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THE ISSUES

Hydraulic fracturing and horizontal drilling—the techniques that allowed this unprecedented production of natural gas and oil from low-porosity rock such as shale—have reversed the course of energy production in America and transformed the fates of many manufacturing industries that are both major suppliers to the oil and gas industry and heavy consumers of energy. One need look no further than President Obama’s 2014 State of the Union address to understand the importance of this broad economic transformation:

“Now, one of the biggest factors in bringing more jobs back is our commitment to American energy. The all-of-the-above energy strategy I announced a few years ago is working, and today, America is closer to energy independence than we’ve been in decades.

“One of the reasons why is natural gas—if extracted safely, it’s the bridge fuel that can power our economy with less of the ­carbon pollution that causes climate change. Businesses plan to invest almost $100 billion in new factories that use natural gas.”

The regulatory, legislative and legal framework under which this “Shale Gale” continues is profoundly important to key suppliers and end users in the energy industry as well as the consumers of energy. This article provides an overview of the framework as well as key issues to watch in 2014.

THE STATES

States are the primary regulators of the oil and gas industry. In 2014 (in a process that began in 2013), many states will update their oil and gas regulations and statutes to account for and regulate the increased use of hydraulic fracturing. State regulations of hydraulic fracturing cover a wide variety of issues including siting, permitting, disclosures, water withdrawals, fluid storage, water disposals, ­casing and other well-integrity standards.

An important aspect of many state oil and gas laws is that they are generally designed to “preempt” the imposition of a patchwork of inconsistent local regulations and bans. Courts are challenging this issue, however. For example, in late 2013, the preemptive portion of Pennsylvania’s oil and gas law was struck down by the Pennsylvania Supreme Court. In 2014, we expect more state preemption laws to be challenged by activists and strengthened by lawmakers seeking to avoid the fate faced by Pennsylvania’s oil and gas law.

Meanwhile, California will likely have one of the most watched regulatory processes in the country as what’s happening in oil and gas development is a hotly debated issue in that state. Such development was the subject of more than a dozen unsuccessful bills in 2013. Although California is home to the very important Monterey shale ­formation, the state does not presently have hydraulic fracturing-specific regulations.

Colorado also will be closely-watched because the state is the first to propose regulating methane, which is both a valuable commodity and a greenhouse gas (GHG). Methane is already controlled under the federal Clean Air Act.

THE FEDERAL GOVERNMENT

In light of a divided Congress and legislative calendar truncated by midterm elections later this year, the nation is unlikely to see enactment of any major legislation on oil and gas development. The issue will be the subject of many hearings and bills moving through committees of jurisdiction, however. Given the limited prospects for any meaningful legislative changes, the focus on oil and development throughout 2014 will continue to be in the regulatory arena. Among the types of decisions that can impact the Shale Gale are the direct regulation of oil and gas industry processes under environmental, health and safety statutes, public land access and demand-side issues.

The foremost demand-side regulatory activity relates to exports (see sidebar). There is some irony here. For many years, Congress was focused on curbing our nation’s dependence on foreign energy. Now, the tables have turned and the country has begun to more closely examine energy export policies. Already, the Senate Energy & Natural Resources Committee held a hearing on crude oil exports, which have been banned since the 1970s. Also, while natural gas exports are not banned, shipping product to countries that don’t have a free trade agreement with us requires approval by the Department of Energy, a process that can be overly time-consuming. Some parties advocate a cautious approach, expressing concerns this nation might export its new-found competitive advantage. Expect continued discussions, studies and issue papers focused on the pros and cons of modifying the country’s energy export policies. While legislative action this year is unlikely, Congress may begin to lay the groundwork for future action.

WHAT MAY GET DONE

We anticipate a variety of federal environmental health and safety regulatory activity in 2014, including:

• Finalization of the Bureau of Land Management rule to further regulate hydraulic fracturing on federal land
• Finalization of Environmental Protection Agency (EPA) guidance on the regulation of hydraulic fracturing that uses diesel under the Safe Drinking Water Act
• Hearings and comments on the Occupational Safety and Health Administration’s proposal to further regulate silica exposures across industries, but with particularly significant impacts on the hydraulic fracturing industry’s use of silica sand as a proppant
• Potential further EPA regulation of air emissions from hydraulically fractured natural gas wells
• Completion of EPA’s study of the potential impacts of hydraulic fracturing on drinking water, which is viewed by many as a prerequisite for potential regulation under the Clean Water Act, as well as regulations regarding the treatment of wastewaters associated with oil and gas development
• Issuance by EPA of an advanced notice of proposed rulemaking to increase reporting requirements under the Toxics Substances Control Act for chemicals used in hydraulic fracturing
• Continued use of the Endangered Species Act by some environmental groups to block or constrain development within critical oil and gas basins and of pipelines and other energy infrastructure
• Continued aggressive use by EPA of its enforcement and emergency response powers under multiple statutes

While the fortunes of geology and innovation make it likely that the Shale Gale will storm onward, the cumulative impact of these potential regulatory changes will be closely watched throughout 2014. Stay tuned to 名媛直播 Magazine and VMA’s other resources for updates on how this will happen. VM

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Wayne D’Angelo is special counsel for environmental and energy issues at Kelley Drye & ­Warren. D’Angelo can be reached at wdangelo@kelleydrye.com or through his blog, www.frackinginsider.com.

Maggie Clarke is a government relations and ­public policy advisor at Kelley Drye & Warren. Clarke can be reached at mclarke@kelleydrye.com.

 

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The Shale Gale Debate

By Kate Kunkel 

As Wayne D’Angelo and Maggie Clark point out, there is much speculation about the possibility of the U.S. one day being a net exporter of energy. To accomplish this will require major legislative, regulatory and legal action because crude oil exports have been banned since the 1970s.

Discussion is already well on its way, however, as evidenced by the January 2014 hearing within the Senate Energy and Natural Resources Committee. But none of what is to come will happen overnight. There is too much resistance from some refiners and manufacturers that could benefit from cheaper supplies as well as opponents that play the patriotism card by saying American crude should be used to ensure the nation’s energy security.

Still, prominent politicians such as Alaska’s Republican Senator Lisa Murkowski and some producers such as Exxon Mobil Corp. are urging an end to the prohibition with arguments that are multiple and complex.

Meanwhile, conservation and economic factors have decreased energy demands so domestic oil producers want to diversify their markets and gain greater access to foreign buyers. At the same time, a geographic mismatch exists in the U.S. between producers and consumers because of a limited pipeline system for delivering U.S. crude to the coasts. Finally, many U.S. refiners, after making huge investments to handle heavier crude such as diluted bitumen from Alberta’s oil sands, are ill-equipped to process the growing supply of domestic light oil.

But biggest among the issues right now is: how much oil can actually be produced? Can U.S. oil production ever exceed U.S. consumption?

SUPPLY

In December, the U.S. Energy Information Administration (EIA) released a report projecting that American production will peak at 9.6 million barrels per day (bpd) in 2019; but, as wells age, production will slowly decline. Demand is also expected to fall after 2020, but not as quickly as production. EIA also projects that imports will decline to 25% of use in this country by 2016, but should rise up again to 32% by 2040.

This indicates the possibility that the U.S. simply cannot produce enough to meet its own needs, let alone generate enough to export without endangering its own supply. However, some analysts say a vibrant export market would spur production and make North America essentially self-sufficient in oil. According to a 2013 report from the EIA1, the United States has 58 billion and Canada has 9 billion barrels of technically recoverable tight oil.

Some analysts would say that’s enough to eventually create a surplus for possible export. Turner, Mason & Co., a consulting engineering firm based in Houston, projects that, with a best-case, high-growth scenario, American production could climb by 2022 to 12 million bpd and Canadian production could increase to 5.5 million bpd. This scenario takes into account only 1.5 million bpd of imports from offshore against roughly 3 million bpd of exports from North America.

Many who oppose lifting the ban say allowing crude exports would decrease energy security and create higher gasoline prices. Other analysts and some economists say it would have little or no effect on prices because the U.S. already exports a great quantity of gasoline and diesel, which are finished products that are not restricted. That quantity was about 2.6 million bpd in 2012.

According to independent producers, this current state of affairs benefits only major refiners, which are processing lower-priced crude and selling record amounts of finished products overseas. At the same time, Graeme Burnett, senior vice president for fuel optimization at Delta Airlines, which owns the former Phillips 66 Trainer refinery, said lifting the ban would benefit only oil exploration and production companies.

Obviously, the opinions are varied depending on viewpoint and perspective. Sen. Ron Wyden (D-OR), the chairman of the committee that held the hearing, said that for him, the “litmus test is how middle-class families are going to be affected.”

TRANSPORT AND PRICE ISSUES

One obstacle to exports is the issue of transporting crude. With the dearth of pipelines in areas where the oil is extracted, a significant concern is how the crude will get from the isolated plays to its ultimate markets. Recent disasters have made the option of transporting by railcar less attractive, and increased regulatory requirements will also make that more expensive.

Transport problems also impact the price of refined products domestically. Amy Myers Jaffe, executive director for energy and sustainability at the University of California, Davis, calls this problem the “tyranny of geography.” The big differences in pricing of refined products such as gasoline result from supply bottlenecks created by absent pipelines or regulatory policies. Jaffe suggested during the Senate hearing that, if the ban was lifted, the nation could moderate gasoline price swings by mandating stockpiles, a tactic that Japan and Europe have adopted.

IS IT ALL A MOOT POINT?

The debate over whether exports are feasible or beneficial could rage for years. In fact, some say that this discussion could last longer than the alleged oil surplus.

Daniel Weiss, a senior fellow at the Center for American Progress, points out that soaring domestic production may not last forever. If production in operational wells declines faster than anticipated, producers may cap capital expenditures to avoid losing more on decreasing crude harvests. As a result, “This energy abundance could be a temporary phenomenon,” he said.

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¹June 2013 EIA Report: Technically Recoverable World Shale Oil and Shale Gas Resources

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Kate Kunkel is senior editor of 名媛直播 Magazine. Reach her at kkunkel@vma.org.