Why a Little Fracking Knowledge is a Good Thing

Transcription

1 Why a Little Fracking Knowledge is a Good Thing Alex MacWilliam, Partner - Calgary Jason Schumacher, Partner - Dallas Association of Corporate Counsel - Houston Chapter June 11, 2013

2 About Dentons We are the product of three firms combining: FMC in Canada, Salans in Europe, and SNR Denton in the US, Africa, Asia, the UK and the Middle East A law firm with 2500 attorneys and one the largest firms in the world One of the largest oil, gas and energy sections in the world

3 Locations April 4, 2013 Dentons US LLP 3

4 Dentons Offices May 17, 2013 Dentons US LLP 4

5 Dentons Offices May 17, 2013 Dentons US LLP 5

6 Fracking Knowledge Is a Good Thing What will we talk about today? Fracking What is it and how is it being portrayed? Fracking regulations Fracking litigation Lessons and future trends

7 Why is Fracking Done? Huge deposits of oil and natural gas in low porosity/low permeability formations not producible using conventional drilling technology Combination of two existing technologies horizontal drilling and hydraulic fracturing allows for economic production of these resources Vertical wells vs. Horizontal wells horizontal drilling allows for far greater exposure to the productive formation Multi-stage hydraulic fracturing creates multiple artificial pathways to the wellbore and thus vastly increases recovery rates of the resource Essentially creates a reservoir in rock that would not have been previously considered to be commercially productive

8 Key Environmental Issues Increase in horizontal multi-stage fracturing operations has led to enhanced scrutiny of issues including: fracture fluid constituents (including disclosure to regulators and public) well integrity water usage (particularly in water stressed areas) waste disposal by injection Issues have been recently considered in numerous U.S. and Canadian jurisdictions Concerns about fracking have potential to also impact resource development overseas

9 Shale Gas Potential Outside North America Significant technically recoverable reserves in many countries but production is dependent on use of hydraulic fracturing Development of these reserves has significant economic, trade and geopolitical implications Actions of governments varies widely from country to country Dealing with public ownership of the resource Little history of petroleum development and no established regulatory regimes Exploration and production lags far behind Canada and U.S.

10 Ukraine One of largest shale gas and tight gas reserves in Europe (42 Tcf) Currently imports vast majority of natural gas needs from Russia (Gazprom) and is Russia s largest export customer Development of shale gas will reduce Russian economic influence Ukraine signed $10B shale gas deal with Shell in January yr Production Sharing Agreement No specific legislation applicable to shale gas so dealt with via PSAs Opposition to fracking could lead to delays in development

11 Poland Largest shale gas and tight gas reserves in Europe 187 Tcf technically recoverable Imports 2/3 of natural gas needs and 90% of imports come from Russia Development of shale gas will reduce Russian economic influence Still at exploration stage less than 50 wells drilled to date Government taking steps to reduce opposition to fracking legislation introduced to prevent groups from getting involved in administrative processes governing drilling (including fracking) unless they have been actively involved for one year prior to the process could preclude newly formed environmental groups from challenging permitting of wells and approval of drilling operations

12 South Africa Heavily dependent on domestic coal and imported oil Technically recoverable shale gas reserves of 485 Tcf in Karoo Basin would be 4th largest in world and bigger than Canada s (388 Tcf) Majors interested in developing but government imposed a moratorium on exploration in 2011 due to widespread public concerns regarding environmental and health impacts of fracking Task force released report in September 2012 recommending normal exploration be allowed but fracking only be authorized under strict supervision Despite recommendations, no further drilling applications processed Government now preparing fracking regulations, based on international best practices, to be released for comment in July, 2013

13 Elsewhere France - first nation to ban fracking. Ban still in place but some suggesting other methods of extraction being developed to get around ban. China world s largest technically recoverable reserves of 1275 Tcf but located in faulted and folded bores in mountainous regions, which would make horizontal drilling and fracking more difficult New York state temporarily banned fracking in 2010 and missed New York state temporarily banned fracking in 2010 and missed February 2013 deadline for completion of study report. More than 150 towns passed bans of their own covering nearly 20% of land atop Marcellus Shale. On May 2, 2013 NY appellate court upheld bans imposed by two towns, dismissing claims by energy company and landowner that bans were preempted by state oil and gas law. Appeal to NY Court of Appeals is expected.

14 Misperceptions Related to Fracking Fracking Explained Video - from YouTube User tdkota

15 The Eye Popper Video from Gasland by Josh Fox Documentary on fracking The money shot

16 Online Stats as of 06/09/2013 Google Results for Fracking - About 11,800,000 results Google Video Results for Fracking - 4,080,000 results Twitter Results for Fracking 34 tweets in one hour between 11:00 PM Central 12:00 AM Central

17 Industry not out in front of the issue Opponents of fracking winning the public relations battle Gasland documentary nominated for 2011 Academy Award Gasland Part II about to be released o Premiered at Tribeca Film Festival April 21, 2013 Hollywood also getting on the anti-fracking bandwagon o Promised Land released in December 2012

18 Drinking Water is Big Problem for Industry Two principal issues: Fracking chemicals getting into the water Gas migrating up through the formation into water sources What do the experts say?

19 Three Studies Duke University Study on Marcellus Wells University of Texas Study on Multiple Plays EPA Draft Report on Wyoming Wells

20 Duke Study Paper Released 5/2011 Conducted random sampling of wells Marcellus Shale in Pennsylvania and New York. Drew water from 68 private water wells - some near gas wells; some not Report available at:

21 Duke Study - Paper Released 5/2011 Results Could not make a determination that any fracking chemicals were in the water Did determine higher levels of methane in water wells near gas wells Explanation of the Results Did not believe methane seeped through 1000 s of feet of rock to water table Most likely cause is poor casing

22 University of Texas Study Released February 15, 2012 Areas of Focus Barnett Shale Haynesville Shale Marcellus Shale Report at: Report at: 02.pdf

23 University of Texas Study Released February 15, 2012 Results Could not make a determination that any fracking chemicals were in the water No migration of gas from shale wells Explanation of results - Poor well casing can lead to Explanation of results - Poor well casing can lead to heightened levels of substances in water tables (such as methane)

24 Environmental Protection Agency Study Draft of Results Released 12/2011 Evaluated wells located in Wyoming where hydraulic fracking was employed Drew water from private wells and two public wells Report available at: OnPavillion_Dec pdf

25 EPA Study - Draft of Results Released 12/2011 Results Contamination was found Explanation of the Results No direct conclusions could be made that fracking caused contamination But, fracking causes contamination How? Why?

26 (From the report) Detection of contaminants in ground water from deep sources of contamination (production wells, hydraulic fracturing) was considerably more complex than detection of contaminants from pits necessitating a multiple lines of reasoning approach common to complex scientific investigations. In this approach, individual data sets and observations are integrated to formulate an explanation consistent with each data set and observation...

27 ... While each individual data set or observation represents an important line of reasoning, taken as a whole, consistent data sets and observations provide compelling evidence to support an explanation of data. Using this approach, the explanation best fitting the data for the deep monitoring wells is that constituents associated with hydraulic fracturing have been released into the Wind River drinking water aquifer at depths above the current production zone.

28 Fracking Regulations Month Day Year Dentons US LLP Document reference # 28

29 Legislative and Regulatory Management - Canada Despite occasional rumbling from Ottawa, no federal regulation of hydraulic fracturing Some provinces have experience with regulation of drilling operations, including fracking Alberta (over 100 years of drilling and 60 years of fracking) Saskatchewan British Columbia (more recent) Other provinces are new to the game and are wary Quebec moratorium pending study (current current favors complete ban) Nova Scotia moratorium to mid-2014 to allow for review New Brunswick rules released in February 2013

30 Legislative and Regulatory Management - US State Federal

31 Texas Chemical Disclosure Requirements as of February 1, 2012 Must disclose within 15 days after well is drilled what chemicals were used in the fracking process

32 Other States That Have Rules Like Texas Louisiana Ohio Michigan Arkansas Tennessee Wyoming

33 New York No permits for high-volume hydraulic fracturing pending the outcome of a study by the state Department of Environmental Conversation Causes a de facto moratorium on the process State of Maryland has similar legislation

34 Pennsylvania Drilling impact fee Stiff penalties for violations of applicable regulations; Increased setbacks from streams, wells and public water systems; The establishment of best practices and enforcement mechanisms to ensure compliance; Greater public disclosure requirements, especially with respect to any hazardous substance content of fracking fluids and waste.

35 Vermont No Fracking From Governor Shumlin "I hope other states will follow us," he said. "The science on fracking is uncertain at best. Let the other states be the guinea pigs. Let the Green Mountain State preserve its clean water, its lakes, its rivers and its quality of life."

36 Federal Regulations Related to Fracking EPA Regulations on Air Related to Fracking Proposed Bureau of Land Management Regulations

37 Fracking Litigation Month Day Year Dentons US LLP Document reference # 37

38 Fracking Litigation Producers face litigation risks from: landowners other producers Risks magnified where fracturing taking place: on freehold (privately held) lands near urban areas in jurisdictions with no history of oil and gas development (e.g. Quebec) in jurisdictions without highly developed regulatory regimes

39 Fracking Litigation U.S. has seen fracturing litigation in both landowner and producer contexts approx. 40 active private landowner lawsuits commenced also numerous lawsuits between producers significant body of law re rights and liabilities as between producers, particularly regarding subsurface trespass and Rule of Capture Canada has seen little fracturing litigation to date, all in Alberta Ernst v. EnCana et al alleges contamination of a landowner s water well from hydraulic fracturing operations note that ERCB and ESRD also sued Zimmerman v. Quicksilver contains similar allegations regarding CBM wells CrossAlta v. Bonavista Energy alleges breach of a gas storage reservoir all lawsuits at early stages

40 Fracking Litigation Issues of proof may be challenging multiple producers operating in a relatively small area, subsurface facts, lack of baseline information, multiple exposures over many years fracturing fluid disclosure and baseline environmental assessments may simplify these issues effective record keeping and monitoring by producers may be critical to both sides Damages issues also problematic required level of reclamation future monitoring requirements predicting future impacts

41 Lessons and Future Trends Month Day Year Dentons US LLP Document reference # 41

42 Lessons and Future Trends Producers will be well-served by establishing sound operational practices, adhering to or exceeding all regulatory requirements, and undertaking effective and detailed monitoring and record keeping Producers, industry associations and others are increasing efforts to set the record straight about fracturing CAPP - Energy in Depth FrackNation released on U.S. TV in January and in Canada last week Attempts to increase the quality of information and decrease the noise o Rational Middle - International Energy Agency suggests operators follow golden rule : measure, disclose, engage

43 Lessons and Future Trends Be sure your compliance department is aware of the February 1, 2012 change to the RRC s rules related to chemical disclosures Be sure your company has a way to keep up with changing federal legislation Consider testing water before and after drilling so that your Consider testing water before and after drilling so that your company can defend itself if chemicals occur naturally in the area.

44 Lessons and Future Trends If water issues are found near your wells, what does your risk profile look like? Are you indemnified by the fracking company? Should you be indemnified going forward? What do your files look like re: chemicals used for fracking? Is your company s future tied to hydraulic fracturing? Should your company be lobbying the federal or a state government? Does your company need to think about PR campaign in areas where it is active to dispel rumors about water contamination?

45 Thank you Alex MacWilliam Dentons Canada LLP 15th Floor, Bankers Court, 850-2nd Street SW Calgary, AB T2P 0R8 Canada Jason A. Schumacher Dentons US LLP 2000 McKinney Avenue Suite 1900 Dallas, Texas Dentons Dentons is an international legal practice providing client services worldwide through its member firms and affiliates. This publication is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Please see dentons.com for Legal Notices.