Pittsburgh Penguins Are the Energy Story of the Year!

By Michael Krancer
Follow: @MikeKrancer 

Pittsburgh coal may be dead, but the NHL’s Pittsburgh Penguins are the “energy” story of the year—maybe the century.

At the turn of the New Year, the Penguins were deader than a rusty, retired coal plant. The team appeared to be out of the playoffs and armchair pundits like me were saying that Penguins Captain Sidney Crosby was a spent force. Now, those same plucky Penguins have been producing more energy than a matter/antimatter reactor and moved at warp speed to take the Stanley Cup back to the Steel City.

It’s a story that has a lot in common with the U.S. energy sector. Eight years ago, the political debate in America was about us becoming more energy efficient and the need to reduce our dependence on foreign oil. Now, the U.S. energy sector is booming thanks to shale gas and the country is on the verge of becoming an oil exporter. Even dirty old coal has cleaned up its act and still has a valuable place in the U.S. energy generation stack. Meanwhile, Saudi Arabia and other oil producing nations of the Middle East are pondering ways to transition their economies away from an unhealthy reliance on oil to become knowledge-based economies.

The Penguins’ run to the Cup is an unlikely story about a likeable bunch—even to a lifelong Philadelphia Flyers fan like me. The Pens’ melting pot mix is about as eclectic as the U.S. energy generation stack. Mike Sullivan, a kid from Boston, took over as head coach in mid-December, coming up from being coach of the team’s American Hockey League affiliate, the Wilkes-Barre Scranton Penguins, affectionately called the “Baby Pens” by fans. Now, in front of him on the bench are a waddle of former Baby Pens who are playing lights out for the Penguins proper—Bryan Rust, Conor Sheary, Tom Kuhnackle, and Matt Murray. Murray, the 22-year old rookie goalie, is as cool as a cucumber and is looking like a combination of 1945 Hall of Famer Georges Vezina (“The Chicoutimi Cucumber”) and Ken Dryden, who won six Stanley Cups with the Canadiens from 1971 to 1979. Then there are the “retreads,” jettisoned from other teams and landed by the Pens, think Phil Kessel, Carl Hagelin, Nick Bonino, and Eric Fehr. To complete the gang are the veteran Penguin “usual suspects” like Crosby, Evgeni Malkin, Olli Maatta, Kris Letang, and Chris Kunitz. Crosby is playing like Superman in the playoffs and is proving me as wrong as those energy experts who predicted we would have run out of natural gas by now.

The Pens are as American as Apple Pie to boot; the majority of the roster are U.S.-born players. I predicted on Twitter back in March that the Cup would return to Pittsburgh. This rag-tag team of baby Pens, retread Pens, and veteran Pens who won this Cup are the best hockey story in North America since “do you believe in miracles” in 1980, when the U.S. Olympic men’s ice hockey team pulled off one of the biggest sports upsets ever by beating the Soviet Union.

The lesson from the Penguins and the U.S. energy sector is the same: never count out a fighter too soon. So “Elvis has left the building” and we do get an Ethane Cracker and a Stanley Cup in the same week!

End Of Crude Oil Export Ban Could Have Negative Unintended Consequences

By Michael Krancer
Follow: @MikeKrancer 

The repeal of the crude export ban, which Congress just passed and the president signed as part of the omnibus appropriations bill (read “budget”), may end up being one of those “watch out what you wished for” events. The ban goes back to 1975 when OPEC, in charge of oil supply, liked to deny us the resource from time to time with embargoes. The thinking at the time was that, by keeping all domestic crude oil inside U.S. borders, supply and national security would be protected.

Back then, the United States could easily use all of the oil it produced, and America’s daily production was already waning. But the dramatic increase in U.S. crude production from hydraulic fracturing of shale formations has altered those circumstances. Domestic producers, finding a crude glut at home, have been clamoring for access to international markets where their product might fetch higher prices. Environmentalists and domestic refiners, however, wanted exports to remain off-limits.

U.S. refiners, who have been investing billions to increase state-side refining capacity for the lighter, sweeter domestic crude, say refining jobs will be lost in the United States. Environmentalists say that more crude on the world market means that more refining and producing will take place, thus feeding the world addiction to hydrocarbon fuel and upping carbon emissions, and that the increased refining will happen in countries with little or no environmental regulations.

The playing field is made even more uneven against domestic refiners by a piece of 95-year-old legislation called the Jones Act. The Jones Act mandates that cargo being moved between U.S. ports can only be carried by ships that were built in the United States and that are owned by U.S. companies flying U.S. flags. This means that refiners on the East Coast pay about three times the transportation costs to acquire ship-born U.S. crude than do their competitors in Canada, Europe, or Asia.

It’s worth noting that, just in the Southeastern Pennsylvania region, refineries that were on the brink of shuttering just a few years ago at the estimated cost of 24,000 jobs, today pump $2.5 billion in wages into the local economy and account for an economic impact of $15 to $20 billion.

Some very credible people are also warning that a major assumption in the equation to repeal the crude export ban, namely the low price of crude, is not going to stick for much longer. As they say, the cure for low prices is low prices. Rob Kaplan, the president of the Federal Reserve Bank of Dallas, gave everyone a dose of reality in his public remarks on November 18, 2015, at the University of Houston. Kaplan pointed out that it is expected that the current imbalance in oil production versus consumption, which is driving and keeping oil prices low, is expected to come more into balance by late 2016 or early 2017.

It’s a complicated issue with myriad implications, a fact outlined in a longer piece that I recently wrote with Blank Rome Partner Matthew J. Thomas for The Legal Intelligencer, where we dissected the case for both sides.

How will lifting of the ban affect this currently vibrant domestic refining sector of our economy? Will the ban do more harm than good? It can’t be said for sure right now. But we can only hope that Congress takes less than 40 years to course-correct if it turns out that the law of unintended consequences hoists us by our own petard.

 

Reality Check on the Auditor General’s Report on DEP’s Oversight of Oil and Gas Operations

By Michael Krancer
Follow: @MikeKrancer 

The expected chorus of politically driven indignation is raining down in response to the Auditor General’s report released this Tuesday on the DEP’s performance in monitoring potential impacts to water quality from shale gas development, 2009-2012.

I’m in the process of digesting the Report which is lengthy (118 pages), along with the DEP’s 27-page response which, per standard procedure, is appended to the Report itself.  A few things strike me as notable though off the bat.

First, of the 15 “case studies” of water complaints the Auditor General looked at, 4 of the 15 were unrelated to oil and gas operations at all.  That’s 27% of the investigation that had nothing to do with what was supposedly being investigated.  Of the remaining 11 matters, 10 had full water replacement or restoration from the responsible operator.  That’s a 91% rate of success on resolution.  The 11th matter has a water replacement plan under review right now by the DEP.  That raises the resolution rate to 100% of the matters reviewed by the Auditor General.

In another case the Auditor General highlighted, where animals had supposedly gotten sick, the matter was determined to be unrelated to oil and gas operations.

Second, the Auditor General also focuses quite a bit on the DEP’s technology and personnel capabilities, alleging shortages and deficiencies.  But it was under the Rendell and Hanger regime that 183 bodies were axed from the DEP in the 2009-2010 budget, mostly impacting IT (information technology) and clerical functions.  Also, the report conveniently ignores completely the brand new oil and gas fee program that the administration brought into fruition.  The fee increases on shale wells will result in revenue of $4.7 million.  This will support new technology, including things like electronic review, mobile digital inspections, reporting system upgrades, and modernized forms and databases.  It will also support the hiring of about 25 new personnel, many of whom will be inspectors.

Third, I would agree with the Auditor General that the General Assembly should review whether the current 45-day clock for resolution of water impact investigation is realistic.  Earlier this year we wrote about Fred Baldassare’s report that methane from deep shale formations, like the Marcellus, has been found as a natural condition in the shallow drinking water aquifer system of the Northeastern Pennsylvania region.  One takeaway for me on that report, and my own experience as DEP Secretary, is that these investigations are long and complicated and putting unrealistic time frame expectations on them is not a good thing.

Lastly, despite the Auditor General’s and the chorus’ protestations to the contrary, the Report is a shot at the dedication and efficaciousness of hard working DEP personnel, especially inspectors.  In one particular case for example, the Auditor General rips an inspector for being too “conciliatory” where that inspector had successfully achieved compliance and a restored water supply and the DEP issued a fine of over $145,000 to boot.

Of course the Auditor General’s Report will, unfortunately, be used as a political football.   It will most certainly be referenced in this year’s gubernatorial race and perhaps in one down the road by the Report’s author.  As veteran Harrisburg reporter Don Gilliland put it in his insightful article about the Report in this morning’s Patriot News: “[t]here is a long tradition in Pennsylvania of audits being vehicles for the political ambition of the Auditor General, and [this] promised investigation of the Department of Environmental Protection’s oversight of Marcellus Shale drilling is no exception.”

I will continue my review of the Report and the DEP’s responses and I may chime in with more as time goes by.

Obama Energy Official: Nuclear Plants Essential To Our Carbon Reduction Goals

By Michael Krancer
Follow: @MikeKrancer 

Peter Lyons, the Department of Energy’s (“DOE”) assistant secretary for nuclear energy, outlined the Obama Administration’s reasons for supporting nuclear power in the United States at the Platts 10th Annual Nuclear Energy Conference earlier this month.

Lyons, who is also a former Nuclear Regulatory Commission member and science advisor to the former Senator Pete Domenici, emphasized that nuclear power is a key contributor to our country’s goal of reducing greenhouse gas emissions (“GHG”). Moreover, he sounded the alarm that the growing list of perfectly healthy and well performing nuclear power plants being shut down for political and/or commercial reasons, or being slated for shutdown, is a serious climate-change threat.

He stated that he is gravely concerned that the loss of existing healthy nuclear plants will cost us dearly in terms of increased carbon emissions. The DOE studied a scenario where 30 percent of the county’s 100 reactors would be shut down. If those closures were to go ahead as per that scenario, there would be no way to meet our goal of cutting GHG emissions and, in fact, GHG emissions from the U.S. would skyrocket. Unsurprisingly, Lyons supplied that the DOE regards many of the nuclear plant closures currently on the calendar as premature.

The bigger problem, Lyons added, is that the market presently has no mechanism to sensibly recognize the value of carbon-free power generation, particularly nuclear power. He stated: “When well-run, clean [nuclear] energy sources are forced out of the marketplace due to a combination of reduced demand, low natural gas prices and market structure…our markets are providing the wrong signals.”

Nuclear power accounts for 20 percent of the electricity generated in the U.S. and for 64 percent of all zero-carbon emission sources. But many nuclear power plants are seeing their profits squeezed these days. There’s very little growth in the demand for electricity, thanks to energy efficiency, demand response, and a hobbled economy. Low gas prices have further reduced energy prices—and the profitability of the existing nuclear fleet.

Nuclear plants aren’t subsidized like other non-carbon-emitting energy plants are. Solar and wind are doubly subsidized; they receive direct taxpayer dollars—about $12.1 billion in the last round of the renewal of the Production Tax Credit. And in about 30 states and the District of Columbia, Renewable Portfolio Standard laws mandate that consumers buy a certain amount of wind and solar power.

Meanwhile, the U.S. has recently seen the closing of viable plants like Wisconsin’s Kewaunee, which in 2008 had won a license extension to 2033, and Vermont Yankee, which in 2011 had its operating license extended for 20 years. Replacing these two plants, even with new, highly efficient plants that burn natural gas, will lead to millions of tons of new carbon emissions. Many other plants are in danger of closing early as well.

This is terrible news for our GHG reduction goals. Just look at the case of Germany when it rushed to shutter its nuclear plants after Fukushima. The result: an estimated whopping increase of 15 million tons in GHG emissions if the gap in power demand is replaced by natural gas burning plants, and 30 million tons if the gap were to be filled with coal-fired plants.

How might policymakers and business people seek to prevent something similar from happening here? Lyons suggests measures that would help the markets recognize the value of carbon-free power generation—a carbon price or a cap-and-trade mechanism, in other words. A Stanford Woods Institute for the Environment review of survey data has shown that the public would favor those measures. The CDP, a U.K.-based environmental data group, recently reported that most big companies are ready, too.

For further insight from Michael Krancer on this issue, please read his recently published Forbes.com article by clicking here.

Associated Press “Investigation” Confirms Safety of Gas Drilling

By Michael Krancer
Follow: @MikeKrancer 

Despite claims to the contrary, the recently released AP “investigation” proves that drilling for natural gas or oil has an excellent safety record.  Moreover, it’s getting better, especially in Pennsylvania.

Let’s first set the broader context.  This is not about hydraulic fracturing.  It’s about well drilling.  Drilling any well has to be done carefully—even (or especially) a drinking water well.  Pennsylvania has 3 million citizens who rely on private water wells as their primary source of drinking water, but we remain alone with Alaska as the only two states in the nation that have no statewide technical protective standards applicable to drilling private water wells.  As reported and documented by the Center for Rural Pennsylvania, 40% of private water wells in Pennsylvania exhibit some level of contamination above federal standards from natural conditions.  In fact, there are many wells in Pennsylvania that experience naturally occurring methane intrusion.  Those wells, by the way, are quite effectively managed by their owners to mitigate the methane.  On the other hand, there are strict technical standards applicable to drilling a natural gas or oil well.

Here are the facts from the AP’s investigation.  The AP says that Pennsylvania has confirmed that, out of more than 5,000 new wells, at least 106 private water well impact cases have been reported since 2005.  While even one case is one case too many, those numbers translate to a 97.9% plus success rate in well drilling.  I say “plus” because, undoubtedly, of the 106 cases reported, there must certainly have been multiple reports about different private water supply wells that applied to the same, single unconventional well.  The story is even more dramatic when all wells, conventional and unconventional, are considered.  The number of all wells drilled in Pennsylvania since 2005 is about 32,000.  That translates to a 99.67% success rate for all wells.

It is also worth noting that a vast majority of complaints were investigated and found to be either without basis or unrelated to unconventional well drilling.  Let’s take a look at only 2012 and 2013, during which time the AP says that a total of 898 complaints were reported.  Yet, there have only been 106 total cases of actual impact since 2005, per the AP’s investigation.  So the numbers show that at least 9 out of 10 complaints investigated by the Department of Environmental Protection (“DEP”) are determined to have no adverse impact.  The actual ratio must be much more lopsided, however, since the AP only reports the number of complaints for 2012 and 2013 as compared with 106 cases of impacted private wells since 2005.  Moreover, the raw number of complaints has been trending down in the last two years.  This supports the view that drillers are improving over time.

Let’s not also forget that even in cases where there is impact, many times the impact is quite temporary, such as sediment, elevated iron, or turbidity.  Impacts from methane migration are easily and quickly remedied, and the driller is required by law to do so.  In my experience, I have found that remedies are effectuated very quickly.  After all, the Environmental Protection Agency, after spending months and who knows how many millions of dollars in Dimock, PA, reported what the Pennsylvania DEP already knew—namely, that there was no health issue with the private water wells there from any parameter.

Complaints about “lack of transparency” are equally unfounded.  Supposed “aggressive” efforts by the DEP to prevent the AP from accessing information were more about respecting the privacy of homeowners than anything else.  The DEP has a quite transparent reporting system accessible on the Internet through its Oil and Gas Department Compliance Portal.  Also, the AP got its information, didn’t it?

In conclusion, despite reports from some circles that claim the AP says the sky is falling, in actuality, the glass isn’t even half full—it’s 98% plus full, and the AP deserves credit for bringing this to light.

PA PUC Chairman Robert Powelson Keynotes Blank Rome’s Midstream Oil and Gas Conference

By Michael Krancer, Peg Hill and Heather Demirjian 

On October 24, 2013, Blank Rome LLP, with Hull and Associates, hosted the first of two programs entitled “Environmental Issues Affecting Midstream and Downstream Oil & Gas Development” in Philadelphia, Pennsylvania.  Public Utility Commission (“PUC”) Chairman Rob Powelson gave the group some tremendous insights into the future of Pennsylvania’s shale gas energy renaissance.  He projected that midstream oil and gas development in Pennsylvania will create 1.6 million jobs by 2035.  He also stated the PUC’s and the Department of Environmental Protection’s (“DEP”) commitment to keeping that development safe and environmentally protective.

The event brought together professionals from major industry, legal, and government sectors to hear and participate in robust and informative discussions of key issues relating to the increase in midstream and downstream development that is occurring as a result of the United States’ shale oil and gas boom.  Both Chairman Powelson and former DEP Secretary Mike Krancer stressed the fact that the Greater Philadelphia area is fast becoming a dominant energy hub due to its key location in and near demand centers; transportation infrastructure, including its world-class port; a talented and experienced skilled workforce and professionals; and educational institutions, such as Drexel University, which has an internationally renowned engineering school that will not only partner with the industry on a technical level, but will also feed much needed technically trained young people into the workforce.

In addition to Chairman Powelson, other featured speakers at this program included:

  • Michael L. Krancer, former DEP Secretary and Partner at Blank Rome LLP, who spoke on the opportunities provided by further midstream and downstream development as well as regulatory and enforcement trends to watch;
  • Stephanie Catarino-Wissman, Executive Director of the Associated Petroleum Industries of Pennsylvania, who provided an overview of current state initiatives and regulations as well as a prognosis of the future of energy development and what it means for Pennsylvania and our nation;
  • Chris Tucker, Managing Director of FTI Consulting, who discussed how to build a communications strategy to properly manage a crisis;
  • James Balaschak, Principal at Deloitte Services LP, whose presentation provided great insight into why  midstream development is the fastest growing oil and gas subsector in the United States, as well as a dramatic look forward into its future development;
  • Margaret A. Hill, Partner at Blank Rome LLP, who spoke on litigation trends impacting midstream and downstream development; and
  • Craig A. Kasper, Chief Executive Officer of Hull and Associates, who discussed burgeoning midstream development in the Utica Shale and provided a perspective on the industry’s role in ensuring successful midstream and downstream development.

This event was of such significance that it was attended and covered by the media.  The Scranton Times Tribune ran a story on the event, headlined “Pipeline industry draws attention as gas production surges,” and provided key highlights, speaker insights, and trending industry topics discussed at the forum.  The article promotes that the surge in Marcellus Shale production and the booming energy industry growth in the United States are drawing both worldwide and domestic attention.  To read the full article online, please click here.

The second and final Blank Rome/Hull midstream forum for this year will be held in Harrisburg, Pennsylvania on November 21, 2013.  We are lucky to have Acting DEP Secretary Chris Abruzzo as our keynote speaker.   The Harrisburg forum will be held at the Crowne Plaza Harrisburg-Hershey from 10:00 a.m. to 3:00 p.m. EST.  For more information and to register for the November 21, 2013 program, please click here.

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Man Bites Dog: Oil Companies Sued for Flaring Gas—by Landowners!

By Michael Krancer
Follow me @MikeKrancer 

Oil and gas companies being sued for flaring natural gas into the atmosphere is not newsworthy.  You would expect the Sierra Club, Natural Resources Defense Council, or WildEarth Guardians to take such action; yet, there’s no story there.  But in a surprising turn of events, North Dakota landowners are suing oil companies about it!  Now that’s news.

Last week, North Dakota landowners filed 10 class-action suits against several oil companies, seeking millions of dollars in allegedly lost royalties.  The oil companies’ sin?  In their fervor to get Bakken crude oil out of the ground, they are flaring the natural gas that accompanies the oil in the formation.  To date, there is simply not enough natural gas infrastructure to bring either oil or natural gas to the market via pipelines.  For oil, that logistics problem can be overcome, to some extent, by using trains.  Train cars that transport oil have been at a premium lately due to the Bakken’s vastly increased production levels.  Natural gas, however, cannot be hauled by train, so it is flared at the wellhead.  From the landowners’ perspective, that is taking and throwing away their property without the required royalty compensation.

Increased oil production from the Bakken has been prodigious—somewhere in the neighborhood of 100,000 barrels per day since May.  That domestic Bakken oil production is what saved our two Southeastern Pennsylvania refineries from closing down, as well as the jobs and way of life of about 22,000 local workers.  Just a few weeks ago, Philadelphia Energy Solutions (“PES”) cut the ribbon on its unit train unloading facility.  The event was a celebration, especially for the 1,000 or so PES workers, including many brand new workers, who attended.   The PES facility will accommodate the unloading of two mile-and-a-half long unit trains, each carrying more than 140,000 barrels of American produced crude oil, every day.  This daily operation will move the needle on improving America’s balance of trade.  The project is also expected to create 65 new jobs.  The other refinery in Southeastern, Pennsylvania, which Delta Airlines purchased a year and a half ago through its subsidiary, Monroe Energy, will be using plenty of Bakken crude oil, too.

One report said that the value of the natural gas being flared is $100 million per month—not small change.  Yet the landowners want to force the oil companies to stop externalizing the cost of throwing out the natural gas in order to recover the oil.

The suits are a game changer in a few ways.  First, there will now be a hard and substantial economic incentive—pressure, really—to bring natural gas pipeline infrastructure to these remote areas and to reduce natural gas flaring.   Secondly, everyone will need to buckle down and try harder and faster at getting these two goals accomplished.   That will take a lot of investment.  Thirdly, as a corollary, these suits may end up resulting in more natural gas being brought to the market.  That would put downward pressure on prices.  We can only hope, however, that the short term impact of the suits will not stifle American oil production from the Bakken.  That would be tragic, and they would be celebrating that result in OPEC circles.