Will EPA Waive The Renewable Fuels Standard Because of the Drought?

The RFS Mandate

The Energy Policy Act of 2005 established a renewable fuel standard (RFS), which was expanded by the Energy Independence and Security Act of 2007 (EISA).  The RFS requires that transportation fuels contain a blend of biofuels.  The amount increases each year.  The RFS mandates that 15.2 billion gallons of renewable fuel be blended into transportation fuel in 2012. 

The RFS mandate has been a major catalyst for the development of biofuels industries in the United States, especially the ethanol industry.  Currently, corn is the predominant source used to meet the RFS.  Corn is also the most expensive single item for animal agricultural producers. According to a Congressional Research Service Report,

In 2005, the United States produced 3.9 billion gallons of ethanol, requiring roughly 1.4 billion bushels of corn; in 2007, those numbers increased to 6.5 billion gallons and 2.3 billion bushels.  In 2007, roughly one-quarter of the U.S. corn crop was directed to ethanol production.  In 2009, production had increased to roughly 11 billion gallons.

While the RFS contains secondary mandates for the use of cellulosic biofuels, biomass-based diesel fuels, and other advanced biofuels, the Environmental Protection agency (EPA), citing a lack of current and expected production capacity, has waived and significantly reduced the cellulosic biofuel mandate.  Therefore, corn will likely continue to be the major source for renewable fuels for the foreseeable future.

The Drought Is Decreasing Corn Production and Increasing Prices

During a July 18, 2012, press briefing, United States Department of Agriculture Secretary Tom Vilsack told reporters that drought conditions in the United States are “the most serious situation we’ve had in probably 25 years.”  “Sixty-one percent of the land mass of the United States is currently being characterized as being impacted by this drought.”  Seventy-eight percent of the nation’s corn crop is in drought -impacted areas.  The drought will result in significant price increases.  Corn prices already have jumped 38 percent since June 1st

RFS Waiver Petition Anticipated

The severe drought and its impact on corn production have led to speculation that several states may petition the EPA this week to waive the RFS requirements.  As amended by the EISA, section 211(o)(7) of the Clean Air Act grants the EPA Administrator, the authority--on the petition of a state or fuel provider, or at her own discretion--to waive the overall RFS requirement for a particular year.  Before granting a waiver, the Administrator, in consultation with the Secretaries of Agriculture and Energy, must determine either: 1) that there is inadequate domestic renewable fuel  supply; or 2) implementation of the requirement would severely harm the economy or environment of a state, region, or the United States.  

The EPA previously interpreted the waiver provision in 2008.  Then, increasing demand for corn for biofuels, the rise in energy prices, and other supply concerns in grain markets led to rapid increases in corn and other grain prices. Texas Governor Rick Perry petitioned the EPA for a 50 percent waiver from the RFS requirements on April 25, 2008.  As grounds for the waiver, Governor Perry cited the negative effects of the RFS requirements on the Texas economy and global food prices.  The EPA interpreted the waiver provision narrowly and denied the waiver request in August 2008, stating that “the levels of potential impacts from the RFS do not satisfy the high threshold of harm to the economy to be considered severe.” 

Recent statements by the Department of Agriculture Secretary suggest that he would not support a waiver. During his press briefing  he was asked about the use of corn for ethanol in light of the severe drought conditions.  He responded:

There’s no need to go to the EPA at this point in time.  Based on the quantity of ethanol that’s currently in storage, there’s no problem in that area at this point in time.

Secretary Vilsack’s position is consistent with the position taken by the American Coalition for Ethanol:

The evidence doesn’t support an RFS waiver.  Because corn ethanol production has exceeded the RFS schedule for several years. The excess ethanol stocks (approximately 850 million gallons in storage) and surplus RINs [renewable identification numbers](between 2.5 and 3 billion RINs in the bank) provide significant cushion for refiners to meet the 2012 and 2013 RFS obligations in drought conditions without it being the cause of a run up in corn prices.  The surplus storage and RINs enable ethanol producers to scale back production based on market cues without impacting obligated parties’ ability to meet the RFS requirements.

If one or more states petition for waiver of the RFS requirements, the EPA could determine that the drought and its impact on corn production do not meet the high threshold that the implementation of the RFS mandate will severely harm the economy.  As the EPA stated in its denial of Governor Perry’s waiver petition in 2008, “it is not sufficient to determine that the implementation of RFS would contribute to such harm.”  Further, "EPA would have to find that there is generally a high degree of confidence that the RFS is severely harming the economy.”

The EPA must act within 90 days of receipt to approve or disapprove a waiver petition, which must be put out for notice and comment.  If the EPA grants a waiver, the waiver expires within one year, but may be extended by the EPA Administrator in consultation with the Secretaries of Agriculture and Energy. 

Dominion and Sierra Club Battle Over Proposed LNG Export Facility

On Friday, Dominion filed suit, asking a state court in Calvert County, Maryland to confirm the company's right to construct and operate a liquefied natural gas ("LNG") export facility at the company's existing LNG terminal at Cove Point in Lusby, Maryland.  Dominion obtained preliminary authorization from the Department of Energy last year to export LNG, which Dominion plans to do from its terminal at Cove Point.  But the Maryland Chapter of the Sierra Club issued a statement in April claiming that it has the right to veto the proposed export facility under a 2005 agreement with Dominion.

Background of the Cove Point Terminal

Dominion's Cove Point LNG terminal was originally owned by Columbia Gas, which constructed the terminal as an LNG import terminal in the 1970s.  Columbia only operated the facility as an import terminal for a couple of years, but in the 1990s it added liquefaction capability at the facility for use in providing "peaking service."  This involves liquefying natural gas and storing it during periods of low demand, then regasifying and selling it during periods of peak use. 

Dominion acquired the facility in 2002 and applied to the Federal Energy Regulatory Commission for authority to expand the facility and use it again for LNG imports.  In 2005, Dominion entered an agreement with the Sierra Club and Maryland Conservation Council, in which those environmental organizations agreed not to oppose Dominion's expansion of the terminal in return for Dominion's agreement regarding the protection of certain other nearby areas.  Since then, Dominion has used the facility for LNG imports.

What led to the current dispute?

Up until the last few years, there were projections that the United States would remain dependent on natural gas imports, including LNG imports, into the foreseeable future.  But domestic production of natural has increased dramatically in the last few years, in large part because of the use of horizontal drilling and hydraulic fracturing to produce natural gas from shale formations.  That has led to decreased imports, and to such a plentiful domestic supply of natural gas that companies are planning to export natural gas.  Dominion applied to the Department of Energy for permission to export natural gas and received preliminary approval to do so last October.

But on April 26, 2012, the Sierra Club sent a letter to Dominion, demanding that it cease plans to export natural gas from Cove Point.  The same day, the Sierra Club issued a press release declaring its opposition to Dominion's export plans.  The Sierra Club contends that the 2005 agreement prevents Dominion from expanding the terminal or from using it as an export facility.  Thus, contends the Sierra Club, Dominion cannot export LNG from Cove Point without the Sierra Club's consent.  Further, the Sierra Club states that it will not give that consent.  In part, the Sierra Club says it objects to expanding the footprint of the terminal, which Dominion plans to do by building additional liquefaction capacity, which would be needed in order to operate the terminal as an export facility.  But the Sierra Club stated that Dominion's operation of the terminal as an export facility would be "unacceptable ... even if Dominion confined its new construction to the existing plant site."  Why?  Because the export of natural gas would encourage more natural gas drilling and the use of hydraulic fracturing, which the Sierra Club opposes.

Dominion's Contentions and its Lawsuit

Dominion Cove Point LNG, L.P. filed suit in the Circuit Court for Calvert County against the Sierra Club, the Maryland Chapter of the Sierra Club, and the Maryland Conservation Council.  Dominion disputes the Sierra Club's contention that the 2005 agreement limits Dominion to using the Cove Point terminal for LNG imports.  Further, contends Dominion, the Sierra Club's opposition to Dominion's export of LNG from Cove Point has very little to do with concern about LNG exports, construction activity at Cove Point, or an enlarged footprint for the terminal.  Instead, the Sierra Club's primary reason for opposing the export of LNG is that the Sierra Club opposes drilling for natural gas and the use of hydraulic fracturing, and the increased availability of LNG export facilities will encourage natural gas drilling.  To support its point, Dominion points to the Sierra Club's "Beyond Natural Gas Initiative."  Further, both the Sierra Club's April 26 press release and its April 26 letter to Dominion give prominent attention to the Sierra Club's opposition to hydraulic fracturing and natural gas drilling, even though neither of those are directly at issue in Dominion's proposal.  Dominion's lawsuit seeks a declaratory judgment that the 2005 agreement does not prevent it from building and operating LNG export facilities at its Cove Point terminal. 

In addition to arguing that the 2005 agreement does not prevent such use, Dominion points out that the proposed project would result in an additional $40 million per year in property tax revenue for Calvert County, 70 to 100 permanent jobs in Calvert County, and 2500 to 3100 construction jobs.

Dominion would like to begin construction in 2014, with a schedule that would call for putting the proposed export facility into service in 2017, pending necessary regulatory approvals and the negotiation of terminal service agreements.

Why is this Important Beyond Calvert County, Maryland?

The resolution of Dominion's lawsuit will turn on the court's interpretation of the language in the 2005 agreement, and the court's interpretation of that language is not likely to have a direct effect on any other disputes.  The importance of this dispute is that it shows the Sierra Club's determination to oppose projects that will encourage ─ even indirectly ─ greater drilling for natural gas and use of hydraulic fracturing.  Natural gas is the cleanest burning of all fossil fuels, and there have been projections that the plentiful supply of natural gas will contribute to an increased use of gas and a decreased use of coal for generating electricity.  Will the Sierra Club oppose increased drilling for natural gas even if less drilling mean more coal use in the U.S.?  Will the Sierra Club continue to oppose natural gas exports if less exports would mean more coal use abroad?

Resources

Successful Methane Hydrates Production Test Announced

Last week, the U.S. Department of Energy announced the completion of a successful field test of technology for the production of natural gas from methane hydrates.  The test was performed on the North Slope of Alaska in partnership with ConocoPhillips and the Japan Oil, Gas and Metals National Corporation.  The field test was based on technology developed in a laboratory setting in a collaboration between ConocoPhillips and the University of Norway, Bergen.

Methane hydrates look like ice, but are a crystalline structure comprised of two compounds ─ water molecules, which are on the outside of a crystal lattice, and methane, which is on the inside.  When methane hydrates are exposed to pressure and temperature conditions for which the hydrates are not stable, the crystal structure breaks down, yielding liquid water and methane gas.  Methane hydrates are found onshore beneath the Arctic permafrost and offshore in ocean sediments along most of the world's continental shelves, including in the Gulf of Mexico.

In the field test, the research team injected a mix of carbon dioxide and nitrogen into a formation containing methane hydrates, then depressurized the formation.  The result was an in situ exchange of carbon dioxide and methane molecules in the hydrate structure, and the release of methane gas.  The field test was conducted from February 15, 2012 to April 10, 2012, with the depressurization phase lasting 30 days.  During the depressurization, the formation produced a steady flow of natural gas.

The Department of Energy's statement called methane hydrates "a vast, entirely untapped resource that holds enormous potential for U.S. economic and energy security."  The Department stated that it plans to conduct a "long‑term production test in the Arctic as well as research and test additional technologies that could be used to locate, characterize and safely extract methane hydrates on a larger scale in the U.S. Gulf Coast."  The work has "the eventual goal of making sustained production economically viable."

The Department said that it still is evaluating data from the recent field test "to determine the efficiency of simultaneous CO2 storage" in, and methane production from, the same reservoir.

Argentina Set to Complete Takeover of YPF

As expected, Argentina's Lower House of Congress joined the Senate in granting the central government authority to expropriate 51% of the shares of stock in YPF, taking all of the expropriated shares from Repsol.  President Cristina Fernández signed the legislation, which she had proposed, on Friday, May 4.  For further details on the takeover,which is being made over Repsol's protests, see the Oil & Gas Law Brief's post dated April 30, 2012.

Argentina Set to Seize Control of YPF through Nationalization

The national government of Argentina is poised to seize control of YPF by nationalizing a 51 percent share of the company.  YPF is Argentina's largest oil and gas company.  It formerly was owned by the government, but it was privatized in 1993 and is majority-owned by Respol, a Spanish oil and gas company that purchased its shares of YPF in 1999.

The move toward nationalization was launched on April 16, when the Argentinian government issued a decree that temporarily placed administration of YPF under a government ministry, effectively transferring the powers of the company's Board of Directors to the government.  President Cristina Fernández also announced that she would ask parliament to enact legislation authorizing the central government to nationalize 51 percent of the shares of stock in YPF, with all of the nationalized shares being seized from Repsol. 

Last week, Argentina's Senate approved a bill to authorize the proposed nationalization of Repsol's shares by a vote of 63 to 3.  Argentina's Lower House of Congress is expected to follow suit this week.  Repsol has issued a statementcondemning the expected nationalization as "manifestly unlawful and gravely discriminatory."  Repsol also stated

The measure clearly contravenes the obligations undertaken by the Republic of Argentina during the privatization of YPF, breaching the most basic principles of legal certainty and of reliance by the international investment community.  Repsol will carry out all pertinent legal actions to preserve the value of all their assets and the interests of all their shareholders."

The move is expected to be popular with Argentinian public, which sees YPF as a national symbol.  The move is also expected to provide short term financial benefits to the central government, enabling it to divert YPF profits to itself, at the expense of Repsol, as well as the shareholder's whose stock is not nationalized. 

The longer term effect of nationalization is less certain.  YPF had begun drilling wells into the Vaca Muerta shale formation, from which both oil and gas can be produced.  One recent report estimated that drilling in the Vaca Muerta shale play could help double Argentina's production of oil and gas within ten years if appropriate investment is made in the play.  But the Argentinian government is strapped for cash and it may be difficult to attract foreign investment after the government nationalizes Repsol's shares.  The Argentinean government has stated that it will compensate Repsol, but the government has suggested that it will not pay anywhere near the value that Repsol has placed on the shares.

In reporting on the nationalization, The Economist magazine recently stated, "For Argentina, it is a disaster."  The magazine predicted: 

The effects of nationalization will be felt far beyond energy.  Spain is Argentina's biggest foreign investor.  After seeing YPF's fate, Spanish banks, utilities and telecoms may also look for the exits.  Ms. Fernández has also endangered Argentina's trade relations with Europe, one of its biggest export markets ... ." 

FERC Approves Construction of LNG Export Facility in South Louisiana

Last week, the Federal Energy Regulatory Commission authorized two subsidiaries of Cheniere Energy Partners to begin construction of facilities for the liquefaction and export of natural gas at the Sabine Pass LNG terminal in Cameron Parish, Louisiana, currently the site of LNG import facilities.  FERC approval for the export of natural gas is required by the Natural Gas Act.  Cheniere hopes to have its proposed export facility in operation by 2015 or 2016. 

Cheniere's export facility would be only the second LNG export facility in the U.S., though other companies recently have begun the process of applying for permits to build export facilities.  The only existing LNG export facility in the U.S. is in Kenai, Alaska.  It was built in 1969 and primarily exports LNG to Japan, the world's largest importer of LNG. 

Just a few years ago, analysts were projecting that the U.S. would be importing increasing amounts of liquefied natural gas in the future.  But domestic production of natural gas production has soared in the last few years, largely because companies have utilized improved hydraulic fracturing and horizontal drilling technologies to produce natural gas from shale formations.  Indeed, the United States Energy Information Administration predicts that the U.S. will be a net exporter of LNG within a few years. 

Louisiana Department of Natural Resources Secretary Scott Angelle offered his "congratulations and appreciation" to Cheniere and federal regulators "for working together moving this project forward — the first of its kind in a generation and the second in our nation's history — and for establishing a procedural path in providing new markets for domestic natural gas and new economic stability in our natural gas markets that could mean more exploration, more jobs and more countries around the world dependent on us for energy instead of the other way around."

Cheniere released a statement in which its Chairman and CEO, Charif Souki, states: "Obtaining approval from the FERC is one more milestone for our Liquefaction Project.  We will now finalize financing arrangements in order to commence construction of the first two LNG trains of our Liquefaction Project promptly."

The surge in U.S. production of natural gas, and the central role that production from shale formations has played in that surge is illustrated by the two graphs below.  The top graph shows total U.S. production of natural gas, which began trending sharply upward in 2005.  The bottom graph shows U.S. production levels of shale gas (natural gas produced from shale formations).

 

graph of Estimated annual U.S. dry shale gas production, 2000-2011, as described in the article text

Court Issues Injunction to Delay Effective Date of Pennsylvania Law Limiting Authority of Local Governments to Regulate Oil and Gas Activity

Yesterday, a state court judge in Pennsylvania issued a preliminary injunction delaying for 120 days the effective date of Act 13, a new law that would limit the authority of local governments to regulate oil and gas activity.  The intent of Act 13 is to ensure that Pennsylvania's state oil and gas statutes and regulations provide a uniform system of rules that does not vary from locality to locality.  A group of plaintiffs recently filed suit to challenge Act 13 on the grounds that it allegedly violates Pennsylvania's constitution.  Act 13 was scheduled to go into effect on April 14, 2012. 

The parties will continue to litigate whether Act 13 is constitutional.

 

Ohio Officials Say Injection Disposal Well Caused Earthquakes

A few days ago, the Ohio Department of Natural Resources issued a preliminary report concluding that the operation of an injection disposal well caused a series of earthquakes that occurred near Youngstown, Ohio in late 2011.  Ohio officials ordered that the injection well at issue, the Northstar One Class II Injection Well, be shut down in late 2011, after officials began to suspect that the well might be inducing the seismic activity near Youngstown, which ranged from 2.1 to 4.0 on the Richter scale. 

In a statement, Ohio DNR noted that injection disposal wells occasionally have been linked to earthquakes in the past, but that such links are "extremely rare."  The statement noted that "[t]here are more than 144,000 operational Class II disposal wells in the United States, but only six have been linked to earthquakes."  In its report, Ohio DNR added: 

Geologists believe it is very difficult for all conditions to be met to induce seismic events.  In fact, all the evidence indicates that properly located Class II injection wells will not cause earthquakes.  To induce an earthquake a number of circumstances must be met: 

  • A fault must already exist within the crystalline basement rock;
  • That fault must already by in a near‑failure state of stress;
  • An injection well must be drilled deep enough and near enough to the fault and have a path of communication to the fault; and
  • The injection well must inject a sufficient quantity of fluids at a high enough pressure and for an adequate period of time to cause failure, or movement, along that fault (or system of faults)."

Ohio DNR states that the Northstar One Class II Injection Well was drilled near a previously unmapped fault.  To prevent similar problems from occurring in the future, Ohio DNR announced plans to reform its injection well regulations in several ways.  For example, Ohio DNR will prohibit all future drilling into the Precambrian basement rock into which the Northstar One Injection Well was drilled.  The new regulations also will require officials to review existing geological data for known fault areas within the state, and will require that new injection disposal wells avoid those areas. 

In addition, Ohio DNR will begin requiring that operators of disposal wells make various geophysical measurements.  For example, operators will be required to measure the pressure of the injection reservoir prior to starting injections, to continuously monitor the formation's pressure during injections, and to provide an electronic feed of those results to Ohio DNR for its review.  Further, Ohio DNR will require that operators of injection wells install automatic shutoff systems that will halt injections if fluid injection pressures exceed a maximum level set by the agency.

Last year, much of the media linked the seismic activity near Youngstown to hydraulic fracturing, but the NorthStar One Injection Well is not a hydraulically fractured well.  Instead, it is an injection disposal well that is used for the disposal of waste fluids.  The Northstar One Class II Injection Well happened to be used for the disposal of hydraulic fracturing wastewater, but Class II injection wells also are used for the disposal of other types of wastewater from oil and gas operations, and other classes of injection wells are used for the disposal of liquid wastes from sources other than the oil and gas industry.  There has not been any suggestion that the disposal of hydraulic fracturing wastewater via underground injection is any more prone to inducing seismic activity than the disposal of other types of fluids via underground injection.

In addition to the information in its press release, Ohio DNR provided a document with answers to frequently asked questions, a copy of the executive summary of its preliminary report on the Northstar One Class II Injection Well and the seismic events near Youngstown, Ohio, and a copy of the full preliminary report.

For additional information on injection disposal wells inducing seismic activity, and whether hydraulic fracturing can induce seismic activity, see Frack Quakes?  Can Hydraulic Fracturing Really Cause Earthquakes?, Oil & Gas Law Brief, January 9, 2012.

Energy Intensity and Carbon Dioxide Emissions

Many people are concerned about climate change, as well as emissions of carbon dioxide, which are believed to drive climate change, and energy use, which is primary source of carbon dioxide emissions.  So, how is the U.S. doing on controlling carbon dioxide emissions and energy use, and how well are we likely to do in the future?

The Energy Information Administration ("EIA") reports that the per capita use of energy "was fairly constant" form 1990 to 2007, but began to decrease after 2007.  The EIA projects that the U.S. population will increase by 25 percent from 2010 to 2035, but that the nation's energy use will only increase by 10 percent over that period.  That translates into an annual decrease in per capita energy use of 0.5 percent per year during the period 2010 through 2035.

The EIA projects that the per capita level of energy-related emissions of carbon dioxide will decrease at an average rate of 1 percent per year from 2005 to 3035.  The EIA projects that the total energy-related emissions of carbon dioxide in the U.S. will increase by 3 percent over that period.

Per dollar of gross domestic product, energy use decreased at an average rate of 1.7 percent per year from 1990 to 2010, and the EIA projects that the decrease will continue in the future.  

The per capita decreases in energy use and carbon dioxide emissions, as well as the decrease in energy use per dollar of GDP, are illustrated in the first graph below.

The decreases are driven by several factors, including increased energy efficiency and increased use of energy sources other than fossil fuels.  Another factor has been the relative shift in the U.S. economy toward service industries and away from manufacturing.  This shift is illustrated in the second graph below, which shows a very small increase in GDP from industrial sectors of the economy and a substantial increase in GDP from service sectors.

 

 

 

 

  

Energy Information Administration Projects that U.S. Will Become Net Exporter of Natural Gas By 2021

The Energy Information Administration (EIA) projects that the United States will become a net exporter of liquefied natural gas (LNG) by the year 2016 and a pipeline exporter of natural gas by 2025.  When both LNG and pipeline shipments are considered, the EIA projects that the U.S. will become a net exporter by 2021. 

The U.S.'s switch from being a net importer to being a net exporter will be driven by significant increases in domestic production of natural gas, with the increased production largely being the result of the production of natural gas from shale formations using hydraulic fracturing and horizontal drilling.  The EIA projects that shale gas production will increase from 5.0 trillion cubic feet in 2010 to 13.6 trillion cubic feet in 2035.  The increase in total production of natural gas is illustrated by the following graph, which also illustrates the relative share of natural gas that is produced from various sources.

Chart showing U.S. natural gas production, 1990-2035. Source, EIA Annual Energy Outlook 2012

The EIA projects that the share of U.S. electricity production that comes from natural gas fired power plants will increase from 24% in 2010 to 27% in 2035.  The following graph shows the EIA's projections for total electricity production in the U.S., and also illustrates the relative shares of electricity generated from various energy sources.

graph of U.S. electricity net generation by fuel, 1990-2035, as described in the article text

The projections discussed in this post are contained in an "Early Release Overview" of the EIA's 2012 Annual Energy Outlook.

Energy Information Administration Projects Increased U.S. Crude Oil Production, Decreased Imports

The Energy Information Administration reports that production of crude oil within the United States has risen during the last few years, increasing from 5.1 million barrels per day in 2007 to 5.5 million barrels per day in 2010.  This increases reverses a decline that began in 1986. 

Further, the EIA projects that domestic production will continue to increase through approximately 2020, reaching a peak of approximately 6.7 million barrels per day that year.  After that, production will begin to decline, but will still be 6.1 million barrels per day in 2035, about 10% above production rates in 2010.

The EIA states that the future increases will be driven by continued development of tight oil, as well as ongoing development of offshore resources in the Gulf of Mexico.  "Tight oil" is crude oil produced from low permeability formations, such as shale formations, typically through the use of horizontal drilling and hydraulic fracturing. 

The Bakken formation in North Dakota and the Eagle Ford formation in South Texas are examples of shale formations from which tight oil currently is being produced.  Exploration has begun in other formations that also are expected to yield significant amounts of tight oil, including the Tuscaloosa Marine Shale in Central Louisiana and the Brown Dense in North Louisiana and South Arkansas.

The graph below shows the EIA projections for the rate of crude oil production from 1990 through 2035, and breaks down the rate of production by the source of the oil. 

graph of U.S. crude oil production, as described in the article text

As the graph shows, increased production from the Gulf of Mexico plays a part in the increased production, but the EIA states that, "The higher level of production results mainly from increased onshore oil production, predominantly tight oil."  The EIA projects that tight oil will account for 31% of onshore production from the lower 48 states in 2035, compared to 12% in 2010. 

The increased production of crude oil is contributing to decreased imports of oil.  Imported liquid fuels accounted for 60% of U.S. consumption in 2006, but had declined to 50% by 2010.  The EPA projects that the share of consumption supplied by imports will continue to decline, and will be down to about 36% by 2035.  The following graph shows total U.S. consumption of petroleum, as well as the portion of consumption supplied by domestic production and the portion supplied by imports.  

graph of U.S. liquid fuel supply, 1970-2035, as described in the article text

 

Increased production of biofuels also is projected to play a part in lessening U.S. reliance on imports.  Biofuel use is projected to increase to more than 1 million barrels per day of crude oil equivalent by 2024. 

The EIA projects that the rate of growth in consumption will be slow.  The EPA predicts that transportation energy demand, which accounts for a large portion of crude oil consumption, will increase by only 0.2% per year from 2010 through 2035.

The EIA's projections are contained in an "Early Release Overview" of its 2012 Annual Energy Outlook.

Second Circuit Issues Opinion Dismissing Chevron's Attempt to Bar Enforcement of $17.2 Billion Ecuadorian Judgment Against It

Today, the United States Second Circuit Court of Appeals issued an opinion explaining the rationale of its prior order vacating a district court's preliminary injunction that barred enforcement of a $17.2 billion judgment against Chevron (see the September 23, 2011 post in Oil & Gas Law Brief).

 The judgment against Chevron arises from claims made by Ecuadorian citizens that Texaco was one of a consortium of companies that contaminated portions of the Lago Agrio region of the Ecuadorian Amazon during petroleum operations from 1964 to 1992.  The Ecuadorian citizens filed suit against Texaco in federal court in New York in 1993, alleging that they had been harmed by the contamination.  The parties litigated for several years in New York, during which time Chevron acquired Texaco.  Texaco (and then Chevron) argued that the case should be heard in Ecuador, rather than New York, and the New York federal court agreed to dismiss the Ecuadorians' claims on that basis. 

The Ecuadorians refiled their claims in Ecuador, naming Chevron as the defendant, and after several more years of litigation they obtained a $17.2 billion dollar judgment in early 2011.  That judgment was affirmed by an Ecuadorian appellate court earlier this month (see the January 6, 2012 post in the Oil & Gas Law Brief). 

In the meantime, however, Chevron had filed its own suit in federal court in New York against the Ecuadorians and their attorneys, asserting various claims.  In one of the claims, Chevron asked the court to issue a preliminary injunction barring the Ecuadorians from enforcing their judgment against Chevron anywhere in the world except Ecuador itself, where Chevron has no assets. 

Chevron based its claim for injunctive relief on New York's Uniform Foreign Country Money-Judgments Recognition Act, which specifies the circumstances in which New York courts will enforce money judgments rendered by foreign courts.  The Recognition Act provides that New York courts generally will enforce foreign judgments, but the Act provides certain circumstances in which New York courts are prohibited from enforcing foreign judgments, and certain circumstances in which New York courts have discretion not to enforce foreign judgments. 

Chevron argued that it had been denied due process during the Ecuadorian litigation and that Ecuador lacked an impartial judiciary, both of which are bases that would prohibit a New York court from enforcing a foreign judgment.  Chevron also asserted that the Ecuadorian plaintiffs had used fraud to obtain their judgment, an alleged fact which would give a New York court discretion not to enforce a foreign judgment.  On March 7, 2011, District Court Judge Kaplan entered a preliminary injunction as requested by Chevron, barring the Ecuadorians from attempting to enforce their judgment anywhere in the world except Ecuador. 

On September 19, 2011, the Second Circuit entered an order vacating the preliminary injunction and staying the litigation that still was pending before Judge Kaplan.  The Second Circuit stated that it would issue an opinion explaining the rationale for its order at a later date.  The Second Circuit issued its promised opinion earlier today. 

The Second Circuit explained in its opinion that the Recognition Act merely specifies the circumstances in which New York courts will or will not enforce a foreign judgment.  The Act does not provide a basis for a defendant to seek an order prohibiting courts outside New York from enforcing the judgment of a foreign court.   

The Second Circuit stated: "The sections on which Chevron relies provide exceptions from the circumstances in which a holder of a foreign judgment can obtain enforcement of that judgment in New York; they do not create an affirmative cause of action to declare foreign judgments void and enjoin their enforcement."  Elaborating, the court stated: 

Nothing in the New York statute, or in any precedent interpreting it, authorizes a court to enjoin parties holding a judgment issued in one foreign country from attempting to enforce that judgment in yet another foreign country." 

The court added that Chevron would "have its opportunity to challenge the [Ecuadorian] judgment's enforcement under this Act at such time, if any, as judgment-creditors seek to enforce the judgment in New York." 

The Second Circuit instructed Judge Kaplan to dismiss in its entirety Chevron's claim for a declaratory judgment that the Ecuadorian judgment is not enforceable.  Chevron's other claims, which were severed (and now are pending in a separate suit) were not before the Second Circuit.  That litigation, still in its early stages, remains pending before Judge Kaplan.

Federal Energy Subsidies -- Who is Getting Them? Who Should?

The federal government uses both expenditures and tax breaks to subsidize energy research and encourage investment.  A majority of the subsides are directed toward renewable sources of energy.  

The Energy Information Agency (EIA) reports that, during 2010, approximately 55.3% of all federal subsides relating to electricity generation and transmission were directed toward renewable sources of energy.  That year, 21.0% of those subsidies were directed to nuclear power, 10.0% to coal, 8.2% to electricity transmission and distribution, and 5.5% to natural gas.

When subsidies are compared based on the relative amount of electricity generated by particular sources of energy, the tilt toward renewables is even more pronounced.  Subsidies directed toward coal amounted to slightly more than $0.64 per 1,000 kw-hour of electricity generated by coal.  Subsidies to natural gas electricity generation were slightly less than $0.64 per 1,000 kw-hours.  Nuclear energy fared somewhat better, receiving subsidies totaling about $3.10 per 1,000 kw-hours.  But renewables received much more, about $15.43 per 1,000 kw-hours.

Renewables also received the largest share of subsidies for non-electrical power, such as fuel used in transportation.  Biomass and biofuels received 73.2% of all federal subsidies for non-electrical power in 2010, and other renewables received an additional 4.5%.  The portion of those subsidies that were directed to natural gas and petroleum liquids was 20.7%.  And again, renewable sources of energy do even better when the amount of  subsidies directed toward different sources of energy are compared based on the relative amount of non-electrical power the U.S. derives from those sources of energy.  Subsidies relating to natural gas and petroleum liquids were approximately $75.83 per million BTUs of power generation in 2010.  In contrast, subsidies for biomass and biofuels were about $1975.71 for million BTUs, and subsidies for other renewables were about $2,600.00 per million BTUs.

The tables below summarize data from the EIA report.

Federal Subsidies Relating to Electrical Power

Fuel

Power Generation

Billion kw-hrs

Subsidies

$ million

Percent of U.S. electrical      power     

Percent of subsidies

Subsidies

$ per 1,000 kw-hrs

Coal

1851

1189

44.9

10.0

0.64

Natural gas & petroleum liquids          

1030

654

25.0

5.5

0.64

Nuclear

807

2499

19.6

21.0

3.10

Renewables

425

6560

10.3

55.3

15.43

Transmission & distribution

971

8.2

 

Federal Subsidies for Fuel for Non-electrical Power

Fuel

Quadrillion BTUs

Subsidies

$ million

% of non-electrical energy

% of subsidies

Subsidies

$ per billion BTUs

Coal

2.94

169

8.3

1.6

57.48

Natural gas & petroleum liquids          

28.55

2165

80.3

20.7

75.83

Biomass & Biofuels        

3.87

7646

10.9

73.2

1975.71

Geothermal, solar, other renewables   

0.18

468

0.5

4.5

2600.00

 

I'd be interesting in hearing readers' views on federal subsidies.  Should the federal government: (1) distribute subsidies somewhat evenly between energy sources; (2) give the bulk of subsidies to well established and proven energy sources, such as petroleum, coal, and nuclear power; (3) give the bulk of subsidies to less established energy sources, such as renewables; or (4) eliminate all subsidies.  I can see arguments in favor of each alternative.

Appellate Court in Ecuador Affirms $18 Billion Judgment Against Chevron

Earlier this week, an appellate court in Ecuador affirmed an $18 billion judgment against Chevron that was entered by a lower court in Ecuador in February 2011.  The plaintiffs are thousands of Ecuadoran villagers who seek compensation for harms they allege they have suffered due to contamination in the Amazon region of Ecuador. 

The plaintiffs allege that the contamination was caused by oil and gas operations of a consortium in which Texaco Petroleum participated from 1960 to 1992.  Chevron acquired Texaco in 2001.  Prior to that acquisition, Texaco contributed funds to a remediation project, and received a release from the Ecuadoran national and local governments.  Chevron has argued that the release was a complete settlement of all claims, including any private claims.  The plaintiffs assert that the release only covered governmental claims, not claims by private individuals.

The plaintiffs filed suit in federal court in New York about 18 years ago, but Chevron successfully fought to have the case transferred to Ecuador based on the legal doctrine forum non conveniens.  Chevron claims that, at the time it requested the case be transferred to Ecuador, that country had sound political and judicial systems, but that the country's political and judicial systems subsequently became corrupted.  Chevron asserts that the lower court in Ecuador denied Chevron due process, and that the multi‑billion dollar judgment entered against it was tainted by fraud.  The plaintiffs dispute that.

Chevron filed an action in federal court in New York earlier this year, seeking a permanent injunction placing a global ban on enforcement of the Ecuadoran judgment.  United States District Court Judge Lewis A. Kaplan entered a preliminary injunction purporting to bar the plaintiffs from enforcing their judgment anywhere in the world except Ecuador, where Chevron has no assets, and he scheduled a trial on Chevron's request for a permanent injunction. 

As reported in the Oil & Gas Law Brief on September 23, 2011, the United States Second Circuit Court of Appeals entered an order vacating the preliminary injunction and staying the litigation in the district court, thereby cancelling or at least postponing any trial on Chevron's request for a permanent injunction.  The Second Circuit did not issue a written opinion explaining the reasons for its order, but stated that it would issue an opinion later.  The opinion has not yet been issued.

Earlier this week, Chevron issued a statement declaring that it "condemns" the "illegitimate decision" by the appellate court in Ecuador. 

Supreme Court to Hear Case Against Oil Companies for Alleged Human Rights Violations

Last week, the Supreme Court agreed to hear two cases in which plaintiffs have sued organizations for alleged human rights violations overseas.   

In Kiobel v. Royal Dutch Petroleum Co., plaintiffs filed a putative class action in the United States District Court for the Southern District of New York against three foreign oil companies (herein, "Shell").  The plaintiffs alleged that Shell provided food and other support to Nigerian troops who violated the human rights of native persons who had protested the environmental effects of Shell's oil exploration and production in Nigeria.  The plaintiffs relied on the Alien Tort Statute as the basis for the court's subject matter jurisdiction.  Judge Kimba Wood dismissed the action, holding that the Alien Tort Statute does not provide jurisdiction for claims against corporations, and a divided Second Circuit Court of Appeals affirmed.    See Kiobel v. Royal Dutch Petroleum Co., 621 F.3d 111 (2nd Cir. 2010).  

The Alien Tort Statute was enacted by the first Congress in 1789.  It states that, "The district courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States."  See 28 U.S.C. §  1350.  The plaintiffs did not point to any treaty as a basis for their claim.  Instead, they asserted that the defendants' actions violated the law of nations.   

The Second Circuit stated that the law of nations involves only those norms that are "specific, universal, and obligatory," and matters of mutual concern between nations.  After reviewing the history of the Nuremberg tribunal and other international tribunals, the court stated that no corporation had ever before been subjected to liability for human rights violations under the law of nations. 

International tribunals have held nations and natural persons liable for a limited number of international crimes, such as "war crimes, crimes against humanity (such as genocide), and torture," but have never imposed such liability on juridical persons, such as corporations, and in some cases have expressly limited their jurisdiction to natural persons.  Liability for such conduct has not been extended to corporations, explained the Second Circuit, "because the moral responsibility for a crime so heinous and unbounded as to rise to the level of an 'international crime' has rested solely with the individual men and women who have perpetrated it."  Thus, individual employees of a corporation potentially could be liable under the law of nations, but not the organization. 

The D.C. Circuit Court of Appeals reached the opposite conclusion on jurisdiction in Doe v. Exxon Mobil, 654 F.3d 11 (D.C. Cir. 2011), holding that federal courts have jurisdiction to hear alien tort claims brought against corporations.  In that case, plaintiffs allege that the security forces of Exxon Mobil subsidiaries committed human rights violations in Indonesia.

The Supreme Court agreed to hear the Second Circuit's Kiobel case along with Mohamad v. Rajoub, 634 F.3d 604 (D.C. Cir. 2011).  In Mohamad, plaintiffs were the widow and sons of a U.S. citizen allegedly tortured and killed by the Palestinian Authority and the Palestine Liberation Organization.  The plaintiffs brought suit in a U.S. federal court against those organizations, as well as various individuals, puporting to assert claims under the Torture Victims Protection Act and federal common law. The district court dismissed the claims against the two organizations, holding that the Torture Victims Protection Act does not authorize claims against organizations, and that he plaintiffs did not have a cause of action under federal common law. 

The two cases will be argued together next year.

Drilling in Allegheny National Forest Need Not Wait for Environmental Site Assessment

The United States Third Circuit unanimously affirmed a district court's preliminary injunction that bars the U.S. National Forest Service from blocking oil and gas drilling in certain areas of the Allegheny National Forest pending completion of a multi-year, forest-wide Environmental Impact Study.

The case concerned drilling on land that was privately-owned until the early 1900s.  In 1891, the Congress authorized the President to establish "forest reservations" on land already owned by the federal government.  Then, in 1908, Congress authorized the purchase of privately-owned land to add to the forest reservations, and the federal government began purchasing tracts of privately-owned, forested land in Pennsylvania. 

But when the federal government purchased those tracts, the government usually purchased only a surface estate, allowing the previous surface owner to reserve a mineral estate and the right to enter the land to exercise the retained mineral rights (or, in some cases, a separate mineral estate already existed and belonged to someone other than the surface owner). 

Because the mineral rights had value, the federal government was able to purchase the lands at a cheaper price by purchasing only the surface rights, enabling the government to purchase as much land as possible with limited funds.  In 1923, President Calvin Coolidge designated the forest lands acquired in Pennsylvania as the Allegheny National Forest.

In late 2008, two environmental organizations filed suit against the Forest Service, demanding that it block oil and gas drilling in the Allegheny National Forest until after an Environmental Impact Study was conducted pursuant to the National Environmental Policy Act of 1969.  That Act requires the federal government to complete an Environmental Impact Study before taking any "major federal action."  Courts have interpreted "major federal action" as meaning a project (1) undertaken by the federal government itself, (2) supported by a federal contract or funding, or (3) requiring a federal permit. 

The parties reached a settlement in which the environmental organizations agreed to dismiss the suit and the Forest Service agreed to block drilling until completion of a multi-year, forest-wide, Environmental Impact Study.  Representatives of mineral rights owners intervened and filed a motion to stay the settlement, but the district court denied the motion, stating that the intervenors could file a new action to object to the Forest Service's decision to block drilling.  See Forest Service Employees for Environmental Ethics v. United States Forest Service, 2009 WL 1324154 (W.D. Pa. 2009).

The intervenors, joined by an oil company, filed a new action, seeking an injunction to bar the Forest Service from blocking drilling.  The plaintiffs noted that, under Pennsylvania property law, the owner of a mineral estate has a right to drill and does not need permission of the surface owner.  The plaintiffs essentially argued that the Forest Service does not engage in a "major federal action" simply because it fails to interfere with the property rights of a person who owns a mineral estate.  Further, the drilling of a well is not undertaken by the federal government or supported by the federal government, and no federal permit is necessary. 

The district court granted a preliminary injunction preventing the Forest Service from enforcing a policy that drilling must wait until completion of an Environmental Site Assessment, concluding that the plaintiffs likely would prevail on the merits and that the other requirements for preliminary injunctive relief were met.  The Third Circuit Court of Appeals unanimously affirmed.  The Third Circuit's decision is Minard Run Oil Co. v. United States Forest Service, 2011 WL 4389220 (3rd Cir.).  The district court's decision is Minard Run Oil Co. v. United States Forest Service, 2009 WL 4937785 (W.D. Pa.).

Second Circuit Vacates Preliminary Injunction That Barred Enforcement of $18 Billion Ecuadoran Judgment Against Chevron

A U.S. appellate court has vacated a preliminary injunction that barred enforcement of an approximately $18 billion dollar foreign judgment against Chevron.  The multi‑billion dollar judgment was entered earlier this year by a court in Ecuador to compensate plaintiffs for contamination of rain forests by Texaco, whose assets and liabilities were acquired by Chevron.

The Ecuadoran plaintiffs had originally filed their claims in New York, but Chevron asked the court to dismiss the claims on grounds of forum non conveniens, arguing that Ecuador, not New York, was the appropriate forum for the litigation.  The New York court agreed and dismissed on that basis.  The Ecuadorans then pursued their contamination claims in Ecuador, ultimately obtaining a nearly $18 billion dollar judgment after several years of litigation.  Chevron is appealing that judgment.

In addition to appealing in Ecuador, Chevron filed suit in the United States District Court for the Southern District of New York, seeking an injunction to permanently prohibit the Ecuadorans from attempting to enforce their judgment anywhere in the world except Ecuador, where Chevron no longer has any assets.  Chevron argued that the New York court should grant the injunction because the Ecuadoran judicial system allegedly is corrupt, and because it allegedly denied Chevron due process. 

The Ecuadorans disputed Chevron's contentions that the Ecuadoran judicial system is corrupt and that Chevron was denied due process.  They also noted that Chevron had praised the Ecuadoran judicial system years before, when Chevron argued that the litigation should take place in Ecuador, not New York.  Chevron replied that the Ecuadoran court system allegedly changed for the worse between the time Chevron argued that the case should be litigated in Ecuador and the time that the judgment was entered against Chevron. 

United States District Judge Lewis A. Kaplan of the Southern District of New York granted a preliminary injunction that purported to bar the Ecuadorans from attempting to enforce their judgment anywhere in the world except Ecuador, and set a trial for later this year on Chevron's request for a permanent injunction.  The Ecuadorans filed a motion asking that Judge Kaplan recuse himself, asserting that some of his actions and statements had shown bias.  Judge Kaplan denied the motion for recusal. 

The Ecuadorans then sought relief from the United States Second Circuit Court of Appeals.  The Second Circuit panel declined to remove Judge Kaplan from the case, but the panel unanimously vacated the preliminary injunction and stayed the district court action, thereby cancelling the scheduled trial on Chevron's request for a permanent injunction. 

The Second Circuit has not yet issued an opinion expressing its reasons for judgment, but it indicated that an opinion will be forthcoming.  It is possible that the forthcoming opinion will indicate that the Second Circuit decided to vacate the preliminary injunction on some narrow grounds that will leave Chevron free to seek injunctive relief later.  During oral argument before the Second Circuit, the counsel who argued for the Ecuadoran appellants stated that his clients would not attempt to enforce the Ecuadoran court's judgment until Chevron's appeal of the Ecuadoran judgment is decided.  It is conceivable that the Second Circuit might state that the request for an injunction is not ripe until Chevron's appeal in Ecuador is decided.  But the Second Circuit might base its ruling on grounds that the U.S. District Court simply should not attempt to bar enforcement of an Ecuadoran judgment.

The case raises interesting legal issues relating to comity, the extent to which foreign judgments are enforceable in the U.S., and when it is appropriate to deny enforcement of a foreign judgment.  These issues also have foreign policy implications.

Chevron issued a statement regarding the Second Circuit decision.  The Second Circuit's decision can be found at Chevron Corp. v. Naranjo, 2011 WL 4375022 (2nd Cir.).  The district court decision that granted the preliminary injunction can be found at Chevron Corp. v. Donziger, 768 F. Supp. 2d 581 (S.D.N.Y. 2011).

Sasol Announces Plans for Gas-to-Liquids Facility in Calcasieu Parish

South African oil and gas company Sasol and Louisiana Governor Bobby Jindal jointly announced last week that Sasol has chosen Calcasieu Parish in southwest Louisiana as the site of its proposed gas-to-liquids (GTL) facility.  The facility would use natural gas a feedstock to produce a liquid hydrocarbon that is similar to diesel.

The GTL fuel could be used in existing vehicles and delivery infrastructure, but would have several environmental benefits.  Relative to traditional diesel fuel, the use of GTL fuel would result in lower emissions of particulates, nitrogen oxides, and carbon monoxide.  Further, GTL fuel has far lower levels of sulfur and aromatic compounds.

The Governor's announcement stated that the facility would entail a capital investment of approximately $8 to 10 billion, and would produce approximately 850 direct jobs with average salaries of about $89,000 per year, plus benefits.  It is estimated that the facility would also produce approximately 4000 additional indirect jobs.  In addition to those permanent jobs, the project would support thousands of construction jobs over a 5-year period.  Construction is expected to begin in 2013, after completion of detailed feasibility study, and be completed in 2018.

In addition to creating jobs, the facility would use approximately 305 billion standard cubic feet of natural gas per year, which would represent about $1.4 billion in natural gas purchases at current prices.  Those purchases would create a new market for natural gas produced in the Haynesville Shale  and from other areas of the state.  The facility would have a maximum production capacity of about 96,000 barrels of fuel per day according to Sasol.

A Bright Future for Oil & Gas Law and Industry

I recently spoke at a meeting of the Energy and Mineral Law Society, a student organization at LSU Law School.  My message to the students was simple.  Exciting things are happening in the oil and gas industry, including the increased use of hydraulic fracturing and horizontal drilling to produce oil and gas from shale formations, and such production ensures a bright future for the oil and gas industry for decades to come. 

I explained that companies only recently learned to profitably produce oil and gas from shale formations, and that shale formations are found in numerous locations.  Accordingly, there are a large number of potentially lucrative shale formations located across the United States, as well as in other countries, that have not yet been tapped for oil and gas.  The development of these shale formations is creating a shale boom that appears destined to transform the oil and gas industry. 

The shale boom already is manifesting itself in several ways.  One way is in the number of active drilling rigs operating in the United States.  The number of active rigs is highly sensitive to economic conditions, and often plunges dramatically during recessions.  But the number of drilling rigs actively operating in the U.S. is at a high level now, despite the nation being in the midst of a significant recession.  This can be illustrated by comparing the number of rotary drilling rigs operating this year to the number that operated in prior years.  A recent rig count show that 1968 rigs were operating in the U.S. during the first week of September 2011.  That number of rigs exceeds the number of rigs operating in early September during 31 of the last 40 years.  In fact, the recent rig count is more than twice that for September 1991, and is more than 50 percent higher that for September 2001. 

The increased oil and gas activity also is reflected in production figures.  Because the first few shale plays happened to involve shale formations that produce natural gas, there has been a sharp increase in domestic natural gas production.  Just a few years ago, everyone expected that the United States would be importing liquefied natural gas for decades to come, but substantial increases in the domestic production of shale gas have led to decreased imports.  A few companies have even applied to the federal government for permission to export LNG.

And now, domestic production of oil is increasing significantly, as companies begin drilling into shale formations from which oil is produced.  For years, domestic production of oil has been in decline, but that trend has now reversed.  Further, the U.S. Energy Information Administration projects that the trends of increasing domestic production of both oil and natural gas will continue for years to come. 

The Energy Information Administration predicts that even the federal government's push for increased use of renewable fuels will not change this trend.  The EIA projects that use of renewable energy will increase in the future, but that the growth in overall energy use will outpace the growth of renewables, so that use of oil and gas will actually increase in coming decades.  The EIA's Annual Energy Outlook for 2011 contains projections through the year 2035, and those projections show the increased use of oil and natural gas throughout that time.

The bottom line, as I explained to the students, is that the U.S. oil and gas industry has a bright future for decades to come, and any student who is interested in pursuing a career in oil and gas law can feel comfortable that there will be work for oil and gas lawyers for decades to come.

U.S. State Deparment Issues Study of Proposed Keystone XL Pipeline

Earlier today, the United States Department of State issued its final Environmental Impact Statement (EIS) regarding the proposed Keystone XL pipeline, which would run from Alberta, Canada to the Texas Gulf Coast.  Because the pipeline would cross the border, the State Department must give its approval for the project.  Issuance of EIS does not constitute approval of the project, but it does put the proposed project one step closer to potential approval bcause an EIS is required by the National Environmental Policy Act before the project can be approved.

The principal purpose of the proposed 1711-mile long, 36-inch diameter pipeline would be to transport oil from Alberta, Canada to refineries on the U.S. Gulf Coast.  Production of heavy crude from oil sands (also called tar sands) found in Alberta is increasing rapidly at the same time that refineries in parts of the U.S. need alternative supplies of of heavy crude.  Although it is anticipated that the pipeline, if constructed, would mainly transport oil from Alberta, it also could transport oil produced in the northern U.S., included oil from the Bakken Shale in Montana and North Dakota, and oil from near Cushing, Oklahoma.  Oil could be delivered to Cushing, as well as to Nederland, Texas and Moore Junction, Texas.

Critics of the proposal voice concerns about the possibility of spills and about the footprint of the pipeline itself.  Also, many environmentalists oppose expanded production of oil from oil sands, arguing that too much energy is used in producing such oil, that too much water is used in the production process, and that production from oil sands causes too much surface disturbance (usually a process similar to strip mining is used in the production of oil from oil sands, though companies are required to restore the surface).  See the May 2, 2011 post of the Oil & Gas Law Brief for a discussion of oil sands.

Supporters argue that oil sands provide a bountiful supply of petroleum from a nearby, stable, friendly country, and that most "easy" sources of oil already have been developed.

The Summary of Findings section of the full EIS states that "most resources would not experience significant impacts" from the proposed pipeline.  The same section states that there would be "adverse effects to certain cultural resources along the proposed Project corridor," but that "mitigation measures have been developed ... to address these adverse impacts."  The Summary of Findings also states that there would be adverse effect to the American burying beetle, raising Endangered Species Act issues, but that Keystone has offered to provide money to acquire habitat area for the beetle, and that Keystone and various government agencies have discussed conservation measures that could minimize potential impacts to the American burying beetle.

The Department of State issued an announcement of its release of the Environmental Impact Statement, and provided a web page where readers can find a "fact sheet" regarding the EIS, an Executive Summary of the EIS, a listing of upcoming public meetings on the subject, and a copy of the full EIS, as well as other documents relating to the proposed project.  The fact sheet includes a map of the proposed route for the pipeline.

Oil & Gas Industry Saves the Whales!

Last week, I attended this year's annual Energy & Mineral Law Institute, where I spoke on the application of implied covenants to oil and gas leases in shale plays.  The meeting was held at a resort in western Pennsylvania, just a few hours' drive from the birthplace of the modern petroleum industry.  Although the speakers focused on legal issues currently facing the oil and gas industry, the location of the meeting tempted a few speakers into commenting briefly on the industry's origins.  They noted that the industry was started in western Pennsylvania, with the first oil well being drilled in Titusville, Pennsylvania in 1859.  The impetus for drilling the well was to find petroleum that could be used to manufacture kerosene for lamps.  At that time, whale oil was the main source for lamp oil, but whale populations were declining due to extensive whaling, and this was driving up the price for whale oil.

Up until this point in the story about the history of the oil and gas industry, the information is all similar to information that I mention to my students in the Introduction to Mineral Law course that I teach each year as an adjunct professor at Loyola Law School in New Orleans.  But Tim McCrum, one of the speakers at the E&MLF Annual Institute, took the historical analysis to the next step by noting that the rise of the oil and gas industry provided an inexpensive alternative to whale oil, thereby leading to a decline in whaling that helped to preserve whale populations.  So, the next time you meet an environmentalist who criticizes the oil and gas industry, you can remind him ─ "The oil and gas industry saved the whales!" 

1861 Vanity Fair cartoon showing whales celebrating Pennsylvania's oil and gas industry

1861 Vanity Fair cartoon showing whales celebrating oil wells

An industry to be proud of

I returned to New Orleans from Buffalo late Tuesday night, after speaking earlier in the day at a conference on the legal and public policy issues raised by hydraulic fracturing.  My topic was the regulation of hydraulic fracturing under the Safe Drinking Water Act. 

The conference included a number of interesting speakers who made  presentations on a variety of topics.  The hosts at the University of Buffalo Law School are to be congratulated on putting together an excellent program.  I certainly learned a lot from the other speakers.

As I flew home Tuesday night, though, I thought about another lesson I learned from the conference.  The lesson is that those of us who care about the oil and gas industry have a long way to go in educating people about the industry.  I met a great many people who are very smart, and willing to be open-minded, but who harbor a substantial amount of mistrust and suspicion toward the industry.  We need to talk to those people and to others about the industry.  

As we know, the oil and gas industry is something to be proud of.  The industry is full of honest and decent, hard-working people.  It creates jobs and generates tax revenue, and it provides the fuel for virtually all our country's transportation, whether it is by plane, train, auto, or ship.  The industry also supplies the fuel used in heating homes and other buildings, and in generating a substantial portion of our electrical power.  It provides lubricants that are important for modern machinery.  And, given that I am a former chemical engineer, I can't skip mentioning that the oil and gas industry is a source for feedstocks used in many plastics, rubber, and chemical plants.  It's a compelling story.  It won't convince everyone, but I'm confident that we can convince enough people to make a difference.