Long Term Risks and Liabilities in Shale E&P

Transcription

1 Long Term Risks and Liabilities in Shale E&P Julie Stanger (Chevron) Brian Kennedy (FTI) Joshua Belcher (Sutherland) Jack Massey (Sutherland) April 8, 2016

2 Jack Massey Litigation Partner, Houston Joshua Belcher Environmental Attorney, Houston

3 Road Map Shale production comes with a number of known and speculative risks. Hydraulic Fracturing Overview Water & Air Pollution Regulatory & Social Litigation Crisis On the Horizon 3

4 Hydraulic Fracturing Overview

5 Hydraulic Fracturing Overview Hydraulic fracturing occurs after the well is drilled, cased, and cemented A perforating gun is fired to pierce the casing, cement, and shale formation Water is mixed with proppant (such as sand) and chemicals and pumped into shale reservoir under pressure Around 3-4 million gallons of water are needed per well ~70% of water flows back up the wellbore where it is recycled or stored (depending on play/formation) 5

6 Hydraulic Fracturing 6

7 Hydraulic Fracturing 7

8 What s Pumped Downhole? Typical water-based solution is 99.5% water and sand EPA reports water is used as base fluid in 93% of wells Chemical additives perform specific functions: creating and extending fractures; transporting proppant; placing proppant in fractures; conditioning well and fluids 8

9 Aftermath: Water Storage, Transport & Injection 9

10 Water & Air Pollution

11 Environmental Risks Water Quality & Use Gas Emissions Surface Damages 11

12 Water Issues Concerns about the contamination and overuse of water drive the heated public fight over hydraulic fracturing. Surface spills tanks, pools, transport Groundwater contamination operating wells and injection wells Subsurface migration of hydrocarbons Inadequate treatment of wastewater Long term environmental damage water loss, drought 12

13 Air Issues Emissions of gases like methane may pose local health risks and have climate change implications. Groundwater contamination Ozone and smog Methane greenhouse impact Porter Ranch Incident 13

14 Land Issues Hydraulic fracturing operations have a large footprint and may cause changes to the land and to mineral formations that anger landowners. Surface damages - Surface tanks - Roads - Hazards Traffic - People - Heavy Equipment Trespass & Conversion 14

15 Legal Implications Familiar operational risks - Landowner suits - Spill liability Longer term environmental risks - Waste water disposal and treatment - Leak detection and repair - Comprehensive site clean-up and remediation Growing regulatory and political risk - Moratoria - Investigation - Reclamation, plug & abandonment, bond release - Special permitting setbacks; pit restrictions; wildlife protection; spill control preparedness; water and air monitoring 15

16 Regulatory, Social & Political

17 Regulatory Framework Shale exploration has traditionally been regulated by the states. But federal and local action is becoming more common. Federal - EPA - FERC State - E.g., Texas Railroad Commission - E.g., Texas Commission on Environmental Quality Municipal / County - Bans 17

18 Enforcement Trends Proposition 13 Denton Federal compliance investigations 18

19 Litigation

20 Endless Litigation Widespread activity, public attention, high political stakes, and substantial pioneer litigation have given rise to a tidal wave of claims. Civil tort actions Oil & gas lease disputes Private claims under federal and state environmental laws FOIA, defamation, and Anti-SLAPP litigation Challenges to regulations 20

21 Class Actions Plaintiffs have a potentially powerful tool for litigating commercial, environmental, and health claims through the class action procedure. Royalty Contamination Earthquakes Climate change 21

22 Class Action Close-up: Earthquakes in Oklahoma The Oklahoma Supreme Court ruled in 2015 that plaintiffs may sue E&P companies for damages caused by earthquakes. Increasing number and strength of earthquakes Arguments that hydraulic fracturing process and wastewater disposal wells cause quakes Oklahoma adopts the scientific consensus

23 Crisis

24 Crisis Management: The Backdrop Confidence/trust in business leadership, financial markets & political leadership is at an all time low. 80% 70% 60% 50% 40% 30% 20% 10% 0% Is the country headed in the RIGHT DIRECTION or off on the WRONG TRACK? 42% 47% 55% 54% 50% 50% 38% 38% 34% 34% 62% 60% 60% 58% 27% 30% 26% 28% 70% 70% 20% 20% 64% 65% 62% 60% 60% 63% 57% 58% 56% 51% 35% 33% 30% 41% 29% 30% 25% 23% 27% 24% Allstate/National Journal Heartland Monitor Poll Conducted by FTI Consulting Right / Wrong Track Republicans 9 / 88 Independents 20 / 66 Democrats 44 / 42 FTI s March 2016 Heartland poll showed that 66% of Americans think that large corporations are impediments to solving issues facing the country; zero trust. 24

25 Observations from Current Events 25 Recent catastrophic events offer insight into the importance of effective stakeholder management during a crisis, when even some of the most well known and highly valued brands are at risk The failure of companies to follow basic rules of engagement can result in significant loss of enterprise value - not to mention brand investment, ongoing operations, reputation & long-term viability. Results in lasting, adverse reputational damage among key stakeholders: - Investors - Employees - Customers - Regulators Common set of missteps include: - Failure to disclose facts immediately - Attempting to minimize events and/or underestimate the extent of a crisis - Declaring victory too soon - Failure to demonstrate accountability; casting blame on others - Inconsistent statements

26 The Drivers of Exposure 26

27 Best Practices in Crisis Management Plan & prepare; store-up capital with key constituencies. Know what you re dealing with. Take control of your story. - Demonstrate concern and accountability - Own the message and manage information Ensure a proportionate, consistent response. Work from the inside out. Anticipate competitive opportunism. Integration of/coordination between legal and communications teams is vital. 27

28 On the Horizon

29 Prediction is very difficult, especially if it s about the future. Niels Bohr

30 Statutory/Regulatory Snowball & Trial Lawyer Opportunism National Environmental Policy Act - Environmental impact statements - Accounting for systemic emissions impacts in permitting and approvals - BLM; USFS; FERC; BOEM; DOE; Army Corps of Engineers; EPA Expanded action under Clean Water Act and Clean Air Act Securities & RICO laws State tag-along Private causes of action 30

31 Political Cases: New York versus Exxon 1921 Martin Act - Illegal for a company to mislead the public by misrepresenting or omitting material facts in offering securities - No proof of intent required - Covers all deceitful practices contrary to the plain rules of common honesty. Case theory is that Exxon made statements about climate change to investors that conflict with its own research and paid outside groups to dispute climate science California, Massachusetts, and the Virgin Islands also investigating; 15 states have publicly offered support Al Gore: Oil industry today like tobacco industry in 1990s NY AG Eric Schneiderman The First Amendment, ladies and gentlemen, does not give you the right to commit fraud. 31

32 Activist Cases: Global Warming & The Constitution Suit brought by young people seeking declaratory and injunctive relief against the U.S. in relation to national energy policy Future Generations are a plaintiff through their Guardian Dr. James Hansen. Survived dismissal on April 8 in the U.S. District Court for the District of Oregon 32