US Approach To Shale Hydrocarbons Development (“Fracking

US Approach To Shale Hydrocarbons Development
Institute of Law and Finance
University of Frankfurt
David J. Evans
March 27, 2015
 15 years ago, no one would have recognized this topic
 Combination of two old drilling techniques – hydraulic fracturing and horizontal drilling (for
simplicity here, "fracking") – changed the oil & gas industry (and perhaps the world
 Today, we will discuss:
Why and how the US led the way in the development of fracking;
Its impact on the US and world oil markets; and
Its future in the US in light of increased public opposition ("fractivists")
 We will also review the current state of US regulation and litigation involving fracking
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Lower 48 States Shale Plays
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Global Shale Gas Resources
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What Makes the US Different?
 Entrepreneurial nature of domestic oil and gas business
 Private ownership of mineral rights; alignment of economic interests
 Developed pipeline infrastructure
 Access to drilling technology
 Access to capital
 Decentralized Federal system - significant “policy-making” at state and local levels
 Receptive “all-of-the-above” national energy strategy
 Geography and geology
 Familiarity with oil & gas in some endowed areas and economic need in others
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US Natural Gas Supply by Source
Natural gas production by source, 1990-2040 (trillion cubic feet)
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US Shale Gas Production, 2000-2014
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Henry Hub Natural Gas Price
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Destinations of Contracted US LNG Exports
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Crude Oil & Refined Products
 The US currently pumps over 9 MBBLs/d of crude oil; up over 55% from five years ago
 Current US law essentially prohibits the export of US crude (with some ad hoc
exceptions; an average of 95,000 BBLs/d were exported to Canada in 2013)
 However, there are increasing calls for this ban (which relates back to the oil crises of the
1970s) to be lifted or modified
 In a series of recent orders, the Department of Commerce has allowed condensate
(ultralight shale oil) that had been "stabilized" and "distilled" to be shipped by tanker to
foreign buyers; this has been touted as the beginning of licensing regime that will allow oil
shipments in spite of the '70s Congressional ban
 Now codified in Department of Commerce guidelines (December 2014)
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Oil Products
 The US is also exporting significant amounts of oil – not as crude, but in the form of
refined oil products, for which no export approval is needed
 Exports of US refined products – especially low sulfur diesel – are up 65% since 2010
 US refined products are displacing European sales
 Significant exports to Mexico
 Refineries are responding to the availability of inexpensive, "trapped" US crude, and will
be adding 400,000 BBLs of crude refining capacity before 2018, and 600,000 BBLs of
"splitters" to process ultra-light shale oil, making even more oil products for domestic
consumption or export
 Allowing ultralight shale oil to be shipped directly to foreign buyers (as noted above) may
threaten the economic rationale for some planned splitters
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Relative Prices of Crude Oil and Natural Gas
Cushing, OK WTI Spot Price FOB
(Dollars per Barrel)
Europe Brent Spot Price FOB (Dollars
per Barrel)
Price of Liquefied U.S. Natural Gas
Exports (Dollars per Thousand Cubic
Henry Hub Natural Gas Spot Price
(Dollars per Million Btu)
Source: created from data sets published by U.S. Energy Information Administration
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So Where Are We Now, Given The Crash In Oil Prices?
 Cancellation or postponement of large projects, such as SASOL GTL, new liquefaction
 Shut-in of shale wells; idling of drilling resources (reduced, but not reversed, production
 Individual producers making decisions at the margin – level of hedges; debt coverage
considerations; different price outlooks; ability to squeeze production costs
 Certainly an effective "shot across the bow" by Saudi Arabia
 The domestic natural gas market is not entirely tied to oil prices (not stranded gas, as in
some countries)
 Sales of natural gas to residential, industrial, process and power consumers continue
 US refining capacity now more closely matched to US crude; benefit of cheap oil products
will continue
 "Nimble" industrial nature of fracking lends itself to ramp-ups and ramp-downs; the "snap
back" could be sharp
 US as the de facto “swing producer” (or “balancing” agent)
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Environmental Impacts of Fracking
 Contamination of acquifers
 Disposal of waste (recovered) water
 Impact on infrastructure
 GHG (primarily, methane) releases
 Seismic activity (UK, Oklahoma, DFW)
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Barnett Shale Timeline
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DFW Seismic Activity
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Fracking Regulation and Litigation
 Applicable oil & gas regulation depends on site – state law for private land, US Bureau of
Land Management for Federal lands (large part of Western US)
 Some states (notably, New York) have banned fracking or placed a moratorium on
 US Environmental Protection Agency and state environmental agencies developing
regulations relating to
Public disclosure of chemicals contained in fracking solutions
Disposal and treatment of returned drilling fluids used in fracking
Impacts on water supplies, including acquifers
Methane emissions for new wells (40% reduction by 2025)
 NEPA considerations in Federal decision-making; how “remote” are the impacts required
to be considered under CEQ Guidelines (BLM case; FERC LNG decisions; GHG
 But largest regulations may be local – zoning and permit decisions of local governments
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Fracking Regulation and Litigation (cont’d)
 Unless preempted by Federal or state law, local regulations control the place and impact
of oil & gas drilling (although not methodology or taxation)
 Thus, the battle has been whether (favorable) state oil & gas law preempts (less
favorable) local regulation / “home rule” rights
 The answer is mixed (and subject to change as legislation is enacted and court decisions
interpret the legislation)
State law preemption found: West Virginia; Ohio; Colorado
State law does not preempt local regulations: New York; Pennsylvania; California
Issue pending: Texas
 New York State-wide moratorium on health and environmental bases likely will be subject
to numerous “taking” challenges
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Take-Away Conclusion
 Shale hydrocarbon development is critical to the US economy, and will continue to be
 Further production and development will be determined by microeconomics, not national
energy policy
 The US may be fairly unique in its ability to exploit shale hydrocarbons; what works in the
US may not be a world-wide model
 There is a balance to be struck between shale oil & gas development and better
environmental practices – forcing producers to absorb externalities will increase costs,
but those can be accommodated in the existing domestic market and expected LNG
 US will play a larger role in world energy balance – both in natural gas and oil exports
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