicate, Canada’s parliament was expected to do so shortly after reconvening near the end of January.

WASHINGTON–A federal lawsuit seeks to block the leasing for oil and gas development of 2 million acres in five western states. The WildEarth Guardians and Physicians for Social Responsibility are challenging the Bureau of Land Management’s approval of 2,067 leases from 23 lease authorizations in Colorado, Montana, New Mexico, Utah and Wyoming.

Their court filing, WildEarth Guardians v. Bernhardt, in the U.S. District Court for the District of Columbia, states BLM failed to fully analyze the direct, indirect and cumulative impacts of greenhouse gas emissions from oil and gas leasing, in violation of the National Environmental Policy Act.

According to the lawsuit, the groups ask the court to deem BLM’s action a NEPA violation. They also request vacating the leasing authorizations, canceling all the leases and requiring the bureau to complete an environmental impact statement that analyzes all impacts of leasing.

A July 2019 ruling in the court supported BLM’s leasing process and denied motions submitted by the two groups contesting leasing in Wyoming, Colorado and Utah. District Judge Rudolph Contreras remanded BLM’s EIS and finding of no significant impact back to the bureau for reconsideration (AOGR, September 2019, pg. 18).

Derrick Henry, a BLM spokesman, says the bureau complies with federal laws when leasing lands under its control.

“The BLM’s leasing decisions are lawful and fully compliant with NEPA, despite the claims made in the lawsuit,” Henry is quoted. “In fact, these leasing decisions were informed by public input, as required by law, which was considered before issuing a final decision.”

The lawsuits target two lease sales in New Mexico covering 95 parcel leases; seven Colorado sales for 126 parcels; four in Montana covering 199 parcels; a single Utah lease sale for eight parcels; and nine sales in Wyoming for 1,639 parcels.

Any reductions in New Mexico’s oil and gas operations threaten the state’s economy and funding for public services and education, asserts New Mexico Oil & Gas Association Director of Communications Robert McEntyre. According to a news report, he cites industry data showing methane intensity has declined even as New Mexico’s production has increased.

“Activist groups will stop at nothing to derail the success story that is putting New Mexico on the map and creating unprecedented opportunities for our state, even if it means eliminating thousands of jobs from our economy, cutting vital funding for public schools, or shifting oil and gas production to other parts of the world,” McEntyre says.

LOS ANGELES–Leases issued during the Obama administration that cover more than 1 million acres in Central California to oil drilling and fracturing stimulation are under attack. Several anti-development groups, including the Center for Biological Diversity and Natural Resources Defense Council, are suing the reopening of the leases because, they say, the Bureau of Land Management failed to consider fracturing’s possible impacts on public health and the environment.

In Center for Biological Diversity v. U.S. Bureau of Land Management, filed in the U.S. District Court for the Central District of California, Western Division, the groups challenge the final supplemental environmental impact statement adopted by BLM’s Bakersfield Field Office on Dec. 12, 2019 (See “BLM Analysis Opens California Acreage To Hydraulic Fracturing,” AOGR, January 2020). According to the court filling, the SEIS supports a resource management plan adopted in 2014 that encompasses 400,000 acres of federal lands and 1.2 million acres of federal mineral estate across eight California counties.

The lawsuit says BLM’s final EIS, written in 2012, fails to analyze the impacts of fracturing on the “diverse and already vulnerable public resources in Central California, including air quality, water and wildlife.”

The Center for Biological Diversity and Los Padres ForestWatch challenged the 2014 RMP, and a court ruled BLM failed to comply with the National Environmental Policy Act because its RMP failed to adequately analyze fracturing’s environmental impacts, court documents say. The bureau agreed not to hold any oil or gas lease sales within the Bakersfield planning area until it completed a supplemental NEPA analysis to address those deficiencies.

The plaintiffs allege the new SEIS fails to consider the impacts of fracturing, unlawfully minimizes the number of wells to be fractured on new leases and fails to evaluate the health effects on local communities. They want the court to set aside the SEIS and enjoin BLM from moving ahead with any oil or gas leasing until it complies with NEPA and related federal regulations.

Rock Zierman, chief executive officer of the California Independent Petroleum Association, says the anti-development groups care more about grandstanding than the environment, and should be promoting more in-state oil and gas production.

“Our members are investing in new technologies to lower the carbon footprint of production to potentially make it carbon negative and offset greenhouse gas emissions from other sources,” he says. The groups involved in this lawsuit “want us to increase our reliance on imported oil from the Middle East, which isn’t produced under our tough environmental rules and must be tankered to our ports.”

p>HARRISBURG, PA.–Pennsylvania’s high court has affirmed the long-held principle of “rule of capture” as it applies to hydraulically fractured shale wells. However, the Supreme Court’s Jan. 22 decision in Briggs v. Southwestern Energy Production Co. also provides an opening for landowners to argue that trespassing occurred because of fractures caused by stimulation of a well on a neighboring property, the Pennsylvania Independent Oil & Gas Association reports.

According to PIOGA, as an accepted oil and gas legal principle dating back to the late 1800s, the rule of capture means that any oil or natural gas produced from a well located on property a producer controls belongs to that producer, even if it potentially originated from a neighboring property not under the producer’s control.

In Briggs, PIOGA explains, a Susquehanna County family accused Southwestern of removing natural gas from its 11-acre parcel with a well on a neighboring property. The plaintiffs argued the rule of capture did not apply to shale wells because oil and gas could not move through a shale formation without stimulation. The Pennsylvania Superior Court agreed in an April 2018 decision.

But the Pennsylvania Supreme Court unanimously vacated the Superior Court’s decision, finding no difference between methods used to recover oil and gas in traditional and unconventional formations, PIOGA reports.

“This court has held that the rule of capture applies although the driller uses further artificial means, such as a pump, to enhance production from a source common to it and the plaintiff–so long as no physical invasion of the plaintiff’s land occurs,” the court said in a 5-2 majority opinion. “There is no reason why this precept should apply any differently to hydraulic fracturing conducted solely within the driller’s property.”

PIOGA notes that the Supreme Court unequivocally rejected the Superior Court’s blanket denial of the application of the rule of capture to hydraulic fracturing, holding that the rule would continue to apply only “so long as no physical invasion of the plaintiff’s land occurs.” The court concluded, however, the plaintiffs failed to allege any physical intrusion into their subsurface property.

“A plaintiff alleging trespass by invasion of property must aver something more than mere drainage of minerals from the subject property, which by itself implicates the rule of capture,” the court wrote. “This holds true even where the defendant has completed its wells using hydraulic fracturing.”

The Supreme Court majority remanded the case to the Superior Court to determine whether the claims could move forward in view of what justices said were the Briggs’ “pleading deficiencies,” PIOGA notes.

An attorney who filed an amicus brief on behalf of the Pennsylvania chapter of the National Association of Royalty Owners described the ruling as “good news for landowners.”

“The court left the door wide open that if the plaintiff can prove there was an actual, physical intrusion as part of the hydraulic fracturing operations, then the rule of capture will not insulate the driller,” Robert Burnett told a Pittsburgh newspaper. While proving such a case would be technically challenging for a landowner, “it is not impossible,” he added.

PIOGA says the case’s significance prompted it to support Southwestern as an amicus.

WASHINGTON–Wells targeting the Bone Spring Formation underlying the Permian Basin’s Delaware Mountain Group have become more productive over time, the U.S. Energy Information Administration says. The number of producing wells grew from 436 in January 2005 to 4,338 wells in mid-2019, the agency says, with average initial oil production for the first six months of operations jumping from 67 barrels a day in 2005 to 770 bbl/d in 2019.

EIA adds that in that same period, average natural gas production per well for the first six months went from 100 Mcf a day to 1.6 million cubic feet a day.

The Bone Spring Formation consists of interbedded siliciclastic, carbonate and shale rocks as thick as 4,000 feet, the agency indicates, and is divided into three intervals. Each interval has low permeability, but advances in completion techniques have increased oil recovery factors to as much as 34%, EIA says.

In August, average monthly production from Bone Spring wells reached 600,000 barrels of crude oil and 1.7 billion cubic feet of natural gas a day.