North America Shale Blog

North America Shale Blog

Southern Methodist University Study Suggests Activities Related to Hydraulic Fracturing Responsible for Uptick in Texas Earthquakes

Posted in Hydraulic Fracturing, Texas

122910-1.cdrIn an article published late last month in the journal Nature Communications, researchers at Southern Methodist University pointed to hydraulic fracturing activities as the probable cause of an increase in earthquakes near Azle, Texas, based on a study they had conducted in the area. The researchers’ conclusion conflicts with the stance of the U.S. Geological Survey that the cause of the earthquakes is inconclusive.

In the study, the SMU researchers analyzed data from the U.S. Geological Survey’s National Earthquake Information Center, which reported that from early November 2013 through January 2014, there were 27 earthquakes near the cities of Azle and Reno, Texas. Since 2008, the northern region of Texas has experienced four swarms of earthquakes, with 130 total quakes. Most of the earthquakes have been relatively small, but citizens have expressed concern about the uptick, particularly since the U.S. Geological Survey reports that the area had only one recorded earthquake in the 58 years before 2008. In the article summarizing the findings of their study, the SMU researchers stated that “while some uncertainties remain, it is unlikely that natural increases to tectonic stresses led to these events.”  Continue Reading

IRS Publishes Proposed Regulations Addressing Fracking Services by MLPs

Posted in Fracking, Oil and Gas

Shale-Denver-Event-BlogOn May 6, 2015, the Internal Revenue Service (IRS) published proposed regulations [REG-132634-14], which if finalized would clarify that income from certain oil and natural gas fracturing (“fracking”) services is “qualifying income” for purposes of determining whether a master limited partnership (MLP) qualifies for favorable “passthrough” federal tax status.

Generally, an MLP qualifies for passthrough tax status if 90 percent or more of the MLP’s gross income for the year is qualifying income, which includes certain income from natural resource-related activities, including income from the exploration, development, mining and production, processing, refining, transportation, and marketing of minerals and natural resources. If an MLP does not satisfy the 90 percent threshold, the IRS could treat it as a taxable corporation, meaning that its income could be subject to two levels of tax – corporate income tax at the level of the MLP and additional tax at the level of the partners in the MLP at the time the income is distributed.

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Crude-by-Rail Update: The DOT’s Final Rule Is Out—How Can Producers and Midstream Transporters Comply with the New Classification Standards?

Posted in PHMSA, Pipeline, Transportation

obrechtOn May 1, the Department of Transportation—through its operating agencies the Pipeline and Hazardous Materials Safety Administration[1] and the Federal Railroad Administration—issued its final crude-by-rail rule. The rule mandates more stringent standards for newly constructed tank cars—along with the retrofitting of older ones—and imposes new operational controls for high-hazard flammable trains.[2] Despite the new rule, congressional and regulatory scrutiny remains focused on crude-by-rail transportation as accidents continue to occur, including a derailment on May 6 near Heimdal, North Dakota.[3]

Aside from the short- and medium-term macroeconomic effects of increasing costs and barriers to crude oil transportation from pipeline-starved shale plays, the rule imposes immediate requirements on the crude-by-rail industry.[4] Primarily, the rule demands immediate compliance from railroads and tank car owners (e.g., new DOT-117 tank car specifications, speed limits, and braking and routing requirements).[5] Continue Reading

Colorado Supreme Court Rejects Orders Requiring Plaintiffs to Present Early Evidence Supporting Their Toxic Tort Claims

Posted in Colorado

Colorado MountainsIn an April 20, 2015, decision that was highly anticipated by the energy industry, the Colorado Supreme Court rejected a procedural device called a “Lone Pine” order that requires plaintiffs to make a threshold evidentiary showing early in the case. The name Lone Pine order comes from the 1986 New Jersey state court case that is credited with pioneering the procedural device. In that case, the New Jersey court issued an order giving toxic tort plaintiffs four months to submit evidence of their exposure to toxic substances and evidence that the exposure was causally related to their alleged injuries. After several extensions of time, the plaintiffs were ultimately unable to produce the evidence, and the court dismissed the case.

Today, Lone Pine orders refer generally to case management orders issued by courts early in the litigation (typically before any discovery has been conducted) requiring plaintiffs to present some minimal evidence supporting their claims. Lone Pine orders have been used almost exclusively in large, complex toxic tort cases to require evidence of exposure to toxic substances, injury, and causation. The orders are aimed at quickly dispensing with baseless lawsuits by requiring plaintiffs to show some level of support for their claims prior to engaging in costly and time-consuming discovery and litigation. One of the more powerful rationales for courts using Lone Pine orders is that they simply require plaintiffs to produce evidence that they should already have before filing a lawsuit. In other words, Lone Pine orders have the potential to prevent fishing expeditions by plaintiffs who file suit first and worry about supporting their claims later. Continue Reading

Keystone XL’s Opponents Won’t Derail Canadian Oil Trains to the Gulf Coast

Posted in Oil and Gas, Pipeline, Transportation

bigstock-shot-of-railroad-crossroads-cl-38788111The U.S. Gulf Coast—with its 1.4 million barrels per day of coker[*] refining capacity geared to maximize output of high-value lighter products from lower-cost, heavy, high-sulfur crude oil feedstocks—is an ideal market for Canadian tar sands oil.[1] Two core factors have opened the door to Canadian supplies—which hit 377 thousand barrels per day (“kbd”) in January 2015 (Exhibit 1). First, Gulf Coast refiners need new heavy, sour crude supplies to compensate for declining Mexican and Venezuelan imports. Second, Canadian oilsands producers, who need cash flow to service debt and have multidecade operating time horizons, continue boosting output despite low oil prices.

Canadian oil is now a long-term proposition on the Gulf Coast. Exhibit 1 shows that in 2012 and 2013, Canadian exports to the U.S. Gulf Coast were opportunistic: refiners sought Canadian barrels during that time because they were cheap relative to other supplies. However, in 2014 and early 2015, import levels increased sharply despite Western Canadian Select (“WCS”) crude being less steeply discounted relative to Maya crude from Mexico. This suggests that Canadian crudes are becoming a baseline-heavy, sour supply stream for Gulf Coast refineries. Continue Reading

The Federal Government Continues to Prosecute Royalty Underpayment Claims Under the False Claims Act

Posted in Colorado, Oil and Gas

governmentEarlier this month, John Walsh, U.S. Attorney for the District of Colorado, announced that upwards of $66,000 had been recovered from Slawson Exploration Company (Slawson) in a settlement for alleged violations under the False Claims Act (FCA).[i]

Slawson is a privately owned oil and gas exploration company based in Kansas. The claims against it stemmed from allegedly improper valuation of gas produced from Indian leases and underpaid royalties to the Office of Natural Resources Revenue (ONRR).[ii]

It was alleged that this was but one instance of many in which Slawson knowingly underpaid royalties on its leases.[iii] Matthew Elliott, Deputy Inspector General for Investigations for the Department of the Interior (DOI), cites this settlement as a “reminder” that Indian mineral interests in particular are being monitored by the DOI, in cooperation with ONRR.[iv] Continue Reading

Colorado Court Ruling Confirms Role of Colorado Oil and Gas Conservation Commission in Resolving Royalty Disputes

Posted in Colorado, Oil and Gas

It is not uncommon for royalty disputes between mineral lessors and operators to increase as oil and natural gas prices decrease. Before mineral lessors go running to the courthouse in Colorado, however, and before operators respond to a lawsuit, both sides should consider the appropriate forum for the dispute. In a recent ruling dismissing a complaint at the outset of litigation, the District Court in Garfield County recognized the role given by the legislature to the Colorado Oil and Gas Conservation Commission (COGCC) to adjudicate certain royalty claims. Business Agreement

In Jolly Family v. Bill Barrett Corporation,[1] the mineral lessors filed a complaint alleging a breach of the lease agreement and demanding an accounting on damages. The lessors alleged that Bill Barrett Corporation (BBC) failed to properly calculate royalties, in part, by failing to fully account for the proceeds from the sale of the gas and the products extracted therefrom; excluding and undervaluing the proceeds received from the sale of NGLs; and excluding volumes of natural gas that had been produced and sold or consumed. BBC responded by filing a motion to dismiss due to the plaintiff’s failure to exhaust administrative remedies before the COGCC, which has the authority to adjudicate disputes over royalty amounts due a lessor by an operator.[2]  The Court agreed with BBC and dismissed the complaint.[3] Continue Reading

State of North Dakota Intervenes in Wyoming’s and Independent Producers’ Challenge to Hydraulic Fracturing Rule

Posted in Hydraulic Fracturing, North Dakota

Hydraulic_Fracturing_iStock_000017667465SmallThe state of North Dakota moved to intervene yesterday in the state of Wyoming’s challenge to the Bureau of Land Management’s new hydraulic fracturing regulations. North Dakota—like Wyoming—asserts that the hydraulic fracturing regulations exceed the BLM’s statutory authority and contradict existing federal law—impermissibly encroaching on the states’ regulatory authority.

North Dakota becomes the second state to request that the BLM’s hydraulic fracturing regulations be set aside, echoing the relief that BakerHostetler requested on behalf of the Independent Petroleum Association of America and Western Energy Alliance two weeks ago. Continue Reading

Hydraulic Fracturing Moratorium Lifted in North Carolina

Posted in Fracking, Hydraulic Fracturing

Last week, North Carolina became the 34th state to allow hydraulic fracturing. Years in the making, new rules developed by the state’s Mining and Energy Commission after receiving over 200,000 public comments went into effect last Tuesday allowing the state to issue drilling permits to companies to begin shale gas exploration and extraction. The new rules open the door for drilling to begin in North Carolina later this year. The new rules govern many aspects of drilling, including well construction, water testing and buffer zones. Officials from the Mining and Energy Commission indicated that any company interested in fracing would have to establish a “drilling unit” by acquiring the mineral rights associated with several hundred acres of land before being able to apply for a drilling permit. Continue Reading

Crude-by-Rail Still Outcompetes Pipelines in the Bakken

Posted in North Dakota, Shale

With low oil prices and producers slashing the rig count in the Bakken shale, it is fair to ask whether crude-by-rail will be able to compete with pipelines in the region. The bottom line is that crude-by-rail is likely to continue playing a vital role in carrying large amounts of crude—more than 700 thousand barrels per day (kbd) or roughly 10 unit trains’ worth per day—out of the Bakken area.

Aggregating the existing crude-by-rail loading facilities and export pipelines in the Bakken area indicates that there are currently approximately 1,360 kbd of rail and 750 kbd of pipeline takeaway capacity (Exhibit 1). Rail capacity could rise to 1,500 kbd over the next three years, primarily from expansion of existing facilities, while pipeline capacity could increase to 1,300 kbd by year-end 2018. In short, the vast majority of potential outbound rail capacity is already “baked in” and pipelines are where capacity could grow sharply if planned projects come through. Continue Reading