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New methane rules: A solution in search of a problem


Last week, a White House that has for months been extolling the virtues of natural gas – and taking credit for the boom in domestic oil and gas production – announced tough new rules designed to reduce methane emissions. If anyone had any doubts that the Obama administration has the energy industry in its sites, the move should dispel them once and for all.


This is a classic case of a solution in search of a problem. Methane emissions fell 10 percent between 2013 and 2014, according to a study from the University of Texas. And the Environmental Protection Agency said that emissions from hydraulic fracturing plummeted 73 percent between 2011 and 2013 – a period when production was soaring.


In other words, the industry – thanks to new technologies, innovation, and a commitment to environmental responsibility – has been doing an effective job on its own to voluntarily reduce emissions. So the new rules are unnecessary and burdensome, and will potentially produce only one tangible outcome: raise the cost of doing business, and thus strangle the U.S. energy renaissance.


It couldn't come at a worse time, either.


OPEC’s price war on U.S. shale is already having an effect. There have been layoffs, bankruptcies, cutbacks in spending. Overregulation is never good, but it when comes as energy companies are having to slash budgets to stay competitive in the global market, the idea of making it more expensive for them to do business is illogical.


Nor is there any logic in taking punitive action against an industry that has been the one bright spot in the economy during our long, stubbornly slow recovery from the recession.


But at the end of the day, I’m not sure the White House is concerned about logic. Because these proposed new rules send a pair of messages suggesting they’re less about sound environmental protection than they are about environmental politics.


First, the administration is going to more aggressively push a green agenda. When the president said he would veto a Keystone XL Pipeline bill – despite popular and bipartisan support – many wondered if it indicated he was going to dial up his efforts to appease the environmental left. The methane emission rules confirm that he is.


And second, the White House is making a more aggressive effort to impose the U.S. government’s will on responsibilities that have been traditionally left to the states. Environmentalists have long pushed for tougher federal rules on the oil and gas industry because they believe – evidence to the contrary notwithstanding – that state rules are too weak. The methane regs would appear to appease them in that regard as well.


But Washington’s first responsibility isn’t to the environmental left. It is to the national interest. Trying to “put another nail in the coffin of fossil fuels,” as one industry trade group executive put it, is not in the country’s economic, energy, or security interest. So while the White House pats itself on the back for what it calls “common-sense” methane rules, the reality is that they are anything but.

 

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North Texas, fracking, and earthquakes: No smoking gun, just smoke


The anti-hydraulic fracturing crowd got a belated Christmas present last week with an article in the Daily Beast that was headlined, “26 Earthquakes Later, Fracking’s Smoking Gun Is In Texas.” But maybe they shouldn’t open it just yet.


The story came after a spate of small tremors occurred in Irving between October and early January. The author of the column was quick to point the finger at fracking, noting that the Irving area is home to 2,000 drilling sites and a number of injection wells are nearby. Therefore, his logic goes, there is a connection: Where there’s smoke (fracturing) there must be fire (quakes).


Except right now, there’s only smoke. Here’s what some of the more objective observers have to say on the subject:
 

  • “It’s premature to speculate on the cause of this current series of seismic events.” – Brian Stump, Southern Methodist University’s Albritton Chair of Geological Sciences
  • “There are no oil and gas disposal wells in Dallas County. And I see no linkage between oil and gas activity and these recent earthquakes in Irving.” – Dr. Craig Parson, seismologist for the Texas Railroad Commission
  • “You can never say never, but it doesn’t look like a smoking gun.” – Cliff Frohlich, a University of Texas seismologist and an expert on Texas earthquakes, on the link between injection wells and the tremors
  • “We cannot say yet what’s causing the Irving earthquakes.” – Heather DeShon, professor of geophysics at SMU



I also want to point out that the Dallas area has seen more than 100 quakes that have measured 3.0 or higher on the Richter scale since the mid-1800s. That’s a long time before George Mitchell’s dream of a developing a better process for extracting oil was even close to becoming a reality.


No one can say right now with any certainty what’s causing the quakes in North Texas. Some have suggested that it’s due to natural shifts in the Balcones Fault Zone, which cuts through Irving. I don’t know.


But the Texas Railroad Commission hired Dr. Pearson, the seismologist, to find out, and has tightened rules for the disposal of drilling wastes. And SMU researchers have installed seismographs in Irving to also try and pinpoint a cause for the recent activity. Those are all appropriate steps.


What’s not appropriate, though, is to automatically put the blame at the feet of oil and gas companies. While that may be politically convenient to do so, all it does is shed more heat than light on the issue.

 

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Lifting ban on condensates may be a good sign - but it's just a first step


As 2014 drew to a close, and concerns continued to swirl about the ongoing effects of falling crude prices, there was a bright spot last week for the energy industry – coming, of all places, out of Washington.


On Dec. 30, the U.S. Commerce Department published guidelines that clearly defined condensate not as a crude oil but as a petroleum product, which “are subject to few export restrictions.” The agency also detailed what companies can do to avoid violating the existing ban on exporting crude.


In other words, it just got a whole lot easier to sell condensates overseas without government approval.


Since the news emerged, there has been speculation that this might pave the way toward lifting the 40-year-old crude ban altogether. However, the department’s Bureau of Industry and Security, which posted the guidelines, did not give any signal as to whether that was on the horizon.


Still, it was the second time this year Commerce has opened the door to increased exports.


Back in March, it said crude condensate that was processed through a distillation tower could be exported legally. But the ruling was private and directed at only two companies, so it didn’t generate a lot of attention. But now, given last week’s broader-based action, the two decisions may provide some insight into the Obama administration’s thinking.


Citigroup believes it could. In a research note, it said the guidelines could “open the floodgates to substantial increases in exports,” which could hit 1 million barrels per day by the end of this year. A senior official at IHS said the move “takes the leash off of Commerce” and is an indication that additional actions on exports may be coming.


The government, of course, is playing it cautious, claiming the latest guidelines did not represent a change in administration policy. That’s because a core part of the rules, “self-classification” – which lets companies export products without federal authorization – is allowed under current law and is common for most exports.


But up until last week, the government had been ambiguous as to how self-classifiction affected crude exports; as a result, most potential exporters were hesitant to go forward. That ambiguity, at least as it relates to condensates, seems to have now been resolved.


It’s hard to predict whether this is a barometer of things to come or a stand-alone policy decision. About the only thing consistent about this administration’s energy policy has been its inconsistency. But it could reflect a sense in Washington that lifting the export ban in entirety is a smart move that respects current global market realities.


Here’s hoping it does. The energy industry has played a major role in the U.S. recovery over the past few years, and those contributions could to some degree be threatened by the uncertain price climate. Government needs to do what is necessary to help keep this engine of economic opportuniuty running. Lifting the ban on condensates is certainly a step in that direction. Now it’s time to do the same for all crude exports.

 

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A simple wish for 2015

No serious issues talk this week. I just want to offer some brief reflections on the past year, which by almost any standard has been a game-changer – from both the American and global perspectives – and to make one simple but critical wish as we approach 2015.

I don’t think anyone will deny that 2014 ended up being a rollercoaster for the energy industry. There were peaks: Soaring production, reductions in methane and carbon-related emissions, lower gasoline prices, North Dakota output hits 1 million barrels per day, the Eagle Ford pumps its billionth. And there were valleys: fracking bans in Denton and New York, plummeting oil prices in the last quarter, cutbacks in spending, layoffs.

Somewhere in the middle, there was proof that leadership and logic can prevail over hyperbolic rhetoric, as Colorado Gov. John Hickenlooper engineered an 11th-hour deal that kept anti-drilling initiatives off the November ballot to prevent a looming crisis in the state.

But regardless of the ups and downs, one thing became very clear in 2014: The energy industry is at the heart of our economy, our foreign policy, and our future.

I have written often about how oil and gas companies were the only bright spot in post-recession America, creating jobs and bolstering the budgets of state and local governments. That was reinforced to some degree by last year’s activity. At the same time, the boom in domestic production has altered geopolitics, weakening OPEC’s use of oil as a strategic weapon and detouring the ambitions of Russia’s Vladimir Putin.

I cannot say with any certainty what the coming year will look like. The landscape in many ways will be shaped by prices, and despite some predictions that we may see a rebound at some point, predicting prices remains an ill-advised exercise.

That said, here is my simple wish for 2015:

As the energy debate goes forward, I hope that decision-makers at every level will take a moment to consider where we would be were it not for oil and gas companies, and pursue policies that enhance rather than endanger the industry’s valuable contributions to our nation and world.

That may seem like a pie-in-the-sky wish given the intensity of the public dialogue. But this is the time of year when we can – and should – believe that anything is possible.

On behalf of all of us at Burleson LLP, here’s hoping you and yours are having a wonderful holiday season.

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In two states, legislation could extract tangible costs from local fracking bans

The dust hasn’t quite settled over Gov. Andrew Cuomo’s decision last week to ban hydraulic fracturing in New York, as both sides of the issue are still sorting out next steps. But in two other states where bans have been enacted, we’re now seeing how local efforts to halt the practice could extract tangible costs from communities.

In response to voter approval of a ban in Denton, Texas, State Rep. Phil King has proposed a bill requiring cities to reimburse the state for any losses – fees, royalties, taxes, etc. – that result from local ordinances. And in Colorado, lawmakers will consider a measure to force counties that ban fracking to compensate mineral rights owners, who number about 600,000 in the state.

I’m not entirely sure either of these measures will ever become law. They raise too many collateral issues and uncertainties that lawmakers may not want to deal with. They put a lot of local money at risk at a time when budgets are already stretched thin. And I doubt seriously that municipalities – whether they are home to fracking or not – will be happy about state government telling them how to spend their tax dollars.

That said, I still think these or some similarly proportionate response may have some merit.

Local governments cannot arbitrarily deny an industry or individuals the rights that state law specifically grants them. It’s not just wrong. It’s illegal. Anything that in any way mitigates that fact has a legitimate place in the debate.

Additionally, there’s no question that legislation like this is designed to make local governments think twice before pursuing or enacting a ban. That’s not necessarily a bad thing.

Anti-drilling activists have long embraced fear as a tactic in their efforts to stop fracking, and at the local level it’s easy to get caught up in – and give into – their rhetoric. Laws like those being considered in Texas and Colorado will give municipal leaders (and, hopefully, voters) pause before going down a path that could disrupt local economies, eliminate jobs, and reduce tax receipts.

Finally, and I apologize if this sounds a bit harsh, but when you act in ways that contravene state law and established regulations there have to be consequences.

These bans are illegally targeting oil and gas companies and mineral rights owners. I will concede that the activist community has every right to push its agenda. But those on the other side of the issue have the right and, frankly, the responsibility to push back and to keep all appropriate options to the table. The proposals in Texas and Colorado are just such options.

I’m the last person in the world to argue that government should have a say in how private industry should conduct its business. But when government illegally inserts itself into perfectly legal business activities– which is precisely what local bans amount to – then sometimes the only choice is to find a legislative fix.

In a perfect world, that wouldn’t be necessary. But in a perfect world, hydraulic fracturing would be seen for its constructive economic and energy impact and not be a casualty of shortsighted political posturing and ill-informed policymaking.

 

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