Monthly Archives: April 2017

West Virginia: Fracking and Water Pollution

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Duke University just concluded a three year study of fracking and its effects on groundwater and surface water.  The study concludes that groundwater is not affected by fracking, but that surface water is.

The study included 112 wells in northwestern West Virginia.  Twenty of those wells were sampled before fracking took place in the neighborhood.

The study found methane and salts in the water wells, but they were different isotopes of methane and salt than were found in the gas formations.  The conclusion was that the methane and salts found in the water wells were from naturally occurring sources, not fracked wells.

Surface water was found to get contaminated from surface spills.

The important thing to note here is that ponds and streams on your property are more at risk than your water well.

While the study notes that surface water typically gets contaminated by accidental spills, it’s not unheard of for a trucker to back up to a stream and unload waste into the stream.  There are criminal penalties for this kind of thing, but it happens anyways.

So what should you do?  Make sure to get samples of your water taken before any drilling activity starts on or within a couple miles of your property, both for your water well and for ponds and streams.  Any water that is or could be a source of water should get tested.  It’s expensive, but if something happens to the water having that baseline to work from will be invaluable.

Mountain Valley Pipeline’s 401 Permit Challeneged

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The State of West Virginia issued a 401 water quality permit for the Mountain Valley Pipeline back in March.

Opponents of the pipeline say the DEP’s review of the permit application was deficient.

Appalachian Mountain Advocates, represented by Derek Teaney, has sent the DEP a letter listing the allegations.

What I’ve heard through the grapevine is that the MVP did a lot of copying and pasting in it’s application.  While some copy-pasta should be expected in an application of that sort, some things that should have received a more personal touch didn’t.

If the DEP doesn’t provide a satisfactory response there will most likely be a lawsuit in the works.

Rover Pipeline Drilling Mud Leak Update

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A directional drilling rig working on the Rover Pipeline leaked a bunch of drilling fluid while it was drilling under the Tuscarawas River a little while ago.  This article from WMFD.com, a local news outlet, is a follow up story highlighting the efforts to clean the mess up and some doubts by the landowner as to whether the clean up is going well.

The Rover representative quoted in the article downplayed the seriousness of the spill, of course.  The Ohio EPA will still be levying fines and monitoring the clean up, so I guess it’s serious enough for that.

We previously noted that Rover is off to a pretty bad start and that all of it’s mistakes are going to shake confidence in the pipeline industry.  We haven’t seen anything to change that opinion yet.

Pipeline Leak: Mariner East 1

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The Mariner East 1 pipeline sprung a leak on April 1st, 2017.  The leak was from an 8-inch steel pipe.  The pipeline was shut down, and repairs carried out over the course of several days.

It was a small leak, just 20 barrels of ethane and propane.  No one was injured, and no water was contaminated.

It’s important to note that the company “was informed of the leak”.  Makes it sound like someone other than the company was responsible for discovering the leak.

This is the first pipeline leak we’ve run across this month.  While it’s small, it’s important because people need to know that pipelines leak and that the company doesn’t usually discover the leaks, especially when they’re “small”.  The safety technology they use doesn’t detect the small stuff well.

Pipeline Opposition: Rover Pipeline Spills 2 Million Gallons of Drilling Fluid in Wetlands

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The Rover Pipeline is a big project that starts in the northern part of West Virginia, crosses Ohio, and heads up to Canada.  Construction began about a month ago.  They’ve been very busy cutting trees and clearing the right of way since then.  They’ve also been busy getting in trouble.

The Ohio EPA has already issued the Rover Pipeline a Notice of Violation for spilling 2 million gallons of drilling fluid in one location, and 50,000 gallons in another.

The Rover Pipeline already has a checkered reputation as far as construction work goes.  It demolished a historic house that was being considered for the National Register of Historic Places.  It also got an injunction against landowners who were trying to stop Rover from coming onto their property, but forgot to include most of the landowners with whom the Rover Pipeline had not been able to get easement agreements from.

Basically, it feels like this project which has been in the planning stages for years is not well planned.

It does not inspire confidence that the final product will be high quality (or in other words safe).

It also does not inspire confidence that the other major pipeline projects, the Atlantic Coast Pipeline, the Mountain Valley Pipeline, and the Mountaineer Xpress, will be any better.

Lease Terms: Confidentiality Clause

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DocumentThe subject of a confidentiality clause in an oil and gas lease has come up a few times in the last couple of months, so it seems like a good time to write about it here.

A confidentiality clause says you can’t talk about the terms of your lease with anybody.

While a confidentiality clause technically means that you can’t talk about the lease terms with your family, friends, and neighbors, or even your spouse, the company doesn’t really expect that to happen.  It’s pretty unlikely to enforce that aspect of the clause except in very egregious circumstances.  For example, if you were to negotiate a totally awesome lease and then go start a landowner’s group using your lease as the base lease, then they might take you to court to enforce the confidentiality clause.

The real reason for the confidentiality clause is that the company wants to keep the lease from being recorded at the courthouse.

The company doesn’t want to file the actual lease for a couple of reasons, the most important being that they don’t want to start bidding wars.  If all the terms of all of their leases were on file at the Doddridge County courthouse, for example, nobody in Doddridge County would have settled for less than $2,500 per acre for the bonus or less than 18% for the royalty.  Everyone would have gone to the courthouse, looked up recent leases, and seen that someone (we won’t mention who) had gotten those terms in their lease.  Everyone would have then asked for and probably gotten those terms and better.  In just a few months lease prices would have gone from $1,500 per acre to $5,000 per acre or more.

Instead of filing the lease, the company will have you sign both a lease and a memorandum of lease.  The memorandum of lease will include a description of the property, the length of the primary term and any extensions thereof, whether there is a right of first refusal, and a couple of other terms that vary from company to company.  It won’t include the bonus amount, the royalty amount, or any other unusual or different terms that you acquired.  It’s just enough information to show a subsequent landman that there is a lease on your property and how long that lease will probably last.  The company will file the memorandum of lease at the courthouse instead of the actual lease.

You want the lease to be on file, however.  The lease is the only actual record of what you and the company agreed to.  The landman will get fired, leave for a different job, get reassigned to a different project, or retire.  Companies lose leases more often than anyone cares to admit.  You could lose your lease in a move, a fire, a flood, or just because people lose things.  Your attorney (you did hire an attorney, right?) will retire and destroy files when the statutory time comes up.  The only somewhat reliable method for keeping a record of the lease is to have it filed at the courthouse.

You and the company have competing interests.  It’s not an easy thing to work around.  However, one solution is to get the company to agree that you can place a copy of the lease on file at the courthouse once there is production from the property.  Before that, it doesn’t matter too much whether the lease gets filed because it could simply expire at the end of the primary term.  Once there is production, however, the lease could be in effect for decades and the risk of losing all copies of it goes up.

As a practical matter, it’s been awfully difficult to get companies to agree to a clause like that.  If you’re in a strong negotiating position, however, I highly recommend you push for it.

Good luck, and get in touch if you want help with your lease.

The State of Oil and Gas: April 17, 2017

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Alternative energy is coming on.  It’s going to be quite a while before it really challenges fossil fuels for supremacy, but it’s definitely growing.

One thing I’ve wondered about in the last year or so was whether the industry would be able to attract the workers that it laid off during the last bust.  This article says that at least some previous oil and gas workers are not coming back.  That should slow down the next boom a bit.

Eclipse Resources holds the world record for a horizontal well at 18,500 feet.  This year they plan to drill 11 extra long wells.

Add another one to the list.  An old coal fired power plant is going to be replaced by a new combined cycle natural gas power plant.  It’s in southwest PA, not too far from the West Virginia border.

Canada used to be the largest purchaser of U.S. crude at around 7 million barrels, but China bought a little over 8 million in February.

The Dimock ruling has been overturned by a federal judge.  It’s somewhat unusual for a judge to overturn a case for “weaknesses in the plaintiff’s case”.  Usually appeals courts are looking at things like incorrect jury instructions, the lower court’s understanding of the law, misconduct by the lawyers, that kind of thing.  Appeals courts don’t overturn jury decisions often, but that’s what happened here.

Natural gas storage volumes are going up.  In 2014 and 2015 the increase was negligible, but in 2016 it was significant.

April 10, 2017: Natural gas prices are at $3.23/MMBtu.  That’s a healthy price.

U.S. oil producers increased investment in 4Q 2016 — by a lot.

Cheniere Energy’s Sabine Pass LNG export plant has it’s third train ready to produce LNG.

This is news I did not expect to hear.  The U.S. has been producing more energy every year for the last six years.  Even during the downturn of 2014 and 2015 production went up.  OK, increased production caused the downturn.  But that’s part of the reason why I figured our energy production was still growing.  But, turns out energy production fell in 2016.  The big loser was coal (at -18%), and the “big” winner (at 7%) was renewables.

Shale drillers have driven their breakeven prices below $40/bbl.  Some say it’s because of increased efficiency.  Others say it’s because oil field service providers have drastically reduced their prices.  It turns out that non-shale projects have also driven their breakeven prices below $40/bbl.  This supports the argument that it’s the cost of oil field services that is behind the lower breakeven price.

In spite of the title, this article says that the supply of oil is going down and the price of oil is going up in the next few years.

Oil service companies have started hiring again, in spite of having fired over 1/3 of their workers during the downturn.

One of the cool things about natural gas is that it’s cleaner than coal or oil.  Energy related CO2 emissions fell by 1.7% in 2016, mostly because we’re using less coal, partly because we’re using more gas.

April 17, 2017: Tax Day!  Both oil and gas prices are at what I consider healthy levels for U.S. developers, oil is at $52.76 and gas is at $3.20.  It’s going to be interesting to watch the prices going forward as things seem to be somewhat stable for the moment but something always happens to upset the proverbial apple cart.  It’s anybody’s guess what that will be.

Is There A Need for the Atlantic Coast Pipeline?

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One argument that opponents of the Atlantic Coast Pipeline are making is that there simply isn’t a need for it.

This is an important argument to make, because one of the main factors that the FERC looks at when deciding whether to approve a pipeline is whether there is a need for the gas.

An article by Samantha Baars on c-ville.com looks into the question a little better than most I’ve seen.

She interviewed Greg Buppert, a lawyer for the Southern Environmental Law Center (SELC) and looked at data from the Dominion Energy and Duke Energy, the main companies backing the pipeline, and from PJM Interconnection, a group that controls the electricity grid in Virginia.

The data from Dominion/Duke and from PJM are significantly different.

Dominion/Duke say that Virginia will need 24,016 megawatts of electricity in 2017.  PJM says Virginia will only need 20,501 megawatts.

Dominion/Duke says that PJM doesn’t take into account some factors that it should.

PJM, however, is responsible for running the grid.  If PJM doesn’t get the numbers right, it would be left scrambling to find other sources of power on short notice.  PJM doesn’t just have money as a motivating factor.  I lean towards trusting PJM more than Dominion/Duke on this one.

It’s possible that there isn’t enough demand for electricity in Virginia to warrant building the pipeline.  If that’s so, then there’s a real case to be made that the FERC should not approve the Atlantic Coast Pipeline.

New West Virginia Pipeline Project: Buckeye Xpress. How You Should Prepare.

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TransCanada has proposed a new pipeline in the northern panhandle of West Virginia.  It’s called the Buckeye Xpress (no E on the front of Xpress).

The Buckeye Xpress will move gas from the Sherwood plant in Doddridge County to the Oak Grove processing plant in Marshall County, from the Oak Grove plant to the Seneca plant in Noble County, OH, from Oak Grove to the Majorsville plant in Marshall County, and will pick up gas between the Waynesburg compressor station and the Smithfield compressor station.

Unfortunately, WordPress is acting up on me and not allowing me to put a map on here.  The only map I could find is pretty vague and mostly useless for determining whether the route is on your property.

If you’re on the route, you’ll want to stay ahead of the action as much as possible.  What do I mean by that?

Well, we’ve watched a handful of our clients go through the process with the Atlantic Coast Pipeline.  We’ve learned a thing or two, and here’s what you need to know.

First, they absolutely do not have the right in West Virginia to enter your property to survey until after they get FERC certification, which is going to take years.  If you find a survey crew on your property without permission you can ask them to leave and they have to leave.  If the surveyors say they have the right to be there they are either ill-informed or lying.  You can literally call the sheriff and have them escorted off the property.

Second, if you don’t want the pipeline to cross your property you’re going to have to give them a good reason not to be there.  This project will be seeking FERC approval, and when it gets FERC approval it will have the power of eminent domain.  If they really want your little piece of almost heaven, they will be able to take it.  You need to give them a rational, logical, verifiable reason not to take it.  Things they want to avoid are environmentally sensitive areas, wetlands, historic sites and graveyards, and places where the ground is likely to slip.  If you can show them that it will be easier (or less expensive) for them to go on your neighbor’s property they probably will.

Third, if you don’t mind them crossing your property but you would prefer that they move to a different part of it, you need to tell them so immediately.  The pipeline will usually be willing to work with you on the location, but if you wait until they’re a long ways into the process they’re less willing to work with you.

Fourth, if you have plans to build on or subdivide your property in the future you need to get those plans on paper and filed in the courthouse or under contract now.  You’ll want to make sure that you get compensated for what you plan to do with your property.  The standard for measuring compensation for your property is it’s current actual use, not any possible future uses.  If you want to build a house on the ridgetop and you think you might be on the pipeline’s path, go pull a building permit and get some estimates from contractors and stake out the location.  Maybe even dig and pour a foundation.  If you want to sell lots on your property go get it surveyed and have the survey filed at the courthouse.  Stake out the lots.  Build a road and lay some water lines electric lines or something that shows you are actually going to develop it.  You need documentation that would hold up in court that will show that your property is not just pasture or steep timberland.

Those last suggestions could be expensive, of course.  Only undertake them if you already intend to do those things.  If the pipeline doesn’t come across your property and you’ve spent money on any of those things hoping to increase the value of your property you’ll lose money.  You should only do those things if you are already planning to do them in the next few years anyways.  This is only a suggestion to bump your timeline forward to today.

And one last bit of advice from someone who negotiates with oil and gas companies all the time–be nice (but firm) to the pipeline guys and you’re more likely to get concessions from them.

Good luck.  Luck favors the prepared.

Why You Should Always Ask How Long the Lateral Will Be

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Eclipse Resources holds the world record for a horizontal well at 18,500 feet.  This year they plan to drill 11 extra long wells.

Longer wells have several benefits, including a better ROI for the companies, and fewer environmental burdens on the surface.

The one thing people don’t like about them is that there will be fewer workers as there will be fewer drilling rigs.

Regarding the ROI, Eclipse says it makes an ROI of about 25% on a 6,000 foot well, 67% on a 13,000 foot well, and 87% at 19,000 feet.  That’s a huge jump in ROI.

It occurs to me that if the company is going to be making a lot more money per well, maybe it’s time we started tying royalty percentages to the length of the lateral.  A typical negotiated lease in West Virginia provides for 15-18% royalties, with a few even higher.  If the well is going to be longer than usual, say between 5000 and 10,000 feet the lease could provide for a 2% increase in royalties.  If between 10,000 and 15,000 feet, 4%.  And if between 15,000 feet and 20,000 feet, 6%.  So a 2% increase in royalties per 5,000 feet of lateral.

Share the wealth.

This may not be terribly applicable in some parts of West Virginia.  Well length and unit size are limited in Harrison County in part because there are a lot of leased properties checkerboarding the area.  The company wanting to do horizontal drilling isn’t always able to get an assignment for all the tracts it wants to drill.

It’s an idea to consider, though, and should work well in the northern panhandle where all the leases are owned mainly by Southwestern.