Many of you may not be aware of the happenings in the Cowboy State concerning the future of the energy industry. Wyoming is not just sitting back and allowing market forces to have huge impacts on the state, it is taking steps to be on the forefront instead.  Here are a couple of big things going on in Wyoming.

Carbon Emissions – ITC

A new Wyoming research center is the driving force for change. The Wyoming Integrated Test Center (“ITC”) was dedicated by Governor Mead in Campbell County, Wyoming, last week. Check out the ITC website here.

  • What is the ITC?

Bottom line: It is a big deal – it is a collaborative effort that has the ability to change the future of energy by developing ways we can use power plant emissions.

The specifics: According to the About ITC website, the funding for the ITC came from the Wyoming State Legislature ($15 million), the Tri-State Generation and Transmission Association ($5 million), the National Rural Electric Cooperative Association ($1 million) and Basin Electric Power Cooperative is providing the host site at their Dry Fork Station located in northern Wyoming and additional valuable in-kind contributions (important things like engineers and construction management services). Supporters also include Rocky Mountain Power, Black Hills Power, XPRIZE Foundation and the University of Wyoming School of Energy Resources – the ITC is a true public-private partnership with a shared goal.

The goal is simple yet significant – to develop commercial uses for carbon dioxide emissions. Check out more on the science of this here.

The headline from the Casper Star Tribune says it all, In Unassuming Wyoming, A Quest to Change the National and Global Future of Coal.

Since this project involves coal, obviously it is hotly contested and controversial. Opponents reportedly question the use of taxpayer funds on the ITC and wonder whether the cause is useless because coal is a sinking ship.

Oil and Gas – Secondary Recovery

In addition, secondary recovery in oil and gas operations is a focus of the Cowboy State. The Casper Star Tribune highlighted this focus in its article yesterday entitled, UW Institute Fosters $2 Million of Research into Oil and Gas Recovery in Wyoming. The Enhanced Oil Recovery Institute reportedly, “announced recently that $2.2 million of research is about to roll out in Wyoming.” The plan is to dig deep into figuring out ways to increase secondary recovery and optimize production using new technology in Wyoming’s old wells.

Wyoming is clearly a force for change in the energy industry – there is something to be said for that Cowboy grit and work ethic. Cowboys know when to adapt and when to buckle down to figure out a problem. One thing is true – do not underestimate the Cowboy state.

The Bureau of Land Management (“BLM”) announced today that it has temporarily postponed certain requirements contained in its 2016 final Waste Prevention Rule (also known as the Venting and Flaring Rule) for 1 year, until 2019.

The full text of the proposed rule language governing “Waste Prevention, Production Subject to Royalties, and Resource Conservation; Delay and Suspension of Certain Requirements” can be found here. The new rule is scheduled to be published in the Federal Register tomorrow, December 8, 2017.

By way of a reminder, the prior 2016 rule, known as the Waste Prevention Rule, or the Venting and Flaring Rule (81 FR 83008) (the “2016 Venting and Flaring Rule”), contained provisions that went into effect almost a year ago in January of 2017, and the rest was scheduled to go into effect just around the corner in January 2018. According to the BLM website, “[t]he [2016 Venting and Flaring] rule is intended to limit the loss through venting, flaring or leaks of natural gas from oil and gas production on public and Indian lands.”

Folks were tuned in to this new rule – over 150,000 comments on the new rule were reportedly received during the notice and comment period.

Basically, the new rule suspends and/or delays until January 2019 certain provisions of the 2016 Venting and Flaring Rule…

According to regulations.gov’s summary of the new rule, it will:

  • suspend until July 17, 2019, provisions pertaining to: waste minimization plans; flaring and venting of gas during drilling and production operations, and during well completions and related operations; determining the emissions levels of storage vessels; and minimizing gas vented during downhole well maintenance and liquids unloading
  • delay until July 17, 2019 (or by 18 months) provisions pertaining to: gas capture; measuring and reporting gas volumes vented and flared; existing approvals to flare royalty free; replacing pneumatic controllers; and leak detection and repair.

These time extensions are expected give the oil and gas industry more time to get into compliance and figure out the budgeting to accomplish this. Folks in the know (the BLM in its Regulatory Impact Analysis) estimated that the requirements of the 2016 Venting and Flaring Rule “would impose compliance costs, not including potential cost savings for product recovery, of approximately $114 million to $279 million per year.” According to the Law 360 article entitled, BLM Finalizes Delay to Methane Venting Rule Compliance, “[t]he BLM said in a statement that temporarily putting off certain requirements would help operators avoid compliance costs for requirements that could be taken away or significantly changed.”

According to the BLM, the extra time until January 2019 also “gives the BLM sufficient time to review the 2016 final rule and consider revising or rescinding its requirements.”

Only time will tell the fate of the venting and flaring rule…stay tuned!

 

 

Many of you know that when I travel, I tend to start to wonder about that state’s energy sector. What fuels it? What makes it different from Colorado and Wyoming?

This weekend, I was in Nashville, Tennessee – “Music City.” I started to wonder, besides being the home of country music and amazingly fun honky tonks where folks from all over the country come to kick their heels up, what fuels Tennessee?

It’s not all country music, hot chicken, cowboy boots and southern hospitality. Tennessee has more going on in the energy sector than one might think at first blush. Biofuel, a little oil, hydroelectric power, coal, natural gas, nuclear, wind, solar…Tennessee has it all.

According to the U.S. Energy Information Administration’s (“EIA”) state profile on Tennessee:

  • Most of Tennessee’s electricity generation is supplied by the Tennessee Valley Authority’s (“TVA”) Watts Bar 2, which is the nation’s first new nuclear power reactor in the 21st century (which began operating about a year ago)
    • The TVA operates:
      • 19 dams
      • 2 nuclear power plants
      • 7 natural gas-fired generating plants
      • 6 coal-fired plants
  • Tennessee is home to the nation’s third-largest pumped storage hydroelectric generating facility and more than 2 dozen hydroelectric dams
    • In 2016, it had the 8th highest net generation from hydroelectric power in the nation
  • Tennessee is home to the Southeast’s first major wind farm, which has been operating since 2000 – it is located on Tennessee’s Buffalo Mountain
  • Selmer, Tennessee is home to the largest solar facilities in the state

While crude oil production in the state is low, the state’s energy profile is very diverse. A more detailed discussion on Tennessee’s energy profile can be found here.

It can be easy to overlook what each state has going on in its own unique energy sector. Tennessee is one of those places that will surprise you with all it has going on, even in its energy profile!

 

Yesterday, the Wyoming Supreme Court issued its opinion in Lon V. Smith Foundation v. Devon Energy Corp., et al., 2017 WY 121 (Wyo. Oct. 10, 2017), which provided guidance on the application of the Wyoming Royalty Payment Act (“WRPA”). The full case can be found here.

There were 3 issues before the Wyoming Supreme Court, one involving a probate question and two involving the WRPA.

Let’s just focus on the issues concerning the WRPA that the Wyoming Supreme Court gave us guidance on:

What were the WRPA issues?

  • Whether ORRI proceeds held in Devon’s own “suspense account” and not in an interest-bearing account in a Wyoming financial institution violated Wyo. Stat. Ann. § 30-5-302; and
  • Whether either party is entitled to attorneys’ fees in this case under WRPA.

Wait – let’s back up. What is the WRPA?

The WRPA is found at Wyo. Stat. Ann. § 30-5-301, et seq. and it governs the payment of royalties in Wyoming. It has been around for a pretty long time – the WRPA is by no means a “new” statute, although recent case law over the past 20+ years or so has really refined its terms and application.

I usually don’t cite cases in my blogs, but it is worth noting that the Cabot Oil case really explains the policy behind the WRPA: The WRPA is a remedial statute “enacted in 1982 to stop oil producers from retaining other people’s money for their own use.” Cabot Oil & Gas Corp. v. Followill, 2004 WY 80, ¶ 11, 93 P.3d 238, 242 (Wyo. 2004) (Internal citations omitted). The Wyoming Supreme Court in its opinion yesterday further explained the policy behind the WRPA as follows, “[t]he WRPA was designed to level the playing field between royalty interest owners and oil and gas producers.” Lon V. Smith Foundation v. Devon Energy Corp., et al., 2017 WY 121, ¶ 54 (Wyo. Oct. 10, 2017).

I will be honest, cases involving the WRPA might be my favorite cases to read. Insert joke about me being a big nerd here.

So, back to yesterday’s Wyoming Supreme Court opinion in Lon V. Smith Foundation v. Devon Energy Corp

Ok I kind of fibbed, we do have to quickly touch base on the probate issue to fully understand what is happening here.  Actually, it really sets the stage for the whole outcome of the case.  Without going into detail on the probate issues, basically, there was a dispute over who was the proper owner of an overriding royalty interest (“ORRI”) after the death of Mr. Smith. The Wyoming Supreme Court affirmed summary judgment in favor of Devon and determined that the Lon V. Smith Foundation (“Appellant” or “Foundation”) was not the proper owner and that the Marguerite Brown Smith Trust (“Trust”) is the proper owner of the ORRI. Id. at ¶¶ 34-39.

Now on to the WRPA issues…

Ok lets get to the good stuff.  WRPA!! Devon admitted that it held funds in an account that did not comply with the requirements of the WRPA when it just held funds in its own “suspense account” – but it argued that the account requirements for holding funds only applies if the party asserting the claim is “legally entitled to the proceeds.” Id. at ¶ 42. The Wyoming Supreme Court concluded, as you might guess, that because the Foundation is not the owner of the ORRI, it is not the “person legally entitled” to the proceeds and it cannot make a claim under WRPA. Id. at ¶ 45.

The next issue was whether the prevailing party language in the WRPA, specifically, Wyo. Stat. Ann. § 30-5-303, applies to entitle somebody, either the Foundation or Devon, to an award of fees and costs. Again, the Supremes looked to who is “legally entitled” to receive payments as the preliminary step in the analysis. Id. at ¶ 47. Again, as you might guess, because the Foundation was found to not be the owner of the ORRI, the Court concluded that “the Foundation did not have a statutory right to seek relief under the WRPA.” Id. at ¶ 52. “[N]either the Foundation nor Devon is entitled to attorney fees because neither party was the prevailing party in a proceeding brought pursuant to the WRPA.” Id. at ¶ 52.

As you can see, the Wyoming Supreme Court gave us some guidance on the applicability of the WRPA – Being “legally entitled” to the dolla bills is the key.

This week, a new public website was unveiled that provides participating states’ well data. The site is called National Oil & Gas Gateway and it can be found here – www.noggateway.org

  • What is it?

One stop shopping for well data. It is basically a consolidated source for oil and gas well data from the states that participate. In short, “[t]he Gateway is the first publically available website of well-level data across the nation” and its information is submitted by individual participating states.

According to the “About” section of the website, the U.S. Energy Information Administration (“EIA”) collaborated with the Ground Water Protection Council (“GWPC”) and its member states, along with the Office of Fossil Energy, to put the Gateway together.

  • What info does it provide?

The Gateway reportedly includes, “data on well identification, production, completion, well tests, underground injection control, geologic information, and other data elements determined by each state” and it “also integrates the hydraulic fracturing chemical disclosures from FracFocus.”

According to NGI’s Shale Daily, “[w]ell data is to be updated monthly by participating states.”

  • What states participate?

The Gateway reportedly only includes well data from participating states. While all oil and gas producing states can participate, so far, ten states are submitting their well data information, including the following:

  1. Alabama
  2. Arkansas
  3. Colorado
  4. Kentucky
  5. Mississippi
  6. Nebraska
  7. New York
  8. Oklahoma
  9. Utah
  10. West Virginia

Problem: You’ll note that some of the major producing states are currently absent from this list…

  • Takeaway

This is pretty rad and it is a great new resource. Having easy access to oil and gas well data in one place is a serious benefit instead of having to go to each state’s oil and gas commission website, as noted by the article in NGI’s Shale Daily.  According to Daily Energy Insider, “Gateway users can view, analyze, and export data on oil and gas wells, including well location, name, unique API number, operator, current status, type, production, injection, and disposition.”

Hopefully more producing states participate!

Natural Gas Exports To Mexico will loom large in NAFTA negotiations

The North American Free Trade Agreement (“NAFTA”) entered into force some 23 years ago and in simple terms, the Treaty created a free trade zone between Canada, the United States and Mexico. At the time, NAFTA was viewed as a pathway to integrate Mexico into the highly developed economies of the U.S. and Canada. By doing so, however, it guaranteed there would be winners and losers as Mexico’s less-developed economy would attract U.S. industries to set-up shop there in order to take advantage of much lower labor costs. Indeed, small farmers and auto workers in the U.S. were two groups most impacted by labor cost disparity from south of the border.

Rendering of North America from SpacePresident Trump’s mantra of “America First” does not bode well for NAFTA as he has called it “the worst trade deal ever.” Upon taking office, President Trump vowed to withdraw from NAFTA. However, due to intense lobbying from the business sector, the President reversed his plan to withdraw from NAFTA and on July 17th, the Trump administration gave Congress official notice that it planned instead to renegotiate NAFTA with the U.S. Trade Representative Office’s publication of a Summary of Objectives for the NAFTA Renegotiation. The tri-nation negotiations are slated to begin shortly with the U.S. negotiations being led by Robert Lighthizer, the U.S. Trade Representative. Lighthizer is a former senior trade official in the Reagan Administration who advocates greater trade protectionism. He is joined in this view by other senior Trump officials such as Secretary of Commerce Wilbur Ross and White House Chief Strategist Steve Bannon. Ross has spoken out publicly against the hollowing out of the U.S. manufacturing sector from NAFTA and Bannon would like to see NAFTA supply chains repatriated to the U.S.

The president’s decision, however, to renegotiate NAFTA instead of its withdrawal sends a strong signal that NAFTA will survive in good measure. The tri-nation supply chains which have been developed over some two decades simply prove too costly and disruptive to overturn. Natural gas exports to Mexico are a prime example.

Mexico imports nearly all of its natural gas from the U.S. and exports to Mexico are expected to double by 2019, with Texas fields being the primary source. At least 17 pipelines currently carry four billion cubic feet of natural gas a day from Texas to Mexico, with four additional cross-border pipelines in the works. Mexico’s demand for U.S.-sourced natural gas has been a boon to domestic producers as it has greatly offset the oversupply of natural gas production. Without this outlet to Mexico, natural gas producers in the U.S. will face a severe downturn with wells shut, job losses and investment curtailed.

The U.S.-Mexico natural gas symbiotic relationship is just one example of the tri-nation supply chain intricacies and complexities forged under NAFTA. There are countless others, such as deep supply chains in agriculture, construction materials and autos to name a few.

The extent to which NAFTA will be modified remains to be seen. However, from a legal standpoint, there are two sections of NAFTA which will certainly be squarely in the crosshairs of the U.S. Trade Representative. These provisions relate to the remedies available should a NAFTA nation’s exports injure the domestic market of another NAFTA member.

Specifically, under Section 302 of the NAFTA Implementation Act, the U.S. International Trade Commission determines whether increased imports from Canada or Mexico are a substantial cause of serious injury or threat of serious injury to a U.S. industry. If the ITC makes an affirmative determination, it makes a remedy recommendation to the President, who makes the final remedy decision. Section 302 investigations are similar procedurally to investigations under Section 201 of the Trade Act of 1974.

This is referred to under NAFTA as the “Safeguard Section” as it provides the U.S. the ability to seek redress via the ITC for damaging levels of NAFTA imports. The Trump administration however views the ITC as an impediment to taking action against NAFTA import abuses since the ITC has a high threshold of proving “actual injury.” Hence, the U.S. proposes to terminate the ITC’s jurisdiction in these cases, and instead transfer them to the Commerce Department which is a lot more biased toward U.S. interests.

Similarly, the US Trade Office will seek to eliminate NAFTA’s Chapter 19 dispute settlement mechanism. This Section establishes a mechanism to provide an alternative to judicial review by domestic courts of final determination in antidumping and countervailing duty cases, with review by independent bi-national panels of trade experts. A Panel is established when a Request for Panel Review is filed with the NAFTA Secretariat by an industry asking for a review of a domestic investigating authority’s decision involving imports from a NAFTA country.

These two changes will allow the Trump administration to unilaterally take direct action against NAFTA imports where it finds them to be injurious to U.S. commerce. This is completely in line with the protectionist leanings of the Trump administration.

Canada and Mexico will no doubt object to any proposal to eliminate these Sections as they prefer the non-interference protections afforded and want to have a buffer against U.S. unilateral decision-making. The stage is set therefore for some very intense and difficult negotiations. At the end of the day, however, natural gas will continue to flow from Texas to Mexico and if necessary, it will be made an exclusion from any final decision upon NAFTA’s fate. These exports are too vital for both countries as U.S. producers need the Mexican market and Mexico needs the gas.

Opportunities Abound in Downstream Infrastructure Logistics

The Marcellus and Utica Shale Plays are abundantly rich in “wet gas”; some 30-40% of natural gas produced in these fields is estimated to be recoverable into natural gas liquids with ethane being the most prevalent.

Chemical formula and molecular model of Ethane (C2H6)Ethane is a natural feedstock for ethylene, the primary petrochemical building block from which we derive products such as polyethylene. The latter is produced and eventually converted into a myriad of everyday consumer products from plastics to vinyl to rubber.

But it all starts of course with ethane. Transporting ethane out of the Marcellus and Utica gas fields; however, will follow different routes:

  • Exported via pipelines either east to Marcus Hook Terminal on the Delaware River for ocean transport to the UK and Norway for chemical feedstock; south to Gulf Coast refineries; or north to Sarnia, Canada;
  • Stored in underground caverns or large ethane storage tanks in Terminals and Tank Farms; or
  • Consumed by refineries located in the tristate (PA/OH/WV) region, most notably the Shell Cracker.

All of these transport modes abound in logistical infrastructure investment and commercial opportunities. With respect to exports out of the region, we are presently witnessing billions of capital investment in pipeline infrastructure build-out. Excess ethane not transported via pipelines is currently an impediment however as the region lacks proper storage capacity. Plans are underway to address this imbalance with its first ethane storage facility based in Ohio in the works.

With respect to ethane being consumed within the region, different downstream logistics will be in demand all emanating, of course, from Shell’s ethane steam-fed refinery. Shell is currently working on its Falcon Ethane Pipeline; a 94-mile pipeline with two “legs” which will feed Shell’s ethane cracker plant in Beaver County. Once online, this ethane cracker will produce as a final end-product polyethylene (PE) resins which are pelletized. The Shell Cracker will produce some 1.5 metric tons of this stuff, which Shell will ship to wholesalers and distributors as well as downstream manufacturers who convert these pellets into everyday consumer products. It is estimated that over two-thirds of US and Canadian demand for PE is located within 700 miles of Southwestern Pennsylvania.

Therein lies the foundation for all sorts of logistical infrastructure coming online in our region. Storage facilities, tank farms, shipping terminals, freight forwarding, warehousing, trucking, rail and barge transport will all see significant investment in meeting this demand, not to mention the data processing and IT and web based applications associated with these modalities. Should additional ethane crackers come online in the tristate region as projected, logistical infrastructure investment and commercial opportunities will only exponentially multiply.

What does the Industrial Internet of Things (IIOT) have to do with the Shell Cracker?

A lot…

We have heard a great deal about the $6 billion construction of the Shell ethane cracker underway in Beaver County. The construction phase of course brings to mind the erection of a huge physical plant complex:

Shell Ethane Steam-Fed Cracker Facility (Beaver County, PA)
Source: Shell Oil

Some 6,000 workers from a myriad of construction trades will bring the cracker to life. Once online, this highly complex facility will first “crack,” or break apart, ethane’s large molecules and re-arrange the carbon and hydrogen atoms to create ethylene. The facility will further process the ethylene to create different types of polyethylene for a variety of manufactured plastic products.

However, perhaps the most critical part of the cracker’s build-out will emanate from the IIOT. It is estimated that a significant percentage of the plant’s total capital expenditures will evolve around IT services, software, data analytics and physical equipment and systems, all connected digitally to a secure and failsafe industrial process control network and plant business systems and entirely integrated into the global Shell Chemical enterprise.

The entire design, engineering, construction, start-up and finally operations and maintenance of the cracker entails the convergence of cutting-edge information technology, engineering technology and operations technology whereby robust process control systems monitor 24/7 smart connected instruments, process equipment and subsystems all under the umbrella of  secure web based software platforms and tools.  This convergence results in the digitization of the entire process manufacturing complex via the IIOT.

Once built, anyone can marvel at the impressive physical plant but it is this digital transformation within its infrastructure that provides the data and analytics ensuring the plant’s safe and secure daily operations.

The Indian IT global outsourcing firm Infosys (NYSE: INFY), recently announced that it plans to hire 10,000 American workers over the next two years.

Industrial techniician using tablet
Copyright: theerapong28 / 123RF Stock Photo

Infosys and other India-based information technology consulting companies have come under fire lately for their use of the H-1B visa program. These foreign consulting firms have been the leading sponsors of H-1B visa holders for some years now and have been criticized for allegedly displacing American IT workers.

To counter this backlash, Infosys will open four new Technology and Innovation Hubs across the country focusing on cutting-edge technology areas, including artificial intelligence, machine learning, user experience, emerging digital technologies, the cloud, and big data. These four hubs will not only have technology and innovation focus areas, but will closely serve clients in key industries such as financial services, manufacturing, healthcare, retail, energy and more.

The first hub, which will open in Indiana in August 2017, is expected to create 2,000 jobs by 2021 for American workers and will help boost Indiana’s economy. North Carolina will host the second hub and Infosys announced it will work with the North Carolina Community College system to create a customized tech program.

Why Not Beaver County?

What about Beaver County as the next Infosys hub? Think about it…

Beaver County is the site of the largest capital investment project in the State of Pennsylvania since WWII – the $6 billion Shell Cracker. Some 6,000 workers from a myriad of construction and industrial trades will bring the plant to life. However, a critical part of this build will emanate from the Industrial Internet of Things. Hundreds of millions of dollars of this build will evolve around software, data analytics and physical equipment connected digitally to a secure and failsafe industrial process control network..

The Shell Cracker will usher into Southwestern Pennsylvania a new era in advanced manufacturing, requiring new skills tied to the digital world. An Infosys Hub in partnership with the local community college in Beaver County and tailored to a customized advanced manufacturing technology training programs would greatly benefit the county’s residents as well as the entire workforce of our region.

Engineer at refinery
Copyright: 36clicks / 123RF Stock Photo

Abundance of Natural Gas From Marcellus Leads to Government Pipeline Investment Program to Connect the “Last Mile”…

Pennsylvania has embarked upon a economic grant program to make low-cost natural gas energy available to its residents, manufacturers and other organizations residing in the State. Realizing the economic competitive advantage which natural gas affords its residents in terms of energy consumption, the State is providing grants aimed at connecting the last few miles of natural gas distribution lines to businesses parks, existing manufacturers and industrial enterprises.

Enacted into legislation in late 2016, the Pipeline Investment Program is up and running under the auspices of the Commonwealth Financing Authority. The CFA has already made three grants this year totaling $2,442,274. Under the Program, eligible applicants are defined as:

  • Economic Development Organizations;
  • Businesses;
  • Municipalities;
  • Hospitals; and
  • School Districts.

Each grant may be as large as One Million Dollars and funds may be used for defined costs associated with extending natural gas pipelines to serve eligible applicants. All eligible applicants shall provide matching funds of not less than 50% of the total project cost.

This Pipeline Investment Program is a direct offshoot of the tremendous supply of natural gas now flowing out of the Marcellus Shale and the State views this Program as a means to promote its economic competitive advantage in attracting and retaining businesses through access to low-cost natural gas.