Range Resources Challenges South Fayette's Drilling Law

- Range Resources Challenges South Fayette's Drilling Law

Wednesday, August 17, 2011
Knight Ridder/Tribune Business News
by Mike Wereschagin, The Pittsburgh Tribune-Review

A natural gas company has asked South Fayette's zoning board to overturn a 2010 law it says enacts a de facto ban on drilling in the township.

Range Resources petitioned the board on Tuesday, saying the restrictions strip the company's right to drill on 4,000 acres it has leased in the township. South Fayette's ordinance, enacted on Nov. 15, bans drilling within certain distances of homes, schools, streams, ponds, gas stations, mobile home parks, day cares, hospitals and nursing homes. The distances range from 300 feet to 2,500 feet.

Add each restriction together -- plus the requirement that the land on which drilling takes place be at least 10 acres -- and it covers the town's entire land mass, Range spokesman Matt Pitzarella said.

"You can't (drill in South Fayette). It can't be done," Pitzarella said.

One of the law's chief supporters said the legislation leaves land open to drilling -- just not some of the land Range has leased.

"Their problem is they bought their way into some land that's right in the middle of the community," said Keith McDonough, head of the anti-drilling group Friends of South Fayette. McDonough said he wanted to ban drilling in the town, but state law forbids it. "The entire western border (of South Fayette) that borders Cecil Township, which is heavily drilled, is all permissible. I wish that weren't the case, to be honest with you, but it is."

The conflict arises as municipalities around the state are crafting their own drilling regulations -- something Range worries will lead to an unpredictable and costly patchwork of restrictions on its business. There are 2,565 municipalities in Pennsylvania.

The Pennsylvania State Association of Township Supervisors in December published a model zoning ordinance for towns to use, although it doesn't recommend the size of buffer zones.

Just across the state line, a Morgantown judge struck down that city's drilling ban on Friday, saying it illegally pre-empted state law. Range says in its complaint to the South Fayette zoning board that Pennsylvania law also doesn't allow towns to ban drilling.

But the Pennsylvania Supreme Court has allowed municipalities to restrict drilling to certain areas by using zoning ordinances, said Myron Arnowitt, state director of environmental group Clean Water Action.

Arnowitt called South Fayette's ordinance "one of the best ... in the region." He said he wasn't sure whether it was legal to use zoning rules to ban drilling, and said he didn't know whether South Fayette's law amounts to such a de facto ban.

According to one South Fayette commissioner, "it's arguable" that it does.

"By limiting drilling to a very limited amount of zones, as South Fayette does, it does severely impact drilling operations," said Sue Caffrey. She said the ordinance was an emotional reaction to widespread drilling opposition in the town. Rather than solving difficult problems about how to safely regulate drilling, she said, "it kind of skirts that issue through zoning."

"I voted for it, and it is the one vote in my 12 years I regret making," Caffrey said.

The zoning board operates independently of the five-member board of commissioners. Whichever side the zoning board takes on Range's petition, the decision could wind up in the Court of Common Pleas.

Copyright (c) 2011, The Pittsburgh Tribune-Review

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Report: Bakken Oil Creates Boon, Challenges for North Dakota

- Report: Bakken Oil Creates Boon, Challenges for North Dakota

Thursday, August 04, 2011
Rigzone Staff
by Karen Boman

The Bakken oil boom has bolstered North Dakota's employment rate and tax revenues, but also has created a number of challenges for state and local government as well as producers operating in the Bakken, according to a report by the Energy Policy Research Foundation.

North Dakota has been an oil producing state for 60 years, but only during the past three years has the Bakken boom made North Dakota the fourth largest oil producing state in the U.S. and one of the largest onshore plays in the country. The success of the Bakken, which the U.S. Geological Survey estimated in 2008 to hold 4.3 billion barrels of technically recoverable reserves, has been largely attributed to advances in oil field technology such as hydraulic fracturing and horizontal drilling. High oil prices, low natural gas prices and ready access to privately held prospects also have contributed to the Bakken's success.

With an unemployment rate of 3.2 percent, the state received $749.5 million in state revenues from crude oil taxes on production and extraction in 2010, and more than $10.1 million in extraction taxes for natural gas last year. The oil and gas industry also spent $1.49 billion in taxable sales and purchases.

However, the influx of drilling activity to the state means that state and local governments face a range of new requirements to support the surge in oil production, especially road repair and construction, the report noted. And while North Dakota enjoys the lowest unemployment rate in the nation, the high wages offered by the oil and gas industry is beginning to make it difficult for local stores, shops and restaurants to keep workers given the opportunities in the petroleum sector.

The rate of services required to support the oil boom also are in short supply, with hotels in petroleum producing regions booked two to three years out and every apartment rented. Many oil companies operate their own "man camps" where employees eat and sleep while they are working. "A challenge for the state is to address the requirements for expanded infrastructure and related services while at the same time address the financial risks of an economic downturn should the rising production prove unsustainable," the report noted.

Limited access to traditional transports on infrastructure such as pipelines means that Bakken production is expensive to deliver to major refining centers and is discounted heavily at the wellhead. Bakken crude sells at a discount to Light Louisiana sweet and even West Texas Intermediate crude, despite its high quality, as transportation costs remain high for shipment to refining centers and major consuming markets. However, new infrastructure developments may soon support higher wellhead values.

Well drilling costs also have increased significantly in the past few years, and are expected to grow further, as rising oil prices have triggered drilling activity in multiple shale plays throughout the U.S. While the cost can vary from company to company depending on a host of factors such as the length of the horizontal lateral, the number of frac stages, and the choice of proppant (sand or ceramic), the cost of drilling and completing an oil well in North Dakota in 2009 was $5.6 million, according to the North Dakota Petroleum Council.

Today, several companies have reported drilling and completing costs of over $10 million per well. The increase is largely due to longer horizontal laterals and more frac stages, but also higher input costs from increased demand in rigs and completion services throughout the country and region.

Constraints on well completion services mean that many companies face a backlog of wells that are awaiting completion. The delay can come from weather related constraints as well as constraints in available frac crews. Projects are currently underway to secure the water supplies needed for hydraulic fracturing activity, but the issue of water supply for both local communities and the oil field will continually be dealt with and debated as drilling increases in the region.

Producers also must overcome severe weather constraints, such as heavy snowfall and temperatures as cold as -40 degrees Fahrenheit in the winter, which can result in well shut-ins. The past few winters have been some of the worst in North Dakota history and are proving to be very challenging for the industry. Additionally, severe spring rains have caused towns to be evacuated due to flooding.

While uncertainties exist about the future of shale oil, "North Dakota is embracing oil development and has thus far provided a regulatory environment that addresses genuine environmental concerns but also embraces the economic benefits of rising oil production," the report said.

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Analysis: Iraq Faces Challenges in Growing Oil Production

- Analysis: Iraq Faces Challenges in Growing Oil Production

Friday, July 29, 2011
Rigzone Staff
by Karen Boman

Iraq's large oil-production potential could allow it to compete for leadership with Saudi Arabia in the coming decades, but a new energy study by Rice University's Baker Institute for Public Policy finds that in the near term, both Baghdad and Riyadh may have difficulty meeting rising demand for oil.

The study, "Iraqi Oil Potential and Implications for Global Oil Markets and OPEC Politics," argues that ambitious targets set by the government of Iraq may not be reachable in the short-to-intermediate term while international oil companies operating in southern Iraq continue to experience infrastructure development problems.

Iraq has the potential to increase production from 2.5 million b/d in 2010 to over 5 million b/d in the next five to 10 years. The country has expressed the ambition to reach 10 to 12 million b/d of production by 2017, but this lofty target will be difficult, given mounting political, bureaucratic and infrastructure related barriers.

"Political decentralization inside Iraq, social tensions and electricity shortages remain barriers to large-scale repair and construction of infrastructure that is needed before export levels can rise," said author Amy Myers Jaffe, the Wallace S. Wilson Fellow for Energy Studies at the Baker Institute. "Failure to progress quickly on water injection, pipeline, electricity and natural gas facilities will limit the ability of independent oil companies to translate upstream oil-field expansion successes into continued export increases."

The return of international oil companies to Iraq has raised the prospect that Baghdad's oil production will indeed be increasing in the coming years. Iraq is expected to see a 200,000 b/d increase in output in 2011, with output expansions already achieved at the Rumaila, Zubair, West Qurna-1 and Majnoon fields. As of spring 2011, Iraq's southern oil fields were producing a total of 1.986 million b/d and total production was pegged at around 2.7 million b/d. Iraq's June 2011 output was 2.56 million b/d, of which 2.27 million b/d were exported.

However, foreign oil company officials say that, while output gains are easily achievable based on field performance and geology, infrastructure bottlenecks might make future increases harder to accomplish. "The end result may be that ambitious targets set by the government of Iraq may not be reached in the short to intermediate term, delaying the time when OPEC will have to address rising Iraqi output," the study found.

While these operational and logistical factors will play a large role in whether Iraq reaches its energy potential, political factors will be equally important, the study concludes. The resolution or management of several political issues – including ongoing challenges to political stability, difficult power-sharing arrangements at the national level between political parties and growing pressures for provincial empowerment – is essential to the smooth development of Iraq's energy potential.

Iraq's logistical and political challenges come at the same time that the costs for Saudi Arabia to continue to expand and maintain sufficient spare capacity to influence global markets have increased dramatically, according to the study. Saudi Arabia has less spare capacity immediately available now than in the 1980s and 1990s, and it will be quite expensive for Saudi Arabia to bring on additional production capacity.

Saudi Arabia has spent $14 billion since 2005 to increase its oil production since 2005 to grow its oil production capacity from 10 million b/d to 12 million b/d. Future investment in a new tranche of Saudi production capacity is likely to be even more expensive because the kingdom will have to shift to areas that have more complex geology and require greater technological intervention.

But Saudi Arabia is also facing competing priorities with higher spending requirements on social services and defense in light of new regional and internal challenges, which calls into question whether sufficient spending on spare oil production capability will be maintained. King Abdullah ordered sweeping spending increases of $67 million in March 2011 for housing, job creation and the military, on top of a $36 billion hand-out to citizens in February, in an effort to respond to increased instability across the Middle East. "The pressures for higher defense and social spending will make it that much harder for the government to justify a massive campaign to expand its oil sector."

Possible increases in Iraqi oil production will likely be very important to the future stability of the global oil markets, and Iraq’s aspirations to become a major oil exporter create shared interested with the U.S. and other major oil consuming countries. The U.S. and other major powers should meet to discuss way to support Iraq's realization of the potential of its oil and gas deposits.

"As the U.S. government did successfully in the Caspian region and the Japanese government did successfully in Qatar and other LNG [liquefied natural gas] producing nations, the United States, EU, Japan and China should work together to ensure that IOC’s [international operating companies] operating in Iraq and the Iraqi government are able to attain attractive financing and loan packages to underwrite major export infrastructure development projects," the study noted. "Multinational assistance would also be appropriate as a means to support major investments as well as bilateral or trilaterial trade finance and development assistance."

Iraq's ability to reach its energy potential should be of broad regional and international concern. The nation could be poised for a dramatic transformation, one in which it finally escapes the political and technical constraints that have kept it producing less than four percent of the world's oil, despite having the third largest conventional oil reserves in the world.

"Should Iraq meet its ambitions to bring nearly 10 million more barrels of oil on line by 2017, it would constitute the largest ever capacity increase in the history of the oil industry," said Meghan O'Sullivan, the Jeane Kirkpatrick Professor of the Practice of International Affairs at Harvard University's Kennedy School. The health of Iraq's energy sector – currently the source of more than 90 percent of revenues accrued by the state – is a major determinant in setting Iraq's overall trajectory.

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