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Interior Department fracking rules expected in a few weeks


Latest Oil and Gas News: 02/07/2012  Compiled By:Larry Persily


(Bloomberg; Feb. 3) - Federal rules for fracking on public lands, set to be released in a few weeks, may serve as a model for states to get companies to disclose the chemicals used in the drilling process, an Obama administration official said.

The proposed federal standards will be compatible with rules already in place in states such as Wyoming and Texas, and will allow limited exemptions for "legitimate trade secrets," David Hayes, deputy Interior secretary, said Feb. 3. "What we expect is that the momentum that you already see in states for disclosure will be reinforced by what we do," Hayes said. "Most folks would like to see an across-the-board approach to deal with these issues."

The Interior Department began consideration of regulations for production of natural gas and oil from shale on federal lands last year. In addition to chemical disclosures, the rules will set standards for well construction, which is the most important aspect to ensure that groundwater isn't contaminated, Hayes said. At least 90 percent of U.S. onshore natural gas production comes from fracking, according to Richard Spears, vice president of the Tulsa-based consulting company Spears & Associates.

Pennsylvania may have deal for new
impact fee on natural gas wells

(Philadelphia Inquirer; Feb. 6) - Pennsylvania Gov. Corbett and Republicans who hold the legislative majority have reached a tentative deal to levy a fee on Marcellus Shale natural gas production. The local impact fee, which could be voted on as early as this week, would fluctuate with the price of gas and inflation. For instance, if the price of gas is between $3 and $5 per million Btu, the fee would be $310,000 per well spread over 15 years. The fee would be lower if gas falls under $3 and would rise at prices over $5.

The maximum fee would be $355,000 per well, if gas stays above $6, and that does not account for inflation. The minimum would be $240,000, not counting inflation. Counties where drilling occurs could decide whether to impose the fee. If a county declines to impose the fee, half its municipalities would have the option to force it to do so.

Sixty percent of the money would go to areas directly affected by drilling for things such as infrastructure and public safety costs. The other 40 percent would go to statewide projects, many of them environmental, including repairs to greenways and recreational trails, protection of open space, and other beautification projects. Pennsylvania does not levy a production tax on natural gas, and the deal would not change that.

Dow Chemical may hedge to lock in low natural gas prices

(Reuters; Feb. 3) - Dow Chemical, one of the largest U.S. buyers of natural gas, is considering a hedging program for the first time in a decade to lock in rock-bottom prices for the fuel. The move by Dow could signal growing concern in the nation's industrial sector that low gas prices will not last. Natural gas prices have fallen 50 percent in the last six months as output from vast U.S. shale fields flooded the market.

Dow CEO Andrew Liveris said, "We used to do a lot of that (hedging) in the late 1990s, early part of the last decade, and you can expect us to talk more about that in the future." The price Dow pays for ethane, a component of natural gas used to make many chemicals, rose as high as 94 cents per gallon in the fourth quarter 2011. Prices have eased off in the first quarter 2012, but executives are clearly worried about volatility. Every 10-cent drop in the cost of ethane boosts earnings by $200 million, Liveris said.

Natural gas prices likely will rise back to $4 to $6 per million Btu by the end of the decade, Liveris said during a conference call with investors Feb. 2. If Dow is able to lock in prices near current levels, it would solidify its cost advantage over European rivals, such as BASF, many of which use crude oil-derived naphtha, rather than natural gas, to produce chemicals. Dow is planning to build two chemical plants on the U.S. Gulf Coast and bring them online later this decade to process even more natural gas.

B.C. energy strategy favors potential LNG export industry

(Vancouver Sun; Feb. 4) - British Columbia Premier Christy Clark announced a new provincial energy strategy Feb. 3 that moves away from BC Hydro's self-sufficiency targets for meeting B.C.'s electricity needs in favor of devoting more available power to a new liquefied natural gas industry that has the potential to attract new businesses, new jobs and an estimated $20 billion in investments to the province. The cornerstone of the strategy is establishment of three LNG export plants at Kitimat by 2020.

The plants require huge amounts of energy to liquefy gas. One LNG plant alone would use as much power as the three paper mills operated by B.C.'s largest energy user. To feed the LNG plants, the government intends to abandon BC Hydro's long-held strategy of planning its hydroelectric generation around so-called critical water - the amount of water needed behind the dams to get the province through years of drought. The new standard will be average water - keeping enough water in reservoirs to meet the needs in average years.

During periods of drought, the province would buy energy on the open market, likely from Alberta or Washington. That change in the standard is expected to provide enough power for the first two LNG plants. The proposed Shell LNG plant, expected to be the largest of the three proposed export plants, would be powered by a combination of wind power and a natural gas-fired power generation station.

Still no shale gas wells in Virginia

(Washington Post; Feb. 6) - Carrizo Oil and Gas had every reason to believe the rustic town in the foothills of the Blue Ridge Mountains was an ideal place to build Virginia's first well to explore for natural gas in the Marcellus Shale. Carrizo liked Bergton's location - eight miles from the West Virginia border, not far from where other operations are extracting gas. Carrizo bet that gas was locked in the shale under the town and put up tens of thousands of dollars for landowner leases.

All it needed to start the job was a special land-use permit from the four Republicans and one Democrat on Rockingham County's Board of Supervisors. Carrizo didn't even come close. Concerned about controversial drilling methods, the supervisors never voted on the permit, and recently the company shelved its application following a two-year pursuit, ending its immediate hopes of exploring for gas.

The rejection was yet another hard knock against companies trying to extract natural gas from the Marcellus Shale. Negative publicity about water contamination at drilling sites in the Chesapeake Bay region and out west in Texas, Wyoming and Oklahoma is raising concern even among those who support gas exploration. Virginia has 7,700 natural gas wells in operation, but none extracts gas from the rich Marcellus. No other company has approached Virginia since Carrizo abandoned its permit application.

Pennsylvania demand drives up
costs for N.Y. pipeline extension

(Platts; Feb. 3) - High construction costs, prompted in part by the natural gas boom in Pennsylvania, have delayed construction of a pipeline extension in New York's North Country planned by St. Lawrence Gas, the company said Feb. 3. The plan, first proposed in 2008, is to construct a 48-mile pipeline to extend gas service to 4,000 customers in one of the state's farthest north counties along the Canadian border.

But the project's construction costs have doubled in two years to about $18 million, said James Ward, assistant general manager of St. Lawrence Gas, a subsidiary of Enbridge Gas. The utility will have to increase its contribution to the project and extend a temporary surcharge on customers. Ward also said the company may be eligible for more grants. It already has received a $2.5 million state grant for the project.

A shortage of skilled welders and other workers is cited for escalating construction costs, along with rising prices for steel pipe. Both are blamed on the high demand for workers and steel in Pennsylvania's Marcellus Shale region. "There has been a market change since we put the pricing together a few years ago," Ward said. "Pennsylvania seems to be a lucrative spot to do natural gas work now. It's our understanding that the impact of the shale is affecting construction costs."

Canadian analysts warn of continued low gas prices

(Calgary Herald; Feb. 6) - Investment brokerage FirstEnergy Capital has slashed its already poor 2012 natural gas price outlook by 40 percent, citing extreme oversupply as the major culprit. The Calgary-based firm dropped its 2012 average natural gas price Feb. 6 to $2.27 per million Btu in New York from a previous $3.75 forecast - prices not seen since 1998.

FirstEnergy analyst Martin King's outlook for Alberta gas this year was even more dramatic, falling to $1.73 from an average $3.19. "For the North American natural gas market, everything that could go wrong has gone wrong in the form of a very mild winter, still robust U.S. domestic supply growth, and an indefinite delay to a policy shift that would have favored additional gas burn in the U.S. power generation sector," King said in market report, referencing a frozen clean air initiative.

Sustained low prices will affect reserve evaluations, reducing companies' net present value and marking some reserves as uneconomic - removing them from total proved asset profile, noted Bruce Edgelow, vice president of energy with ATB Financial, in Alberta. "The combined impact of lower cash flow and a reduction in available bank debt may result in the most challenged producers having outstanding debt that exceeds their current credit facility limit when their annual review is completed this spring-summer.

Survey shows 62% of Canadians support fracking moratorium

(PostMedia News; Feb. 6) - An environmental group says a survey it commissioned shows that a majority of Canadians want Ottawa to impose a moratorium on hydraulic fracturing until federal reviews of the contentious drilling technique are complete, The poll said 62 percent of people strongly or somewhat support such a moratorium, said the Council of Canadians.

"Communities across Canada are saying 'no' to fracking projects. It's time for the federal government to listen and ban the practice," said Maude Barlow, national chairperson, Council of Canadians. Last September, the federal conservative government launched two separate reviews on the science and use of hydraulic fracturing by the energy industry in Canada and its impact on the environment. The studies are expected to be completed within two years.

There is currently no federal legislation on fracking, although as Environment Minister Peter Kent has said in the past, exploitation of natural resources is not regulated by the federal government. Some provinces have stepped in, with the province of Quebec, for instance, announcing last March it would put commercial hydraulic fracturing drilling on hold pending a detailed environmental review.

Analyst expects consolidation among
proposed B.C. LNG projects

(Reuters; Feb. 6) - A handful of LNG export facilities proposed for Canada's Pacific Coast could spark a round of acquisitions and new joint ventures as the projects' backers look to secure sufficient natural gas supplies to fill their facilities, an analyst said Feb. 6. While interest is hot, some of the potential projects do not have enough gas in the ground to support their export plans and may look to acquire it, Andrew Potter, an analyst at CIBC World Markets, said on a conference call.

That could lead to a round of acquisitions and joint-venture deals as the backers look to secure supplies for their multibillion-dollar projects. "There is going to be more consolidation of upstream resource as companies get more serious about LNG projects," Potter said.

Canada's National Energy Board has already handed export licenses to two proposed LNG projects near Kitimat, B.C.: Kitimat LNG, backed by Apache, Encana and EOG Resources; and BC LNG, a 13-member co-operative with a small project. Shell and partners Korea Gas, Mitsubishi and China National Petroleum Corp. have bought land for a potential LNG terminal at Kitimat. And Calgary-based Progress Energy Resources and Malaysian partner Petronas are conducting a feasibility study for a project, too.

India companies want domestically
produced gas indexed to LNG

(New Delhi TV; Feb. 7) - An association of oil and gas companies in India has demanded that price of domestically produced natural gas should be indexed to LNG imported into the country. The Association of Oil and Gas Operators in a 20-page response to the Saumitra Chaudhuri Committee report on gas price pooling said the LNG import price is a natural benchmark for market-driven gas prices.

"Any additional domestic gas is a direct substitution of LNG imports, hence, the LNG import price is a natural reference point (benchmark) for market-driven gas price. The other basis of benchmark price could be domestic crude with suitable calorific value adjustment," the association wrote to the Oil Secretary.

Domestically produced gas is currently priced at $4.2 to $5.73 per million Btu, less than half the rate at which LNG is imported into India. Companies want a higher price for domestically produced gas to make new fields commercially viable. Also, gas fields that are currently marginal or uneconomic would come into production, the association said, adding that increased domestic production would lead to lesser import of costlier LNG.

Pakistan to buy LNG from Qatar

(Platts; Feb. 7) - Qatar and Pakistan Feb. 6 signed a memorandum of understanding for the supply of almost 500 million cubic feet of natural gas a day, an official at Pakistan's ministry of petroleum and natural gas said. A Qatari delegation is expected to visit Pakistan by the end of this month to finalize the plan of bringing LNG into Pakistan and the price structure.

Pakistan had earlier expressed interest in importing LNG from Qatar as it strives to alleviate the country's deepening energy crisis. Pakistan is already in a crisis with a gas deficit of around 1 billion cubic feet a day and the situation is expected to worsen in the coming years.

The government last year issued licenses to three companies to set up three LNG terminals with a combined regasification capacity of 1.5 bcf a day. The terminals are expected to be set up by the third quarter of 2012. 

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