Forced Pooling in the Age of Horizontal Drilling

Forced Pooling in the Age of Horizontal Drilling

Forced pooling of individual oil and gas leases has been a major focus and controversy over the past several years due to horizontal drilling. Forced pooling refers to a situation where owners of a certain percentage of acreage in a state-defined drilling unit lease to be drilled triggers a rule that forces those who did not lease to accept a lease at fair market value. At issue is the ability of small “holdout” mineral owners to block horizontal drilling at state spacing requirements. These days forced pooling most often has little or nothing to do with surface use but mainly with the subsurface. In order to be efficient and to extract the most gas or oil with the least surface impact the industry relies on multi-well pads with long laterals. Longer laterals require more acreage. Most forced pooling provisions only trigger forced pooling when a certain percentage of landowners in the state-defined unit are leased. One argument is that small percentages of acreage of landowners should not be allowed to take away the rights of adjacent landowners to have their minerals developed. Anti-drilling activists and landowners that are against development say forced pooling is unfair and takes away their property rights. However, most often these days their surface property is not affected, only the subsurface. There are situations where a well can be steered around a piece of property that is a holdout. Typically, the well path is required to remain a certain distance from the property boundary. However, there is also some potential that this could compromise the ability to finish the well.

While I can certainly understand a property owner’s objections to any kind of forced pooling of their surface rights even in those cases they should also consider the views and rights of their neighbors. I think that for surface disruption the percentage of acreage that triggers forced pooling should be higher than for mere subsurface development. I am not sure if this is the case in various state rules but it seems fair to me. In the recently proposed forced pooling bill in West Virginia it is two-thirds of acreage in a unit that triggers forced pooling. Severed minerals is another contentious issue that affects a lot of landowners in Appalachia, including me. I would probably be against most surface disturbance on my property but not subsurface development.

Drilling units for horizontal wells, which represent 80-90% of current wells, are developed in specific orientations due to the drilling direction that optimizes resource production. One issue that can arise is that a unit may be designed as many are, to drill wells in both directions from a common center which makes up the drill pad. This is the most efficient, least impact design when used with longer laterals. However, such a design leaves less choices for surface location and lease roads. Russell Gold, in his 2014 book about fracking, The Boom, mentions such as case where a land owner was disputing such surface location rights. In the Appalachian Basin Marcellus, Upper Devonian and Utica shales the well direction is perpendicular to the maximum principle stress direction of the reservoir rocks, which is in a northwest-southeast direction. Thus each unit is a rectangle with this orientation. In other plays in other basins the rectangles are oriented differently. But with horizontal drilling the units will be rectangular. Holdouts that trigger forced pooling are often small pieces of property amidst larger leased properties. Forced pooling in one sense is simple majority rules regarding local mineral development. While that may seem unfair to some it can also be seen as unfair to deny adjacent mineral owners the ability to develop their minerals and to a lesser extent to force well operators to limit the length of their wells thus reducing the efficiency of resource extraction. Reducing the efficiency of resource extraction results in more pollution and more carbon emissions per unit of energy produced and so allowing forced pooling can have the effect of decreasing pollution and carbon emissions relative to not allowing forced pooling.   

The West Virginia State Legislature voted down HB576 which called for forced pooling. However, EQT CEO Steve Schlotterbeck recently said he wanted the House to revisit the 'co-tenancy' part of the bill which would require 75% of owners of a tract to trigger drilling even if 25% of owners do not want drilling or cannot be located. He also noted that due to this EQT, probably the biggest player in Appalachia, has allocated funds to drill much more in PA (80%) rather than WV (20%) even though 60% of their acreage is in WV and only 40% in PA. It is simply less efficient and less economic to drill shorter laterals and build more well pads. Such a co-tenancy requirement would put WV with most other oil and gas states. Another outdated issue in WV is 'joint development' which apparently would update century-old leases so that landowners get modern royalties (>12.5%) like other states do rather than keeping very old leases where many were just at 8.5 %. This is simple common sense and fairness and should be addressed.

Reference:

EQT CEO Wants Co-Tenancy Addressed in Special Legislative Session - by Jim Ross, in West Virginia State Journal, April 27, 2017

Compressed Natural Gas (CNG): The Most Practical Low-Smog Engine Fuel

Compressed Natural Gas (CNG): The Most Practical Low-Smog Engine Fuel

The use of natural gas as a transportation fuel currently has several advantages over gasoline and diesel: operations cost, reduction of engine wear-and-tear, much lower carbon emissions, lower pollutants, and now even lower smog-producing NOx pollutants. NOx pollutants refer to nitrogen oxides: NO2 (nitrogen dioxide), N20 (nitrous oxide), and NO (nitric oxide). All three are implicated as the major contributors through combustion reactions, to ground-level, or tropospheric ozone, also known as smog or photochemical smog. In addition, N2O is a significant greenhouse gas. 

The new Cummins Westport Natural Gas Engines could have positive implications for places like Los Angeles, California that are prone to smog. These engines are the lowest NOx producers so far of any internal combustion engines. The technology is available now. Peterbilt announced at the end of August 2016 that it will be offering the Cummins Westport Natural Gas Engines in three of their 2017 models. Torque and power performance is expected to be comparable to diesel models. 

The major hurdle to CNG vehicles is initial up-front cost. The state of California has more stringent emissions standards than the rest of the country largely due to the susceptibility to smog. Therefore, California will be the first area where these low NOx engines will be widely utilized. As Oil and Energy magnate T. Boone Pickens points out there is a great opportunity for natural gas to be utilized in over-the-road trucking throughout the U.S. Infrastructure, basically gas stations that sell compressed natural gas (CNG), has been growing throughout the U.S. and NGV short-haul and long-haul trucks continue to penetrate the vehicle market, although at a much smaller rate than it could be. Pickens thinks that some of the massive fraud fines to be paid by Volkswagon should be used to promote NGVs. Although I don’t always agree with Pickens I think he has a great idea here. There is a sense of justice to it – it would be a great way to directly use funds from emissions penalties to reduce emissions in the most practical and inexpensive manner. Sure, one could do it with EVs but the costs are too high compared to NGVs and additionally the EVs are often powered by grid coal which makes their life-cycle emissions greater than NGVs. Initial upfront costs are recouped in lower fuel costs as well as low-maintenance natural gas engines since wear-and-tear on some engine parts is far less and catalytic converter maintenance is not an issue. 

Technically, the cleanest lowest life-cycle emissions form of transport would be an EV powered with renewable energy but renewables are scarce on the power grids so in reality in most cases it would be an ultra-low emissions CNG powered with biogas, aka. renewable natural gas (RNG). Of course, RNG is a limited resource compared to fossil fuel natural gas so buying RNG exclusively is impractical unless one finds access to a secure source. Refuse truck fleet vehicles have led the charge to fueling with landfill RNG since the same companies may own the landfills as well as frequenting them. UPS announced in Dec. 2015 a deal to fuel its fleets in Memphis Tennessee and Jackson, Mississippi with landfill biogas. RNG there will fuel 140 fleet vehicles. UPS fuels 3800 vehicles with natural gas worldwide (as of Dec. 2015). Ryder also announced a deal in Nov. 2015 to fuel with RNG at two RNG fueling stations in southern California with Clean Energy Renewables providing maintenance and supply for their fueling stations. Fueling heavy duty vehicles with natural gas in ultra-low emissions engines has the potential to reduce pollution in high-smog areas and to decrease greenhouse gas emissions and other pollutants as well. Companies such as Unilever are geared toward reducing environmental impact for both social and financial reasons and using RNG and CNG is one very clear and important means to do so. 

   

Natural Gas engines run quieter, the fuel is currently cheaper than gasoline or diesel (and likely to remain so), engine maintenance is lower, engine life is longer, engine performance is adequate, emissions are lower, smog-producing NOx emissions are near-zero, and there are some government incentives for switching. Currently, natural gas fuels about 3% of the national medium and heavy-duty transportation fleet, 35% of the transit bus fleet, and 55% of the refuse truck fleet. According to the DOE there are about 150,000 NGVs on the road in the U.S. so the current market share is quite small. According to Chuck Feinberg of the New Jersey Clean Cities Coalition “Natural gas is the cleanest alternative-fuel vehicle available today for medium and heavy-duty vehicles.”

In addition to CNG there are also LNG (liquified natural gas) vehicles and some can utilize both. While vehicles that run on LNG are more expensive they can travel longer distances without refueling since the gas is stored as a liquid. Overall though, CNG has less environmental impact since LNG requires energy for liquefaction. Additional CNG tanks can be added but that does increase weight as well as reducing cargo area. Thus, driving range is a small issue but is considerably more than EV driving range. Fueling time was once an issue but fueling now is much faster.  

EVs cost 3 to 4 times as NGVs. Thus fleet conversions to NGV can offer vast advantages compared to conversions to EVs in NOx emissions reductions since more 3-4 times more vehicles can be converted at the same cost. Thus NGV fleet conversions can reduce city smog faster and cheaper than EVs by taking more higher-emitting vehicles off the road. NGVs are a cheaper and faster way to reduce NOx and other emissions than EVs.

There are or at least were some significant issues with methane leaks from NGVs and NGV fueling stations. However, new leak reduction technologies have reduced them very significantly. Although leaking methane is not a pollutant that affects air quality it is a powerful greenhouse gas. Such leakage is one reason lifecycle emissions of NGVs are not lower on past tests. Although they were significantly lower than diesel lifecycle emissions, they are now much lower than they were. A recent study by the West Virginia University Center for Alternative Fuels, Engines, and Emissions noted methane leak reductions successes by the NGV industry:

“The findings confirm that many of the technologies being deployed on the latest generation of natural gas engines and refueling infrastructure are dramatically lowering emissions and continue to make natural gas the ‘greenest’ choice for fleets across North America.”

NGV America explained the methane emissions reductions which include closed crankcase systems:

“Today’s natural gas vehicles provide significant environmental benefits including the lowest emissions of nitrogen oxides (NOx), particulate matter and other pollutants that directly affect public health. Additionally, the latest engines (which were not among those studied as part of this research) include closed-crankcase systems and other upgrades that optimize operation and increase efficiency. For these new spark-ignited natural gas engines, these changes have resulted in a more than 70 percent reduction in methane emissions compared to engines produced only a few years ago.”

Less than 20% of the methane leaks in the study were coming from the fueling stations and those leaks have also been addressed:

“New technologies and best practices at CNG and LNG stations with dispensers, compressors, boil off gas management systems for storage tanks, and other equipment are lowering these emissions even further and the study provides a solid baseline to demonstrate future improvements.”

NGV America also estimates that 20-30% of natural gas used for transportation is RNG/biogas. EPA classifies RNG as cellulosic biofuel and notes that RNG represents the largest share of cellulosic biofuel sold in the U.S. today.

References:

‘Near-Zero NOx’ Natural Gas Engine from Cummins Westport is On the Way - by John O’Dell, in Forbes (Autos), April 11, 2016

Air Quality and Climate Protection Goals Can Be Immediately Addressed Most Effectively with Ultra Low Emission Heavy-Duty Natural Gas Engine Technology and Renewable Natural Gas Fuel, Technical White Paper Finds – posted at Clean Energy

Next Generation Heavy-Duty natural Gas Engines Fueled by Renewable Natural Gas – NGV Game Changer Technical white Paper (ngvgamechanger.com)

How Volkswagon is Shaping America’s Energy Future – by T. Boone Pickens, in LinkedIn, March 10, 2017

UPS to Power Memphis and Jackson Alternative Fuel Fleet with Natural Gas from Landfills – at UPS.com, Dec. 18, 2015

Ryder to Fuel Fleets with Renewable Natural Gas – fleetowner.com, Nov. 12, 2015

Natural Gas, the Other Alternative Fuel for Transportation Sector – by Tom Johnson, in New Jersey Spotlight, Feb. 15, 2017

Peterbilt Introduces Cummins Near-Zero Engine for Select Models, in Next Gen Transportation News, Aug. 30, 2016

U.S. Dept. of Energy – Alternative Fuels Data Center – Natural Gas Vehicles

Fact Sheet: Natural Gas Vehicles’ Emissions Data and Comparisons – Northwest Gas Association

NGV America Applauds Collaborative Approach of New Study That Identifies Opportunities for Improving on Emissions Benefits of NGVs – press release form NGV America, Jan. 5, 2017

Peak Oil vs. Peak Oil Demand: Which Will Happen First? Does It Really Matter At This Point? Thoughts and Speculations about Resource Depletion

Peak Oil vs. Peak Oil Demand: Which Will Happen First? Does It Really Matter at This Point? Thoughts and Speculations about Resource Depletion 

Resource depletion has long been a major worry and a rallying cry for the technological search and development of renewable and more sustainable sources for energy and materials.

Julian Simon pointed out that the availability of a ‘finite’ natural resource is defined not merely by its quantity but also by the technologies and innovations used to retrieve it. Thus, human ingenuity is an inextricable part of a natural resource. Availability is also determined by market economics. Technology and innovation virtually always move toward greater resource availability (except possibly in cases where technology is regulated due to environmental and/or safety effects). Market economics fluctuate according to momentary and regional supply and demand. Thus we have the categories of: resource in-place, technically recoverable resources, and economically recoverable resources. Resource in-place changes with new discoveries. Technically recoverable resources change typically toward more availability. Economically recoverable resources fluctuate according to market conditions. One might also add “practically recoverable resources.” This would put off limits a certain amount of known reserves due to practical considerations: potential negative environmental and safety effects often being the big factor there. One current example of resources currently impractical to develop is the large natural gas reserves in the Marcellus Shale, the Utica Shale, and the Burket/Geneseo Shale under the city of Pittsburgh in Alleghany County, Pennsylvania – estimated at an impressive 15 TCF – more than many entire countries. While there may be some development of that resource in a few areas it is unlikely on a large scale due to environmental/safety considerations and multiple land/minerals ownership issues that would be nearly impossible to untangle and get agreement. There is also a drilling moratorium in the city that is unlikely to change.

Energy resources, particularly fossil energy resources, are burned and once burned are gone. One recent possible future exception to that may be current attempts to economically make ethanol from CO2 exhaust. Many material resources are recyclable so their usage may be extended and their depletion be delayed. Both exploration and new technologies can increase recoverable reserves of energy and materials.

Shell recently reported that they think that globally we might hit peak oil demand around 2022 – 5 years away. Other oil demand analyses don’t think it will happen that soon. Factors that affect peak oil demand include energy efficiency, CAFÉ fuel standards, ramping up of electric vehicle manufacture and usage, conversion of trucks, trains, ships, and other equipment from diesel to natural gas, increased use of biodiesel and ethanol, oil price, and oil price relative to natural gas prices and EV costs. U.S. biomass-based diesel production is up recently and is expected to continue rising modestly according EIA. Ethanol usage is higher than biomass-based diesel since it is blended up to 10% and typically present in all gasoline. Its forecasted use in the U.S. going forward is for just slight growth. If peak oil demand precedes (or at least coincides with) peak oil then the specter of oil depletion as a serious problem will be weakened. The fact that peak oil demand is even being predicted, and so soon by Shell, bodes well for oil demand dropping or at least stabilizing before peak oil becomes a serious issue.

 

Some energy commentators in the U.S. and in Europe have urged for peak oil planning. Most of them have ties to the renewables industry or renewables promotion. Those from Richard Heinberg at the Post Carbon Institute are aimed at post-carbon strategies, obviously. His analysis in a few books (Powering Down and The Oil Depletion Protocol) occurred before the shale revolution occurred with the new technologies of fracking and horizontal drilling. Technological, efficiency, and cost improvements have continued in the oil & gas sector with simultaneous and zipper fracking, multi-well pads, stacked pay zones, more stages per well, more proppant per stage, longer laterals, better targeting and geosteering, better definition and focus on core areas, better reservoir characterization, faster drilling, lower drilling and service company costs, and less rig down time. Other efficiency enhancements and production enhancements are possible. The fracking revolution has extinguished the “fire” of peak oil declarations, at least for now and at least in the U.S. In Europe this is less clear. Jeremy Leggett’s 2014 book, The Energy of Nations, also touts the importance and danger of peak oil, but happens just before the very beginning of the big oil price downturn beginning in the fall of 2014. Currently, both global oil as well as gas in many regions are glutted and rigs are way underutilized but demand is still high. The current high amount of drilled but uncompleted wells (DUCs) in the fracked oil plays indicates that domestic oil production can rise quickly if economic conditions warrant it due to higher demand. The bottom line is that primarily due to fracking and technology, peak oil is not an issue in the near term. 

Others have pointed out that peak oil demand may also be premature since the factors that favor it have some issues. For instance, EVs still have a ways to go toward widespread adoption. There are also logistics to work out with the potential effects of EVs on the electric grid, including preparing for peak demand, upgrading smart grid technology, and building more power generation to cover new demand. There are further issues regarding who will pay for such grid upgrades. There is also the potential issue down the line of how to replace tax revenue generated all along the cycle from oil production through gasoline and diesel consumption. Many oil analysts point out that globally, particularly in the developing world, the amount of cars being produced is still growing and some expect it to nearly double within the next 20 years. EVs currently only make up a tenth of 1% of the global vehicle market and even with massive deployment at the highest end of predictions there is still projected growth of gasoline and diesel vehicles.

References:

CERAWeek: Pumping the Brakes on Electric Vehicle Uptake – by Trent Jacobs, in Journal of Petroleum Technology, March 10, 2017

The Energy of Nations: Risk Blindness and the Road to Renaissance - by Jeremy Leggett (Routledge, 2014)

The Oil Depletion Protocol: A Plan to Avert Oil Wars, Terrorism, and Economic Collapse - by Richard Heinberg (New Society, 2006)

Hoodwinking the Nation: Fact and Fiction about Environment, Resources, and Population - by Julian Simon (Transaction Publishers, 1999)