North America Shale Blog

North America Shale Blog

Efforts to Avoid Ballot Measures on Fracking Fail in Colorado

Posted in Colorado, Fracking, Legislative

Faced with the potential for two anti-fracking measures on the Colorado ballot this November, Colorado governor John Hickenlooper and state lawmakers have been working for weeks to develop a legislative compromise to avoid putting the issues to a popular vote.  Hickenlooper’s proposal would have placed some additional restrictions on fracking, but would have clarified that local governments could not ban fracking altogether.  Last week, however, Hickenlooper announced that there would be no special legislative session on the proposal because he lacked the support to get a compromise deal done.  With legislative compromise effectively off the table, both sides of the fracking debate will be gearing up for a fight this fall.

The Colorado ballot measures 88 and 89, which would take effect as amendments to the Colorado Constitution if successful, would give local governments authority to regulate oil and gas development and would mandate setbacks of 2,000 feet from occupied structures for new oil and gas wells.  While phrased as a setback requirement, opponents claim that initiative 88 would effectively ban fracking across Colorado because the overlapping setbacks cover most of the state.  Opponents also claim that the initiatives would cost some 68,000 jobs, $567 million in tax revenue and $8 billion in GDP within five years.

The ballot measures have garnered major attention and concern from both ends of the political spectrum.  Democrats—including Governor Hickenlooper and Senator Mark Udall who are running for re-election this fall—fear that the ballot measures could harm their re-election chances with millions in outside political spending.  Republicans, who generally oppose any bans on fracking, see an opportunity to win crucial seats in the upcoming elections.

The deadline to gather enough signatures to place both measures on the November ballot is August 4th.

Additional coverage on these issues can be found here and here.

Utilities, Oil and Gas Companies Feeling Drained by “Energetic Bear”

Posted in Oil and Gas

The following was authored by Mary Guzman, Senior Vice President, InfoSec Practice Leader with McGriff, Seibels & Williams, Inc.

There is much going on in the cyber world related to energy and utility companies.  As has long been anticipated, it appears that Industrial Control Systems are the subject of targeted attacks both against Oil and Gas companies as well as Utilities.  At the moment, it appears the attackers are focused on espionage with a plan for who knows what down the road.   There is a new Oil and Gas ISAC (Information Sharing and Analysis Center) in addition to an already very active ICS ISAC (if you don’t visit their web site often already, it is a great source of information about current cyber threats against Critical Infrastructure). Also, the DHS is holding several closed working sessions for select insurance industry representatives on how we can play a more crucial role (and how they can help us) in developing risk transfer solutions and risk mitigation strategies for clients in this sector.  I attended the first one and I am hopeful some good things will come out of it in the coming months!

Below you will find several recent articles highlighting attacks on the energy sector, as well as an update on how robust the SEC is becoming in pursuing companies that do not provide adequate disclosures around information security related risks and security breaches that have already occurred.  The debate looms over how much information is too much, but really how much is a sophisticated hacking group like Energetic Bear going to learn from a paragraph in your SEC filing?

On the insurance front, as you are hopefully aware, McGriff has developed an energy line slip that provides $100mm+ in insurance capacity that covers the full spectrum of information security related risks for utilities and other energy companies, including full privacy coverage with no sub-limits for breach response expenses, damage to data, business interruption and extra expense, failure to supply resulting in regulatory investigation/fines and/or law suits from third parties who suffered an outage as a result, and other industry specific risks that have not been readily insurable before.  We are gaining traction on both the product and the process we use (partnering with a third party information security firm) to provide robust risk assessment underwriting data to the markets on a confidential, secure basis.

Given the current state of these targeted attacks, some of the coverage features we’ve built into this policy form (not available on standard policy language or, as far as we are aware, anywhere else) become even more vital to make sure the protection you believe purchased is in fact included in the contract.

  • automatic 2 years of Prior Acts coverage (huge if you are buying this insurance for the first time)
  • favorable “warranty” language
  • favorable Notice and Consent provisions
  • full regulatory coverage even for non-privacy related fines and penalties where insurable and with most favored venue language
  • failure to supply
  • first party “programming or administrative” error coverage
  • affirmative “cyber terrorism” coverage

This policy is geared specifically to your industry and the very risks discussed in these headlines.

Of importance to note, in the Oil and Gas sector there are already exclusions on most property and/or terrorism policies for cyber attacks that preclude coverage for actual property damage and/or business interruption and extra expense.  Having several rigs out of operation for days on end could cost millions of dollars in lost income and damage to or loss of proper use of a blow out preventer could have serious consequences.  We are seeing a nudge (as opposed to a push) to add these exclusions to utilities and we are also seeing concerning language on casualty policies (such as regulatory or intentional acts exclusions) that may be problematic in the event of a major breach event.  There is capacity available on a separate policy form and through a different underwriting process for these risks (several carriers now coming out with policies written to address these gaps).  If cyber-related property damage is of interest to your organization, please let us know.

We hope you find this of use and that you will pass this along to others in your organization that may be interested.

Further Resources:

Hackers Target Energy Firms
By Mathew J. Schwartz, July 1, 2014 (BankInfoSecurity.com)

Russian Hackers Targeting Oil and Gas Companies
By Nicole Perlroth, June 30, 2014 (The New York Times)

Author Contact:

McGriffMary Guzman
SVP, InfoSec Practice Leader
404.497.7535
mguzman@mcgriff.com

Ohio Natural Gas Production Reaches Historic Levels

Posted in Hydraulic Fracturing, Ohio, Ohio DNR, Oil and Gas, Utica Shale

Natural gas production in Ohio nearly doubled last year largely because of a surge in hydraulic fracturing operations in the state.  Speaking at a conference earlier this month about oil and gas development in the state, the Ohio Department of Natural Resources (ODNR) Director James Zehringer said the amount of natural gas extracted in Ohio rose by 97% between 2012 and 2013 to about 171 billion cubic feet.  Oil production also rose by nearly 62% to 8.1 million barrels during that same period.

Zehringer attributed the soaring natural gas outputs to the oil and gas industry’s aggressive development of the Utica Shale play, which runs beneath much of the eastern portion of the state.  The number of fracking wells operating in the play increased from 85 in 2012 to 352 last year.  And that figure promises to continue growing.  State officials have issued permits for approximately 350 additional wells since January alone and expect to approve 350 more by the end of the year.

Also in attendance was Richard Simmers, head of the ODNR’s Oil and Gas Division, who pointed to advancements in drilling technologies as another important reason why oil and gas production in Ohio reached historic levels in 2013.  Simmers said drillers who needed around 35 days to hit 13,000 feet in 2010 could surpass 17,000 feet in less than half that time today.

The conference, held outside of Canton, Ohio, at Stark State College, highlighted the achievements of Ohio’s energy sector over the last few years.  In addition to discussing the growth in natural gas production, speakers addressed a wide swath of issues, ranging from pipeline development to regulatory practices.  According to Zehringer, “Ohio’s oil and gas industry is growing and moving [the] state toward energy independence.”

To watch a video of the conference click here. Click here, here, and here for additional coverage.

Texas Railroad Commission Chairman Calls Proposed Denton Fracking Ban ‘Extremely Misguided’; Asks City Council to Reject Measure

Posted in Fracking, Hydraulic Fracturing, Texas

On July 11th, Texas Railroad Commission Chairman Barry Smitherman sent a letter to the mayor and city council members for Denton, Texas asking that the council reject a proposal to ban hydraulic fracturing in Denton. Chairman Smitherman’s letter, which calls the proposed attempt to ban drilling “extremely misguided”, was sent ahead of the July 15th public hearing on the matter.

Denton is currently under a drilling moratorium after the City Council unanimously adopted an ordinance on May 9th of this year which stated that “…increased drilling in close proximity to residential and other protected uses … have resulted in negative and deleterious effects on Denton citizens, calling into question whether the various interests could be better balanced by additional review of the city’s ordinances and regulations… .” The July 15 hearing and vote was mandated by Denton’s municipal law after an organization called the Denton Drilling Awareness Group presented the city council with a petition which now contains over 1,900 signatures asking that fracking be banned in the Denton city limits.

In the four-page letter, Smitherman stated that a “ban on hydraulic fracturing of oil and natural gas wells within the city limits of Denton is essentially a ban on drilling” and argued that “[t]hose advocating for a ban on hydraulic fracturing know that what they are really calling for is a ban on drilling.” Smitherman will not be able to attend the council meeting but has requested that his letter be considered by the council as part of its decision.

If the ban is adopted, Denton would be the first Texas city to ban fracking. If the council rejects the proposal, the initiative would be included as a ballot measure for Denton residents to consider in November.

Media Coverage Resources:

Ohio Tremors Cause Pennsylvania Department of Environmental Protection to Contemplate New Fracking Regulations

Posted in Fracking, Ohio, Pennsylvania, Utica Shale

The Pennsylvania Department of Environmental Protection (DEP) is considering regulating drilling near “seismic hazard areas” after geologists linked a series of small earthquakes in Ohio to fracking at a Utica Shale well. The Pittsburgh Post-Gazette reported that the DEP is beginning a “massive data-mining project” to determine whether the regulations are necessary.

In April, state geologists in Ohio determined that a “probable” link existed between five small tremors and fracking in the Utica Shale. State Oil & Gas Chief, Rick Simmers, believes that the fracking may have increased the pressure on a previously unknown microfault. As a result, the Ohio Natural Resources Department is implementing a special permitting condition that would require oil and gas companies who intend to drill within three miles of a known fault or seismic activity area of 2.0 magnitude and higher to install seismic-monitoring equipment. If the monitoring equipment alerts activity of 1.0 magnitude or greater, the company would have to temporarily cease drilling so geologists could evaluate the activity. If the evaluation reveals a link between the drilling and seismic activity, then the company would have to stop drilling.

Before Pennsylvania implements a permitting condition similar to Ohio’s, the DEP intends to look for possible links between fracking and seismic activity to determine if the state has any seismic hazard areas, and, if so, where they are. To do this, the DEP will compare current and historical records of seismic activity with completion reports that oil and gas companies have filed that detail fracking activity.

For further information regarding fracking and seismic activity, please see here and here.

This post was coauthored by Kathryn Geisinger(2014 BakerHostetler Summer Associate).

The American Petroleum Institute Pens “Good Neighbor” Standards for Fracking

Posted in Fracking, Hydraulic Fracturing, Oil and Gas

In a press release Wednesday, the American Petroleum Institute (“API”) published a first-of-its-kind industry standard for community engagement in shale-rich areas where oil and gas can be extracted using horizontal drilling and hydraulic fracturing techniques. API is a national oil and gas trade association with members including large integrated companies, as well as exploration and production, refining, marketing, pipeline, and marine businesses, and service and supply firms.

API Director of Standards, David Miller, announced at a press conference on Wednesday that the guidelines “will provide a roadmap for oil and natural gas operators seeking to build lasting, successful relationships with local residents in areas of the country where energy development opportunities are open for the first time.” He said that the standard “provides a detailed list of steps that oil and natural [gas] companies can take to help local leaders and residents prepare for energy exploration, minimize interruption to the community, and manage resources.”

The Community Engagement Guidelines document is divided into five phases of oil and natural gas development:

  • Entry: During the entry phase, companies are encouraged to introduce key personnel to local leaders, share information on safety commitments and operational goals, and set professional standards for local employees and contractors.
  • Exploratory Drilling: During the exploratory drilling phase, companies are encouraged to focus on transparency, open dialogue, and education, with recommendations for community meetings and discussions around training for job opportunities.
  • Development: During the development phase, companies are urged to work with local emergency responders to prepare for any potential risks, engage with local authorities, develop relationships with mineral owners, and promote best practices regarding safety and environmental protection.
  • Operations: During the operations phase, when industry presence declines as existing wells continue to produce, the guidelines recommend long-term standards for maintenance and safety, as well as a public feedback mechanism to allow local residents to maintain two-way communication with company representatives.
  • Exit: During the exit phase, as companies close or transfer ownership of local operations, companies are encouraged to engage with the community regarding plans for reclamation and restoration, and prepare stakeholders for the transition.

David Miller stressed that “each community is different, and the standards are not designed to be exhaustive, but rather to serve as a reference for developing a plan-of-action that matches the needs and concerns of a broad range of stakeholders — from rural farmers to indigenous tribes.”

More information is available here.

U.S. Surpasses Russia and Saudi Arabia as World’s Leading Producer of Oil

Posted in Hydraulic Fracturing, Oil and Gas

With an output exceeding 11 million barrels per day in the first quarter of 2014, the United States has surpassed Saudi Arabia and Russia to become the largest producer of crude oil and liquids separated from natural gas in the world, according to a report released by Bank of America Corp. on July 4, 2014. In June, the International Energy Agency also called the United States the biggest producer of oil and natural gas liquids. The United States has been the largest natural gas producer since 2010. Oil production in the United States is expected to continue to increase to 13.1 million barrels per day by 2019 before leveling off, according to the International Energy Agency, and the United States is expected to retain its status as the largest oil producer in the world until the early 2030s.

Oil production has climbed in the U.S. due to extraction at shale formations across the country through hydraulic fracturing, or fracking. “The American shale revolution has had a transformational effect on the U.S. and global economies in recent years,” said Francisco Blanch, Bank of America’s head of commodities research in New York. According to the Bank of America report, oil production in the United States has “expanded by 70 per cent since bottoming out in 2008, as has natural gas liquids (NGLs) output, while natural gas output has grown by 40 per cent since shale gas drilling picked up in 2005.”

Despite being the largest oil producer in the world, the U.S. Department of Energy reported the United States imported an average of 7.5 million barrels per day in April, making the U.S. the largest consumer of oil in the world. However, the Bank of America report also notes that as supply has grown more quickly than demand, America has shifted away from dependence on foreign fuels and now spends less than 1.5 per cent of national income on foreign oil and gas, in stark contrast to the heavy dependence on foreign fuels prior to the 2008 financial collapse.

Although oil production has increased in the United States, oil prices worldwide have remained high as this surge in U.S. supply comes at a time when outputs in other countries are endangered by civil unrest. Oil outputs from Iraq, the second-largest oil producer in Organization of Petroleum Exporting Countries, could be interrupted by the growth of an insurgency in Northern Iraq, while outputs from Libya (protests) and Nigeria (theft and sabotage) have also been reduced.

Additional coverage of this story can be found here, here and here.

Rural Nevada Anti-Fracking Group Seeks to Enjoin Oil and Gas Lease Sale

Posted in Fracking, U.S. Bureau of Land Management

Reese River Basin Citizens Against Fracking filed a complaint in federal court on June 27, seeking to enjoin the United States Bureau of Land Management (BLM) from holding an oil and gas lease sale. The rural group is comprised of owners of “farming and ranching land, water rights, and grazing rights” adjacent to the land that the BLM intends to lease. Citizens Against Fracking’s members claim they “derive recreation, aesthetic and spiritual benefit” from their use and enjoyment of the land at issue. In their complaint, the group claims that the BLM violated the National Environmental Policy Act (NEPA) by: (1) minimizing the proposed lease sale’s consequences, environmental impact and adverse effects in its environmental assessment and (2) proposing the lease sale without preparing an environmental impact statement.

In April, the Battle Mountain District Office of the BLM announced that it intended to hold a lease sale of about 230,989 acres of land in Lander, Nye and Esmeralda counties in Nevada. The BLM conducted an environmental assessment of the proposed sale and determined that the proposed sale’s environmental impacts are insignificant based on: (1) the low probability that any of the land will actually be used for oil and gas development and (2) the fact that leasing does not authorize oil and gas development. The BLM wrote an Interested Party Letter this past February and sent it to those with grazing rights to the land, posted it on its website, and noticed it in the Federal Register. The public had thirty days to respond, but Citizens Against Fracking did not respond because its members allegedly did not learn about the proposed sale until after the deadline had passed.

Citizens Against Fracking now claims the BLM minimized the environmental impacts that the lease sale and possible development would have on “air quality, cultural and historical resources, Native American religious and cultural sites, riparian and wetland impacts, threatened and endangered species, waste fluids, forest and rangeland, geology and mineral resources, geothermal conflicts, range resources, and recreation impacts.” Citizens Against Fracking also claims that the BLM did not consider the impacts that may be caused by fracking if the leases are developed. The group alleges that the BLM’s reliance on the low probability of development is misplaced because the BLM did not consider the impact of the newly evaluated Chainman Shale Formation, an area that a 2005 U.S. Geological Survey estimated could contain 1.598 billion barrels of oil and 1.836 trillion cubic feet of natural gas.

For additional coverage of this lawsuit, click here.

This post was coauthored by Kathryn Geisinger (BakerHostetler 2014 Summer Associate).

More Oil and Gas Patenting Worldwide, Especially in China

Posted in Oil and Gas

Innovation in the oil and gas industries, as measured by the number of patent filings, is increasing worldwide.  As reported by Thomson Reuters, from 2012 to 2013 the number of patent applications filed worldwide increased by a whopping one-third.  (“Unconventional energy boom drives oil and gas patents to record” (Thomson Reuters))  See below for a caveat.  Thomson Reuters attributes the increasing IP filings to the oil industry’s expansion into less-established forms of oil and gas extraction, such as hydraulic fracturing.

The oil and gas patent filings in the U.S. went up 18 percent in 2013.  Much of the increasing patenting occurs in China, where roughly 60 percent of new patent applications are filed.  The recent growth in Chinese industry has led to a greater demand for energy, and China’s filings have surpassed those of the U.S. to take over the top spot in international filings in the industry, according to the report.

The numbers reflect an increasing investment in intellectual property in the oil and gas industries, but the conclusions based on the numbers require some explaining because of the heavy effect of Chinese patent numbers.  First, the Chinese government subsidizes patent application filing in several ways, which results in more patents of dubious value.  A recent study found that Chinese applicants break up inventions into small bites for the purpose of filing multiple applications on one invention to increase subsidies (Z. Lei, Z. Sun, B. Wright, “Patent subsidy and patent filing in China”).  Second, a large majority of Chinese patent applications are low quality “utility models,” rather than patents on inventions, as in the U.S. and Europe.  Without the eye-popping patent numbers from China, the numbers still increase, just not in a hockey stick.

Further, it is unclear how Thomson Reuters obtained data for 2013 because patent applications remain secret for 18 months in nearly all countries.  The numbers might reflect official reports from patent offices around the world, which tend to be crude.

But the above questions about the data do not affect the overall conclusion: increased investment in IP in the oil and gas industries is clear and the surge of patenting in China is impressive.

This post was coauthored by Dmitry Dymarsky (BakerHostetler 2014 Summer Associate).

New York High Court Affirms Local Fracking Bans

Posted in Fracking, Hydraulic Fracturing, New York

On Monday, New York’s highest court—the New York Court of Appeals—upheld local bans on shale gas drilling designed to eliminate hydraulic fracturing.  The 5-2 decision clears the way for drilling opponents to target fracking at the local government level while the statewide moratorium remains in limbo.

Judge Victoria Graffeo wrote the opinion for the majority, which held that the “statewide Oil, Gas and Solution Mining Law (OGSML) does not preempt the home rule authority vested in municipalities to regulate land use,” and therefore could not restrict municipalities’ ability to eliminate drilling through its zoning powers.

The court emphasized that it “will invalidate a zoning law only where there is a ‘clear expression of legislative intent to preempt local control over land use,’” because zoning is a “core power” of municipalities in New York.

The dissent, written by Judge Eugene Pigott, criticized the municipalities’ use of zoning as a “pretext” to regulate oil and gas drilling, likening the bans instead to “regulation.”

Over 70 local fracking bans have already been passed in New York, along with several dozen fracking “moratoriums.”

The decision to uphold these bans creates additional risk for drillers in New York, with the potential for acquiring mineral rights that may become worthless in the event of a local ban. To overturn the bans, drilling operators would need to ask the legislature to revise New York’s oil and gas laws to specifically preempt local zoning laws.

Additional coverage of this story can be found here, here, and here.