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Friday, March 28, 2014

Links for 3/28/14: Fracking Debate Rages On, Noted Anti-Fracking Extremist Scores Partial Court Victory, and More

WRAL:  Fact Check: The Fracking Crew   -   "A coalition of environmental groups has labeled state Sens. Chad Barefoot, R-Wake, Wesley Meredith, R-Cumberland, and Ronald Rabin, R-Harnett, as "The Fracking Crew" in a commercial that..."

Fox&Hounds:  This Fracking Horror Story Is Bad Fiction   -   "An evil corporation aims to flood the earth’s crust with water, causing massive earthquakes and threatening the survival of humanity! Sounds like a movie? Of course..."

Reuters:  Injunction eased so PA fracking foe can go to hospital, grocery   -   "A judge on Friday loosened an injunction restricting the movements of a Pennsylvania anti-fracking activist to allow her access to her local hospital, grocery and other places declared..."

Complete Colorado:  ‘Local Control’ Really Means De Facto Statewide Fracking Ban, Call Reveals   -   "Organized efforts to push fracking bans as “local control” constitutional amendments onto Colorado’s November ballot are just that, according to..."

American Society of Civil Engineers:  New study looks at costs of shale consumption on Pennsylvania roadways   -   "The development of natural gas resources in the Marcellus Shale formation has progressed rapidly in the last several years, particularly in the Commonwealth of Pennsylvania. These activities require many heavy truck trips for equipment and materials, which can damage state and local roads that were not designed for..."

Click on the read more link to see the study.


America is Now Producing More Than 10 Percent of Global Oil Supply

From The American Interest:
America’s suddenly bright energy future has been well-publicized, but did you know that the US is now producing more than 10 percent of the global supply of oil? That’s a remarkable milestone, made all the more so by the rapid pace at which it was reached. The key driver behind this renaissance: fracking, which has released so-called “tight oil” trapped in rock such as shale. In fact, as the EIA reports, more than 40 percent of American crude production in the fourth quarter of 2013:
U.S. tight oil production averaged 3.22 million barrels per day (MMbbl/d) in the fourth quarter of 2013, according to U.S. Energy Information Administration estimates. This level was enough to push overall crude oil production in the United States to an average of 7.84 MMbbl/d, more than 10% of total world production, up from 9% in the fourth quarter of 2012. The United States and Canada are the only major producers of tight oil in the world. In recent years, North American producers have developed technologically advanced drilling and completion processes to produce oil from tight formations.
Click here to read the rest of this post. 

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Guernsey County Sees Active Permitting Week in Latest ODNR Report

The latest weekly permitting report released by the Ohio Department of Natural Resource for Utica shale wells reveals another fairly busy week.

Guernsey County led the way, with 9 new permits last week.  Harrison County had 6 new wells permitted, Noble County saw 5 new permits, and Carroll County rounded out the report with 2 more well permits.  The total number issued for the week ending March 22 was 22.

This brings the total number of permits for horizontal drilling in the Utica shale in Ohio to 1,165.  774 wells have been drilled, 385 are producing, and the Utica rig count is 38.

View the report by clicking here.

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Gas Well Freeze-Offs Increase Considerably During Cold Winter

From Platts:
Although the bitter blasts of the just-completed winter resulted in three times as much US gas being shut in due to well freeze-offs as analysts had forecast, federal regulators say freeze-off data can lag by several months and they have no way to compel producers to release data to them.

Platts unit Bentek reports that US dry gas production fell to an average of 65.7 Bcf/d in first-quarter 2014 due to freeze-off curtailments.

"At the height of freeze-offs, January production dipped to 65.0 Bcf/d. In comparison, fourth-quarter 2013 production averaged 65.8 Bcf/d, and November 2013 reached a record high of 66.6 Bcf/d," Bentek said.
Bentek analyst Ryan Smith said the volume of gas shut in during the winter of 2013-14 was more than three times what the firm's analysts had predicted at the start of the winter.

"We had forecasted for the cumulative freeze-offs for the winter to be 43 Bcf. It was 132 Bcf. Normally it's between 35 or 40 [Bcf]," Smith said.
Read the whole article here.

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Thursday, March 27, 2014

Company Owner Pleads Guilty in Illegal Dumping Case

From the Huffington Post:
The former owner of a Youngstown-based wastewater company pleaded guilty Monday to federal Clean Water Act violations in the dumping of thousands of gallons of fracking wastewater into a northeast Ohio storm sewer.
Ben Lupo, 63, changed his earlier not guilty plea during a hearing before Judge Donald Nugent in federal court in Cleveland. He faces up to three years in prison, a year of supervised release and fines of up to $50,000 per day, to a maximum of $250,000. Sentencing is scheduled for June 16.
Authorities had charged that Lupo, of Poland, Ohio, ordered an employee at Hardrock Excavating LLC to repeatedly dump drilling mud and brine intended for deep injection into a sewer that empties into the Mahoning River watershed, or he dumped the material himself, between November 2012 and January 2013.
Read the whole article here.  You can also search for "Lupo" in the search box on the top left-hand corner of this site for more history on this maddening story.

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Leaking Pipeline in Ohio Spills 20,000 Gallons of Oil in Nature Preserve

From Bloomberg:
Federal environmental officials now estimate more than 20,000 gallons of crude oil — double the initial estimates — leaked from a pipeline into a nature preserve in southwest Ohio.
Meanwhile, Sunoco Logistics said Monday that the pipeline has been repaired and re-opened. Sunoco shut off the stretch of Mid-Valley Pipeline from Hebron, Ky., to Lima, Ohio, early March 18 after a leak was confirmed.
Sunoco spokesman Jeff Shields said under a federally approved plan, a specially engineered clamp was placed on the 20-inch diameter pipeline, which had a 5-inch crack that leaked oil. The clamp was tested before oil flow resumed Sunday evening.
Shields declined to say how much of the oil supply was disrupted in the last week in a system that runs about 1,000 miles from Texas to Michigan. He said the information is considered internal company business.
Read the rest of that article by clicking here.

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Will Proposed Severance Tax Be Good or Bad for Ohio?

From the Salem News:
Gov. John Kasich's plan to drill into Ohio's gas and oil industry for new revenue remains controversial. His budget analysts and those working for the General Assembly differ substantially on how much money could be raised.
But whichever estimate is accepted, the amount is enormous. Legislative analysts say the 2.25 percent severance tax the state House of Representatives favors would bring in $231 million over three years. The state budget office, using the 2.75 percent rate favored by the governor, expects $874 million during the same amount of time.
Gas and oil drilling interests object to any increase, of course.
Clearly, East Ohio has become a mecca for drillers and gas processors. The region appears to be rich in the "wet" gas that is more lucrative because it contains valuable chemicals.
Read the whole article here. 

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Wednesday, March 26, 2014

MWCD Negotiates Piedmont Oil, Gas Lease That Minimizes Impacts



The Muskingum Watershed Conservancy District (MWCD) is completing negotiations for an oil and gas lease for Utica Shale development for nearly 6,700 acres of its property at Piedmont Lake in Belmont and Harrison counties that will minimize negative impacts on normal recreational activities at the lake and on surrounding land through additional protections included in the agreement.

The lease agreement between the MWCD and Antero Resources of Colorado was presented to the MWCD Board of Directors for review during a meeting today (March 21), with an expected recommendation for the Board to approve the lease no earlier than at its next regularly scheduled meeting on April 18.

As part of its pledge to provide for public input and transparency into oil and gas leasing of MWCD properties, the lease document can be found on the MWCD website (/flood-reduction-and-conservation-stewardship/conservation/piedmont-reservoir-lease) and public comments about it will be accepted by the MWCD prior to the April 18 meeting of the Board of Directors. Comments can be sent through e-mail at piedmontcomments@mwcd.org, by fax at (330) 364-4161 and through regular mail to Piedmont Comments, P.O. Box 349, New Philadelphia, OH 44663.

The lease for MWCD property at Piedmont Lake contains numerous environmental protections that automatically can be extended by Antero to adjacent private property if their owners agree to them, said Theodore R. Lozier, MWCD’s chief of conservation.

“This lease for MWCD property at Piedmont Lake continues the MWCD’s commitment in all of the leases it has negotiated through its history to place a premium on environmental safeguards and to ensure that recreational use of the reservoir is not negatively impacted,” Lozier said. “We also are very pleased with the thoughtful suggestions that we have received from members of the public and users of Piedmont Lake, and we have incorporated much of that input into this lease.”

Some of the protections negotiated into the lease include the following, Lozier said:
An opportunity for the MWCD to review and approve erosion control and construction plans
Surface operation requirements including specifications on drilling operations and reclamation
Light and sound controls as well as seasonal restrictions on drilling to reduce the impact on the community

The MWCD anticipates up to two well pads could be located on MWCD property as part of the lease, Lozier said, adding that any well pads would have to be approved by the MWCD and will be in areas of minimal development and recreational activity. Other well pads will be located outside of MWCD property.

Financial terms of the lease still are being negotiated, Lozier said.

The MWCD staff will review comments and suggestions from the public and interested lake visitors and users prior to the April 18 meeting of the Board of Directors, Lozier said, adding that all comments also will be shared with Board members.

“This deliberate process that the MWCD has committed to follow is very important for full and complete public disclosure and transparency into the development of the conservancy district’s property for oil and gas leasing,” Lozier said.

The MWCD followed the same public input process prior to leasing MWCD-owned property at Seneca Lake in Guernsey and Noble counties in 2013, also to Antero Resources. The public meeting and public review and comment period are not required by law. The MWCD previously signed leases for Utica Shale development of its property in 2011 with Gulfport Energy Co. at Clendening Lake in Harrison County, and for non-development leases in 2012 with Chesapeake Energy Co. at Leesville Lake in Carroll County and in 2013 at Seneca.

The MWCD has managed oil and gas leases on its properties for its entire 80-year history as part of its overall natural resources stewardship program. There are approximately 275 traditional (Clinton development) wells that the MWCD receives royalties from, Lozier said.

The MWCD Board also has directed that the funds the conservancy district receives from signing bonuses from Utica Shale leases should be used to defray its debt, to improve public access at its properties and to address deferred maintenance and upgrades at its recreational facilities. Board members also have directed the MWCD staff to review the annual assessment of property owners paid to the MWCD for consideration of any adjustments in the amount collected based on royalties received by the conservancy district.

The MWCD, a political subdivision of the state, was organized in 1933 to develop and implement a plan to reduce flooding and conserve water for beneficial public uses in the Muskingum River Watershed, the largest wholly contained watershed in Ohio. Since their construction, the 16 reservoirs and dams in the MWCD region have been credited for saving an estimated $10.7 billion worth of potential property damage from flooding, according to the federal government, as well as providing popular recreational opportunities that bolster the region’s economy. A significant portion of the reservoirs are managed by the MWCD and the dams are managed for flood-risk management by the federal U.S. Army Corps of Engineers (USACE).

For more information about the MWCD, visit www.mwcd.org and follow the MWCD on Facebook and Twitter.


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Chesapeake Plans to Continue Fire Sale of Assets in 2014

From SNL:
Chesapeake Energy Corp. intends to continue its rapid growth in liquids production while cleaning up its balance sheet, the company said in a presentation released March 24. 
The presentation, which will be introduced at the annual Howard Weil Energy Conference in New Orleans, noted that the company is looking to "achieve investment grade metrics" while striking a balance between capital expenditures and cash flow from operations. 
As part of Chesapeake's efforts, the company said in the presentation, it will continue to divest noncore assets and noncore affiliates while reducing financial and operational risk and complexity. 
Chesapeake said that with asset sales included, its 2013 adjusted production was approximately 231.4 million barrels of oil equivalent, or MMboe. That total, the company said, included 38.5 million barrels of oil, 20.4 MMbbl of natural gas liquids and 1,035 Bcf of natural gas. Chesapeake said it anticipates growing its production by 8% to 10% in 2014, to about 249 MMboe to 253 MMboe. The company expects between 8% and 12% growth in oil production, 4% to 6% growth in gas production, and a jump of 44% to 49% in NGL production.
You can click here to read the rest of that article.

 Here is Chesapeake's presentation for the conference.  Our readers will probably be most interested in slide #14.




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Companies Offer Insights Into Their Utica Shale Plans

From Columbus Business First:
Oil and gas drillers often are mum on medium- or long-term plans for their companies as new shale plays pop up and potential becomes reality.
But representatives of PDC Energy Inc.(NASDAQ: PDCE), Antero Resources Corp.(NYSE:AR), Eclipse Resources LP andCrosstex Energy Inc. (NYSE:ENLK), – which  merged with Devon Energy Corp.earlier this month to form Enlink Midstream Partners LP – laid out their goals for the Utica shale play earlier this month at theOhio Oil and Gas Association’s annual winter meeting in Columbus.
They were asked about their activity in Ohio in three to five years. Enlink is the only midstream company; the rest are oil and gas producers and have been i ssued a combined 108 well permits in the state. 
Read the whole article by clicking here. 

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Shale Credited For US Manufacturing Revival

From CNBC:
The U.S. shale boom is beginning to ripple outward to American cities.
The shale mining industry's rising demand for materials and equipment along with the abundance of cheap fuel are fueling a modest renaissance in American manufacturing, according to a report prepared by IHS Global insight for the U.S. Conference of Mayors.
The shale extraction industry is itself driving growth through its hunger for steel pipeline, extraction machinery and other materials needed at domestic shale deposits, including the Bakken in North Dakota and the Marcellus shale in Pennsylvania. The availability of cheap fuel has in turn allowed these energy intensive manufacturing industries to cut costs and compete better with foreign imports.
Read the whole article here. 



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Tuesday, March 25, 2014

Utica Driller Halcon Resources Looking for a Buyer

From Reuters:
More work needs to be done to develop Halc√≥n Resources Corp's oil and natural gas assets before the company can be sold, Chief Executive Floyd Wilson said on Monday.
Executives have long stated that their endgame for the company, formed in 2011, would be a sale, although weak well results in Ohio's Utica shale formation have hampered that goal. The company's stock is down 45 percent in the past year.
"Our model is still to look for a sale at some point in the future," Wilson said in an interview on Monday at the Howard Weil energy conference in New Orleans. "Wall Street may or may not like us at the moment, but I'm certain they'll recognize us at some point."
Investors and analysts have been eager to see if Wilson can replicate the feat he pulled off in 2011 when he sold Petrohawk Energy to BHP Billiton Plc for $12.1 billion, a 65 percent premium over the share price before the sale was announced.
Read the entire article here.

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Monday, March 24, 2014

Questions Continue About Fracking and Earthquakes in Ohio

From the Youngstown Vindicator:
We’ve heard it since the dawn of the fracking boom in the Mahoning Valley: Fracking doesn’t cause earthquakes. 
Beginning in 2011, a swarm of as many as 109 quakes hit the Valley. Eventually, the cause was linked to an injection well at D&L Energy Inc. on Salt Springs Road, which had penetrated the Precambrian crust with fracking waste. 
That acknowledgement was slow to come. In October 2011, Heidi Hetzel-Evans, a spokeswoman with the Ohio Department of Natural Resources, told The Vindicator “[ODNR has] not seen any evidence that shows a correlation between localized seismic activity and deep-injection well disposal.” 
By the following March, the ODNR was on board, telling the Valley what it had suspected for months: an injection well triggered quakes. 
Two years later and 12.5 miles away, a 3.0-magnitude earthquake shook Poland Township just before 2:30 a.m. In total, geologists have recorded 12 low-magnitude quakes, all near the Carbon Limestone Landfill. 
This time, there was no injection well at the site — only fracking wells.
You can read the rest of that article by clicking here.  There are some interesting details about the investigation into this unusual seismic activity.

Another article from the Vindicator examines how this latest earthquake may affect plans for a new injection well:
Though the president of American Water Management Services Inc. said the start of commercial brine injection just north of Niles is about two weeks away, state regulators say it’s too soon to determine whether several Poland Township earthquakes will delay that plan. 
Ron Klingle, president of AWMS, said last week he was hopeful that in “a couple weeks” testing will be complete and injection can begin so the company “can get a little of our money back” from the cost of construction. 
The Howland company, a subsidiary of Avalon Holdings Corp., has nearly completed construction of the injection facility, which is in Weathersfield Township just north of North Road on state Route 169.
The locations of the Poland Township quakes and the Weathersfield Township injection well are about 20 miles apart. 
Click here to read that entire article. 

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Confusion Follows Rumored RUMA Agreement

From The Morning Journal:
NEGLEY - Chesapeake Energy has not sought a new road use maintenance agreement (RUMA) in Middleton Township but has applied for a permit for a new well, Township Fiscal Officer Bob Chapman said Monday.
Residents Ray and Tracy Barrow turned out for the trustee meeting to say they were trying to verify whether a RUMA had been requested. The Barrows were wondering if what they heard was a rumor, and residents Tom and Susan Cunningham also said they had heard the same.
Chapman said that is not the case, but that the township received a letter from the Ohio Department of Natural Resources (ODNR) about a month ago advising that Chesapeake applied for a permit to drill an oil and gas well on township property, specifically, in section 11, which is in the vicinity of Negley, and accessible from state Route 170.
"There was no indication of a RUMA to be issued," he said.
Read the whole article here. 

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Thursday, March 20, 2014

3 Years Probation for Employee Who Carried Out Illegal Dumping in Youngstown

From the Youngstown Vindicator:
The man who pleaded guilty to dumping oilfield waste into a Mahoning River tributary late in 2012 and early in 2013 has been sentenced to three years probation and 300 hours of community service, with no fine or restitution. 
U.S. District Judge Donald C. Nugent imposed the sentence Thursday on Michael P. Guesman, 34, of Cortland. 
Guesman had pleaded guilty Aug. 29 to one count of violating the federal Clean Water Act by dumping brine and drilling mud down a storm drain. 
Guesman’s boss, Ben Lupo, 62, of Poland, and Lupo’s company, Hardrock Excavating LLC, earlier pleaded not guilty to the same charge, but Lupo is scheduled for a change of plea hearing at 10:30 a.m. Monday.
You can read the rest of that article by clicking here. 

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Should People Be Worried About Earthquakes From Fracking? Science Says No, Activists Say Yes

From The Daily Caller:
Monday’s earthquake came from the northern edge of the Santa Monica Mountains, an area that doesn’t see much seismic activity, lending fuel to the flames for environmentalists who argue fracking will cause more earthquakes.
But the evidence shows that fracking has little to no influence on seismic activity in California. Fracking involves injecting sand, water and chemicals into underground shale formations to extract oil and gas. Fracking operations generally pressurize a small amount of rock for about two hours which causes extremely small microseismic events, but nothing close to earthquakes.
“The energy released by one of these tiny microseismic events is equivalent to the energy of a gallon of milk hitting the floor after falling off a kitchen counter,” said Stanford university Geophysicist Mark Zoback, who was an Obama administration Energy Department advisor.
“Needless to say, these events pose no danger to the public,” Zoback added.
Read the whole article by clicking here. 

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Natural Gas Prices Coming Back Down After Spike

From The Columbus Dispatch:
Natural-gas prices have begun to moderate after a late-January shock that pushed central Ohio bills to their highest level since 2009.
The recent spike was the result of an unusually cold winter, not a sign of a sustained price increase, so gas customers should not panic, analysts say.
“This is one of the worst winters we’ve ever had,” said Robert Bellinski, an energy analyst for Morningstar. “Nobody really saw it coming.”
Columbia Gas of Ohio customers are paying a regulated price of 61.4 cents per 100 cubic feet of gas, a figure that does not include taxes or fees. This translates into a bill of $125.82 for the average Columbia household, including taxes and fees.
Read the whole article here. 

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Tuesday, March 18, 2014

Links for 3/18/14: Lawsuits, Great Expectations for Utica Shale, and More

Press release:  Shell Creates Motor Oil From Natural Gas   -   "Shell announced today the creation of the first-of-its kind base oil made from natural gas, the cleanest burning fossil fuel. It is called Shell PurePlus(TM) Technology, a patented process of converting..."

Press release:  Rock Oil Holdings LLC Announces $250 Million Commitment   -   "Rock Oil Holdings LLC ("Rock Oil" or the "Company"), a newly-formed, Denver and Houston-based oil and gas company today announced an equity commitment of up to $250million from funds managed by energy private equity firm..."

Press release:  Chesapeake Files Form 10 Registration Statement for Possible Spin-Off of Chesapeake Oilfield Services   -   "Chesapeake Energy Corporation (NYSE:CHK) announced today that Chesapeake Oilfield Operating, L.L.C. (COO), its wholly owned subsidiary, has filed a Registration Statement on Form 10 with the U.S. Securities and Exchange Commission. COO currently conducts the operations of..."

Mother Jones (with this week's example of incredibly inaccurate and ridiculously irresponsible activist fear-mongering):  Was the Los Angeles Earthquake Caused by Fracking Techniques   -   "Was the 4.4-magnitude earthquake that rattled Los Angeles this morning caused by fracking methods? It's hard to say, but what's clear from the above map, made by Kyle Ferrar of theFracTracker Alliance, is that the quake's epicenter was just eight miles from..."

Investors.com:  Lawsuit Challenges Use of Endangered Species to Stop Energy Boom   -   "Oklahoma's attorney general has filed what could become a landmark lawsuit against the U.S. Fish and Wildlife Service, arguing the so-called "sue and settle" procedure for..."

Akron Beacon Journal:  Ohio Expects 19,000 Utica Wells in Next 19 Years, Report Says   -   "Ohio is projecting that more than 19,000 new Utica shale wells for natural gas and liquids will be drilled in eastern Ohio in the next 19 years. That’s how many wells would fit on the 3 million acres in eastern Ohio without any..."

Akron Beacon Journal:  More Details From Anticipated State Report on Utica Shale Drilling   -   "Some other details expected when new report from state geologist Mike McCormac is released: ■  In early January, 11 drilling rigs were working in Harrison County, nine in Belmont County, eight in Monroe County and six in Carroll County. All of Ohio had 11 drilling rigs working in..."

Press release:  Magnum Hunter Resources Provides Operational Update on Its Marcellus and Utica Shale Plays   -   "Marcellus and Utica Drilling Update Over the next 30 days, the Company anticipates production flowing to sales from 8 gross (7 net) wells in the Marcellus and Utica Shale Plays via the Company's majority owned Eureka Hunter Pipeline System. Of these wells, the Company anticipates the three WVDNR Pad wells located in Wetzel County, West Virginia, in which the Company owns a 100% working interest, will begin..."

The Review:  Shale Industry Impacts Lodging   -   "Check with any hotel, motel or campground throughout the area, and the one thing found in common is the presence of the shale industry. With employment growth among the Marcellus and Utica shales, workers have counted..."

Columbus Business First:  Pipeline companies sending large amount of gas out of Utica shale play to Gulf Coast   -   "Even more pipeline companies are preparing to send natural gas from the Utica and Marcellus shale regions to the Gulf Coast. Companies operating in the region are beginning to send large amounts of gas from..."

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25 New Utica Shale Permits Last Week

It was another active week for Utica shale permitting last week, according to the latest update from the Ohio Department of Natural Resources.

25 new permits were issued.  Harrison County led the way, with 11 of the permits.  7 were issued for Belmont County, 2 each for Carroll, Monroe, and Noble counties, and 1 for Jefferson County.

There have now been 1,148 permits issued for horizontal drilling in Ohio's Utica shale.  770 wells have been drilled, and the number of wells producing remained steady at 385.  The Utica rig count is 39.

View the report here.

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Forbes: Chesapeake's Plan to Bilk People Out of Royalties Also Means the Company is Stealing From Shareholders

From Forbes:
Chesapeake Energy has long been accused by its oil and gas partners of monkeying around with royalty payments.  It looks as if this long-simmering issue is rising to a boil.
If you haven’t already, be sure to check out Abrahm Lustgarten’s investigationof Chesapeake’s royalty-related chicanery for Pro Publica last week. The WSJ also took a look at the issue. Both stories focus exclusively on Chesapeake’s operations in Pennsylvania, where last year the company paid $7.5 million tosettle a class-action alleging royalty skimming. Lustgarten’s piece in particular sheds new light on how in 2012 cash-crunched Chesapeake ingeniously structured the $5 billion sale of its pipeline business to screw royalty owners. In one instance discovered by Lustgarten, Chesapeake charged a farmer $2.94 per mcf to move his share of gas — more than 30 times the actual cost.
But there’s far more to this than just shortchanged farmers in Pennsylvania and Texas. Indeed, one source well acquainted with oil and gas accounting (but unwilling to be quoted by name on something so sensitive) tells me the royalty scams throw into question the most important elements of Chesapeake’s financial accounting: “Screwing royalty owners means Chesapeake is stealing cash. That cash goes to the overstating of revenues and flows through to inflation of reserves. You inflate the reserves and steal from the mineral owners and the shareholders at the same time.”
Read much more here.  This is a very interesting article that gives an indication of just how damaging the unraveling of this scheme could be to Chesapeake.

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Ohio Landowners Look to Be Next to Sue Chesapeake for Manipulating Royalty Payments

We ran an article from ProPublica yesterday that takes an in-depth look at how Chesapeake has plotted to play fast and loose with deductions from royalty payments, leading to a stream of lawsuits against the company.  While this has been going on in other states, particularly Pennsylvania, for a little while now, it appears that Ohio landowners will soon be entering the fray and taking Chesapeake to court for cheating them out of royalty money.

From Columbus Business First:
The dispute is garnering attention from those with stakes in Ohio’s oil and gas industry.
Okey, whose father, Mark, tried to usher in protections for landowners during his recent stint as an Ohio legislator, told me he has reviewed dozens of royalty statements from Chesapeake to Ohioans and said they don’t show details about deductions by the company for operating costs.
“In fact, they show the number zero in the deduction column,” he said. “We have good information that it is false and deductions are being taken. At least in Pennsylvania they can see what is being taken. In Ohio they’re being led to believe that zero dollars are taken. That’s a giant difference.”
Read the whole article here. 

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Insiders Feel That Kasich Will Get Tax Reform by Continuing to Push For It

From Cleveland.com:
Republicans in the General Assembly praised Gov. John Kasich’s mid-biennium review proposals Tuesday as bold and ambitious, but the governor’s toughest job to get the tax reforms he wants may be convincing those same Republicans to support it. 
The scene is reminiscent of 2013 when the governor floatedan ambitious overhaul in the state's tax structure to pay for income tax reductions.
While the governor may not get all he's asked for this year, many expect that, like last year, there will be some compromise that leads to a lower income tax rate -- something Capitol Square insiders chalk up, in part, to the governor’s persistence. 
Kasich proposed cutting income tax rates across all brackets by 8.5 percent and to increase amounts for the earned income tax credit and the amount middle- and lower- incomes can claim for individual exemptions. 
The tax relief and rate reductions are expected to total more than $2.6 billion over three years. The trick is finding a way to pay for it.
Read the whole article here.

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Frack Waste Bill Makes Activists Unhappy

From The Intelligencer/Wheeling News-Register:
Environmentalists raised concerns about a bill that won final passage Friday in the West Virginia legislature that would overturn caps on how much drilling waste several landfills can accept from hydraulic fracturing. 
The bill, approved overwhelmingly in a special session and now sent to the governor, would allow so-called tonnage caps to be lifted for drilling waste at seven landfills that are continuing to pursue a permit to build separate areas for drilling waste. The bill also mandates that the state Department of Environmental Protection, or DEP, monitor the sites for radioactivity and conduct a study on leaching. 
The seven landfills are located in the nothern part of the state. 
Delegate Stephen Skinner, who voted against the bill passed Friday, called it "a Band-Aid on a very serious problem." 
According to the Department of Environmental Protection, six landfills in the state are currently accepting the drilling mud.
You can read the whole article here.

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Monday, March 17, 2014

Chesapeake Energy's $5 Billion Shuffle

by Abrahm Lustgarten ProPublica, March 13, 2014, 5:45 a.m.

This story was co-published with The Daily Beast.

At the end of 2011, Chesapeake Energy, one of the nation's biggest oil and gas companies, was teetering on the brink of failure.

Its legendary chief executive officer, Aubrey McClendon, was being pilloried for questionable deals, its stock price was getting hammered and the company needed to raise billions of dollars quickly.

The money could be borrowed, but only on onerous terms. Chesapeake, which had burned money on a lavish steel-and-glass office complex in Oklahoma City even while the selling price for its gas plummeted, already had too much debt.

In the months that followed, Chesapeake executed an adroit escape, raising nearly $5 billion with a previously undisclosed twist: By gouging many rural landowners out of royalty payments they were supposed to receive in exchange for allowing the company to drill for natural gas on their property.

In lawsuits in state after state, private landowners have won cases accusing the companies like Chesapeake of stiffing them on royalties they were due. Federal investigators have repeatedly identified underpayments of royalties for drilling on federal lands, including a case in which Chesapeake was fined $765,000 for "knowing or willful submission of inaccurate information" last year.

Last month, Pennsylvania governor Tom Corbett, who is seeking reelection, sent a letter to Chesapeake's CEO saying the company's expense billing "defies logic" and called for the state Attorney General to open an investigation.

McClendon, a swashbuckling executive and fracking pioneer, was ultimately pushed out of his job. But the impact of the Financial Maneuvers that he made to save the company will reverberate for years. The winners, aside from Chesapeake, were a competing oil company and a New York private equity firm that fronted much of the money in exchange for promises of double-digit returns for the next two decades.
The losers were landowners in Pennsylvania and elsewhere who leased their land to Chesapeake and saw their hopes of cashing in on the gas-drilling boom vanish without explanation.

People like Joe Drake.


"I got the check out of the mail… I saw what the gross was," said Drake, a third-generation Pennsylvania farmer whose monthly royalty payments for the same amount of gas plummeted from $5,300 in July 2012 to $541 last February.  This sort of precipitous drop can reflect gyrations in the  price of gas. But in this case, Drake's shrinking check resulted from a corporate decision by Chesapeake to radically reinterpret the terms of the deal it had struck to drill on his land. "If you or I did that we'd be in jail," Drake said.

Chesapeake's conduct is part of a larger national pattern in which many giant energy companies have maneuvered to pay as little as possible to the owners of the land they drill. Last year, a ProPublica investigation found that Pennsylvania landowners were paying ever-higher fees to companies for transporting their gas to market, and that Chesapeake was charging more than other companies in the region. The question was "why"?

ProPublica pieced together the story of how Chesapeake shifted borrowing costs to landowners from documents filed with the U.S. Securities and Exchange Commission, interviews with landowners, people who worked for the company and employees at other oil and gas concerns.

The deals took advantage of a simple economic principle: Monopoly power.

Boiled down to basics, they worked like this: When energy companies lease land above the shale rock that contains natural gas, they typically agree to pay the owner the market price for any gas they find, minus certain expenses.

Federal rules limit the tolls that can be charged on inter-state pipelines to prevent gouging. But drilling companies like Chesapeake can levy any fees they want for moving gas through local pipelines, known in the industry as gathering lines, that link backwoods wells to the nation's interstate pipelines. Property owners have no alternative but to pay up. There's no other practical way to transport natural gas to market.

Chesapeake took full advantage of this. In a series of deals, it sold off the network of local pipelines it had built in Pennsylvania, Ohio, Louisiana, Texas and the Midwest to a newly formed company that had evolved out of Chesapeake itself, raising $4.76 billion in cash.

In exchange, Chesapeake promised the new company, Access Midstream, that it would send much of the gas it discovered for at least the next decade through those pipes. Chesapeake pledged to pay Access enough in fees to repay the $5 billion plus a 15 percent return on its pipelines.

That much profit was possible only if Access charged Chesapeake significantly more for its services. And that's exactly what appears to have happened: While the precise details of Access' pricing remains private, immediately after the transactions Access reported to the SEC that it collected more money to move each unit of gas, while Chesapeake reports that it also paid more to have that gas moved. Access said that gathering fees are its predominant source of income, and that Chesapeake accounts for 84 percent of the company's business.

What's more, SEC documents show, Chesapeake retained a stake in the gathering process. While Chesapeake collected fees from landowners like Drake to cover the costs of what it paid Access to move the gas, Access in turn paid Chesapeake for equipment it used to complete that process, circulating at least a portion of the money back to Chesapeake.

ProPublica repeatedly sought comment and explanations from both Chesapeake and Access Midstream over the course of several months. Both companies declined to make executives available to discuss the deals or to respond to written questions submitted by ProPublica.

Days after the last of the deals closed, Drake and other landowners learned the expense of sending their gas through Access's pipelines would eat up nearly all of the money they had been previously earning from their wells. Some saw their monthly checks fall by as much as 94 percent.

An executive at a rival company who reviewed the deal at ProPublica's request said it looked like Chesapeake had found a way to make the landowners pay the principal and interest on what amounts to a multi-billion loan to the company from Access Midstream.

 "They were trying to figure out any way to raise money and keep their company alive," said the executive, who declined to be named because it would jeopardize his dealings with Chesapeake. "I think they looked at it as an opportunity to effectively get disguised financing…that is going to be repaid at a premium.''

***

At 54, Joe Drake guns his six-wheeler up a steep rock-rutted trail on the backwoods of his 494-acre tract and points to his property line, marked by a large maple in a sea of indistinguishable trees. He knows where it lies, because as a kid his father made him walk that line to string barbed wire. The wire is long gone, but a rusted snag remains entombed in the bark. Back then, the Drakes ran a dairy farm in these pastures.

"It's just something you've got in your blood that you do," Drake said. "But dairy farmers are a dying breed… It was a good way of life." 

Today, the milking stalls have been ripped out of a long barn that still carries the stench of their manure, but stores 20-foot stacks of bailed hay instead. Drake sold all 187 head of cattle two years ago, pinched by regulated milk prices and the rising costs of independent farming. He took out a second mortgage to keep the farm afloat.

Across the road, past his house and just beyond a stand of Oak and Ash, the hillside's natural shape transitions to a steep slope of pushed dirt, capped by a 7-acre flat the size of a large gravel parking lot. In the middle stands a 6-foot stack of steel pipes and valves – a gas well.

When Chesapeake arrived at Drake's door, he was optimistic. Drake plastered a "Drill, baby, drill" bumper sticker in the window of his Ford F-250 pickup. He welcomed the chance to draw an easy income from his land, and was unswayed when his neighbors raised questions about the environmental risks of drilling.

Chesapeake promised Drake one-eighth the value of whatever it made from his well.  It seemed like a fair deal.

If any driller was going to make money for Drake, he thought, it would be Chesapeake. The company had built an empire off finding and drilling natural gas discoveries as the fracking boom rolled across the country. With uncanny foresight, its founder, McClendon, locked up exclusive access to immense tracts of land across the country by promising property owners that their lives would be transformed by the wealth the gas under it would bring.

Then the company drilled furiously -- in Oklahoma, then Texas, Louisiana and later in Pennsylvania's Marcellus Shale – catapulting itself to the rank of second-largest producer of natural gas in the United States. It made McClendon – who snatched up a stake in the Oklahoma City Thunder basketball team and moved into a stone mansion in the posh Oklahoma City suburb of Nichols Hills -- one of the richest men in the world.

McClendon – named by Forbes in 2011 as "America's Most Reckless Billionaire" -- would find his way into plenty of personal trouble. He took a personal stake in Chesapeake's wells, and then liquidated his stock in the company in order to cover his own losses, rattling investors and ringing corporate governance alarm bells. He drew scrutiny for selling his $12 million antique map collection to the company and ire for taking a $75 million bonus as Chesapeake struggled.

In 2012, he borrowed as much as a billion dollars from the company's private equity partners to fund his private interests.  Separately, an investigation by Reuters alleged Chesapeake had rigged land leasing prices in Michigan, under McClendon's direction, sparking a federal criminal probe.

But McClendon's overarching design for the business nonetheless made it a formidable player. Chesapeake aggressively pursued business opportunities beyond its drilling. It created interlocking businesses and took advantage of tax breaks that deliver out-sized benefits to energy companies.

By structuring itself this way, Chesapeake earned a slice of profit from each step. Chesapeake's subsidiaries trucked the drilling materials, drilled the wells, fracked the gas, gathered and piped it away to a hub, and then marketed the end product – what economists call vertical integration. In fact, he built Chesapeake into a powerhouse, an echo of the old Standard Oil empire, positioned to control almost every variable and armed with the leverage to get its way.

Neither McClendon nor his staff responded to requests for comment for this article.

From early on, the company viewed the local pipelines as a profit source.   Chesapeake formed subsidiaries to build and run the lines, then spun them off into a separate, publicly traded company. That company would eventually evolve into Access Midstream, when Chesapeake sold its shares – one of the three deals – for $2 billion in 2012.

The strategy paid dividends. At Chesapeake's headquarters, a group of new, distinctively-designed office buildings went up, with views south over the state capital and the city's small skyline. The company lavished its employees with perks, too. "They've got a 72,000-square-foot gym, free trainers… free Thunder tickets," said Andrea Watiker, who scheduled pipeline capacity for gas traders in one of the company's new towers.

Confident he was in good hands, Drake endured the trucks, dirt and noise that accompanied gas drilling and signed agreements that allowed Chesapeake to run pipelines across his fields. To transport the gas from Drake's well, Chesapeake built a pipeline that stretched south from within spitting distance of the New York border, cutting a wide swath through the forest. Then it went down beyond the white-spired church in Litchfield, and ran some 35 miles further to its handoff at the Tennessee interstate pipeline near the Susquehanna River.

What Drake didn't know at the time was that the pipeline was more than a way to move his gas to market. It would become part of a strategy to make more money off of Drake himself.

***

When the first gas flowed from the well on Drake's land in July 2012, it was abundant, and the royalty checks were fat. "We was hoping to get these loans paid off…with the big money," said Drake, who earned more than $59,400 from the first few months of production, referring to the mortgages on his farm.

That year, many Pennsylvania landowners began receiving similarly sized payments as thousands of new wells – many of them drilled by Chesapeake -- finally began producing gas. Pennsylvania fast approached Texas as the largest source of natural gas in the country, and with it, the prosperity long promised to this rural part of the United States seemed about to arrive.

But then, in January 2013, without warning or explanation, the expenses withheld from Chesapeake's royalty checks for use of the gathering pipelines tripled. Drake's income dwindled. His contract with Chesapeake – and Pennsylvania law that sets a minimum royalty share in the state – promised him at least 12.5 percent of the value of the gas. Drake says the company led him to believe any expenses would be negligible. "Well, they lied."

A few miles away, the same month, his brother-in-law had 94 percent of his gas income withheld to pay for what Chesapeake called "gathering fees." Others across the northern part of the state also saw their income slashed. "I've got a stack," said Taunya Rosenbloom, a lawyer representing Pennsylvania landowners with natural gas leases. She pulled the statements of all of her Chesapeake clients into an eight-inch pile on her desk. "Everyone is having this issue."

Drake found the statements Chesapeake mailed him each month mystifying. He pored over the papers, hired a lawyer, compared notes with his neighbors, but couldn't make sense of the charges.


Thursday, March 13, 2014

Links for 3/13/14: Kasich Still Pushing for Higher Severance Tax, Dinosaur Bones Slow Shale Operation, and More

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Yahoo News:  Anti-fracking activist barred from 40 percent of Pennsylvania county   -   "A court injunction obtained by Texas-based Cabot Oil & Gas is preventing Pennsylvania resident Vera Scroggins from going to her local grocery store, her friends' homes, schools, or even..."

The Washington Post:  The myth of ‘settled science’   -   "I repeat: I’m not a global warming believer. I’m not a global warming denier. I’ve long believed that it cannot be good for humanity to be spewing tons of carbon dioxide into the atmosphere. I also believe that those scientists who pretend to know..."

Forbes:  The EPA Must Finally Take 'No' For An Answer   -   "Federal agencies have many faults, but a lack of persistence is not among them. Twenty years ago, when I was counsel to President Bush, the EPA pushed hard to use the Clean Air Act to exert unprecedented power over major sectors of the economy. Specifically, the EPA wanted..."

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