Although the study’s aggregate macroeconomic results suggest that LNG export has net benefits to the U.S. economy, whether the study will help expedite DOE’s issuance of export authorizations remains unclear.  DOE has approved only one LNG export project to non-free trade agreement countries – to Sabine Pass Liquefication, LLC – while fifteen applications await a decision pending the results of this study, which now are open to public comment.

Federal law generally requires approval of natural gas exports to countries that have a free trade agreement with the United States.  For other countries, section 3(a) of the Natural Gas Act authorizes DOE to grant applications for export authorizations as long as the proposed exports are consistent with the public interest. 

It is DOE’s policy that section 3(a) creates a rebuttable presumption that a proposed export is consistent with the public’s interest.  DOE’s public interest analysis of export applications focuses on the domestic need for the natural gas proposed to be exported, whether there is a threat to domestic security supply, and other factors to the extent they are shown to be relevant to the public interest, such as any economic, energy security, and environmental impacts. 

Study Results

The study’s broad conclusions bolster arguments in support of LNG exports.  Across all analyzed scenarios, the United States was projected to gain economic benefits from allowing LNG exports, according to the metrics of welfare, gross domestic product, aggregate consumption, and trade balance.  Moreover, the net benefits across all scenarios examined and the benefits generally were found to become larger as the amount of exports increases.

Opponents of LNG export, however, may point to higher domestic LNG prices as a major reason for DOE to withhold authorizations. The study noted that increases in domestic LNG prices could hurt trade-sensitive industries (e.g., the steel industry), the electricity sector, and other energy-intensive industries.  Opponents are likely to highlight that higher operating costs in these sectors will shift to consumers, in the form of high prices for goods being produced, and onto suppliers, whose workers and owners may experience losses. 

Currently, fifteen export applications are pending for DOE’s public interest consistency determination.  The study supports a conclusion that LNG exports produce an overall net benefit to the U.S. economy, but DOE may focus more on near-term impacts identified in the study  The very fact that DOE commissioned the study to focus on trade-sensitive and energy-intensive sectors demonstrates that to them it is an area of particular concern.  As much as the report favors DOE authorizing LNG exports, the results are not the slam dunk that the industry had hoped it would be.

DOE posted the report in the fifteen pending export application dockets and invites public comment on each.  DOE intends to consider the comments and the report as it makes its public interest determination in each case.  Comments are due January 24, 2013 and reply comments are due January 25, 2013 in all cases.

Participants included energy-intensive industries, manufacturers that use natural gas as a feedstock, and companies that sell products and materials into the natural gas market.   They were joined by representatives from federal, state, and local government, labor representatives, and numerous members of the oil and gas industry.

Seminar participants heard from a number of the industries that are growing as a result of natural gas development.   Those participants include:

• Steven J. Adelkoff, President of Pittsburgh’s Renewable Manufacturing Gateway  and CFO of Aither Chemicals, which has plans to construct a catalytic ethane cracker in the Kanawha Valley region of West Virginia.
• Douglas Polk, Vice President of V&M Star, which produces pipe for the oil and gas industry and which is spending hundreds of millions of dollars to expand its operations in Youngstown, Ohio.

Other participants included:

• Rep. James Keffer, Chairman of the Texas House Committee on Energy Resources and the author of one of the first state disclosure laws for hydraulic fracturing fluid;
  
  
• Richard Ranger, Senior Policy Director for the American Petroleum Institute;
  
  
• Sarah Magruder Lyle, Vice President of America’s Natural Gas Alliance;
  
  
• Tim Dickson, Executive Director of Oil and Natural Gas Industry Labor Management Committee, and;
  
  
• Eric Planey, Vice President of International Business Attraction for the Youngstown/Warren Regional Chamber.  

“We were fortunate to be able to bring together such a knowledgeable and diverse group of presenters.  There is no better way to understand the game-changing impact that domestic natural gas development can have on our economy than to hear it from the industry experts and from the companies and communities that are leading America’s manufacturing renaissance,” said Dana Wood,  Director of Kelley Drye’s Government Relations and Public Policy practice group.  

Kelley Drye billed the event as first in a series of discussions aimed at helping those industries that benefit from a thriving domestic natural gas industry understand and engage in the dialogue on hydraulic fracturing and natural gas development.

Kelley Drye’s half-day seminar will give participants an understanding of the myths and realities surrounding hydraulic fracturing and the economic and industrial implications of the natural gas boom.

• Our first panel will provide a landscape discussion of the technology behind hydraulic fracturing, horizontal drilling, and the extraction of natural gas (and oil) from source rock.  The panel will discuss the myths and realities of the environmental and societal impacts of natural gas drilling, provide an overview of the existing and emerging natural gas plays in the U.S. as well as an understanding of the amount of economically recoverable natural gas in the United States.  This panel will include Rep. Jim Keffer, the Texas state legislator who proposed and passed the first fracking disclosure law, and Richard Ranger, Senior Policy Advisor at the American Petroleum Institute (API).  

• The second panel of the day will discuss the economic and societal impacts of increased domestic gas production - with a focus on manufacturers benefitting from a thriving domestic natural gas industry because of increased availability of natural gas as a feedstock, increased sales into the energy industry, and decreased energy costs.   Sarah Magruder Lyle of America's Natural Gas Alliance (ANGA) will lead a discussion with Steven J. Adelkoff, CFO of Aither Chemicals, and President of Pittsburgh’s Renewable Manufacturing Gateway, Douglas Polk, Vice President of V&M Star, a leading producer of steel pipe and tube, and Tim Dickson on behalf of the AFL-CIO Building and Construction Trades.

Please email Heather Tighe if you would like us to reserve a spot for you.  We hope to see you on the 23^rd.

Space is limited  | Register HERE | Cost: Free (Lunch Provided)

What the Law Requires

The RFA, as amended by the Small Business Regulatory Fairness and Enforcement Act of 1996, requires federal agencies to assess the impact of proposed rules on small entities.  Congress has long been concerned that regulations may pose different and disproportionate compliance challenges and costs on small businesses, and that agencies were not adequately accounting for these impacts.  The RFA is meant to address that concern.

The law requires that at an early stage in the process, agencies assess the universe of impacted small businesses and whether the rule proposed will have “a significant economic impact on a substantial number of small entities” (“SEISNSE” for short).  If not, as in the case with BLM’s fracking rule, the agency “certifies” that finding to the SBA’s Chief Counsel for Advocacy.  If a rule will have a SEISNSE, then the agency prepares an Initial Regulatory Flexibility Analysis (“IRFA”), takes comment, and publishes a Final Regulatory Flexibility Analysis (“FRFA”) in conjunction with the final rule.  

By design, an IRFA explains the reason and legal authority for the rule, the number of small businesses, organizations, or communities impacted, all recordkeeping and reporting requirements (along with the skills required to complete them), and any conflicting or duplicative rules on the subject.  It should also describe “any significant alternatives to the proposed rule which accomplish the stated objectives of applicable statutes and which minimize any significant economic impact of the proposed rule on small entities.”  The FRFA covers much of the same ground, albeit as informed by information gained during the rulemaking process.  It also must explain all steps an agency took to minimize the impacts of the rule on small businesses. 

The RFA allows small entities to challenge certifications of no SEISNSE believed to be faulty. 

It is worth noting that President Obama has also shown a similar concern for the impact of regulations on small business.  In a Presidential Memorandum issued January 18, 2011, entitled “Regulatory Flexibility, Small Business, and Job Creation,” the President stated:  “My Administration is firmly committed to eliminating excessive and unjustified burdens on small businesses, and to ensuring that regulations are designed with careful consideration of their effects, including their cumulative effects, on small businesses.” 

In a similar vein, Executive Order 13563 reflects President Obama’s commitment to ensuring that rules be based on the principle that benefits exceed costs.  He also affirmed the principle that regulation be tailored “to impose the least burden on society, consistent with obtaining regulatory objectives, taking into account, among other things, and to the extent practicable, the costs of cumulative regulations.” 

Is BLM’s Certification Based on Sound Analysis of Costs?

BLM published a 59-page economic analysis, attempting to estimate the costs of complying with the various elements of the proposed rule.  In the end, BLM summarized its findings as follows: 

For the preferred approach, the estimated costs per well stimulation is not significant when compared against the costs of drilling an oil and gas well.  The average cost per well stimulation is estimated to be about $11,833 in 2013, which represents about 0.3% of the cost drilling a well.

On that basis, the agency concluded that the rule would not significantly impact small fracking companies, and certified as much to the SBA Office of Advocacy. 

Each business will have to make an individualized assessment of the analysis and the impacts of the rule on its operations, profitability, and operating costs.  In doing this analysis, here are some questions that should be asked: 

• Did BLM adequately account for the costs of delays in projects due to new permitting procedures?
• Were the costs of collecting information, producing reports, undertaking analyses, and recordkeeping realistically estimated?
• Did BLM adequately account for existing state rules that overlap with and duplicate the proposed rule?
• Are there other costs or impacts that were not considered or properly assessed?

If you have any concerns about BLM’s economic analysis, or the impacts of the rule on your operation more generally, you would be well advised to contact your local SBA Advocacy representative and set up a meeting.  You can find your local office here, or work with the staff here in Washington, by contacting the Office of Advocacy directly. 

Our experience with Advocacy has been uniformly positive.  Its staff and attorneys have the statutory mandate and authority to work behind the scenes with federal agencies to bring the unique concerns of small businesses directly to the decisionmakers.

There is no doubt that the proposed fracking rules on public and Indian lands will have a great impact.  It is up to the public to ensure that the rules are based on a reasonable and clear-eyed assessment of the actual costs and benefits.  To ensure that is the case, the industry will have to step up and provide information it believes lacking.  It is good to know that it has an ally in this effort. 

While long on promises of coordination and consultation, the new Executive Order is short on details. Nevertheless, any efforts to help ensure that the U.S. speaks with one voice on this issue should be welcomed by industry as a means of reducing or eliminating overlapping and superfluous federal regulation. Indeed the American Petroleum Institute was very quick to jump in support of the Executive Order.

Earlier this week, the American Chemistry Council, in testimony at a Congressional field hearing in West Virginia, noted that the ethane-rich shale gas deposits found in portions of the Marcellus Shale could be a game changer for future economic growth in the U.S. ACC projects that a 25% boost in ethane supplies could generate 400,000 U.S. jobs, $132 billion in U.S. economic output and $4.4 billion in local state and tax revenue every year (read the American Chemistry Council's press release here).

Most stakeholders seem to agree that the abundant domestic natural gas supplies made available as a result of unconventional gas resources and hydraulic fracturing techniques may be a “golden goose” for America’s energy future. President Obama’s Executive Order may help ensure that federal over-regulation does not inadvertently kill it.

The TSCA Section 8 rulemaking, announced on November 23, 2011, may well have the most immediate impact on day-to-day activity. Manufacturers and processors (some of whom may be drilling companies, depending on how EPA defines the scope of the rule) will likely have to begin complying with data and other reporting obligations on hydraulic fracturing chemical and mixture use before the end of next year. Such reporting will almost certainly overlap, and potentially conflict, with the various disclosure requirements now law in most states. If they haven’t already, companies operating in multiple states should be charting each state’s disclosure requirements, and putting in place policies and safeguards to ensure compliance across the board. With respect to the TSCA rulemaking, it is critical that EPA fully hear and evaluate industry’s concerns. This will require robust participation on the part of the industry. Critical issues will be defining a workable scope, encouraging consistency with the state programs, protecting the necessary use of legitimate trade secrets and confidential business information, and limiting potential retroactive regulatory liability.

#2 Congressional Oversight

Last week, Congressman Darrell Issa (D-CA), Chairman of the House Committee on Oversight and Government Reform, sent letters to both DOE [PDF] and EPA [PDF] as part of the Committee’s ongoing oversight of the development of domestic energy resources. Rep. Issa asserted that EPA has “prejudg[ed] that hydraulic fracturing poses an environmental threat, even before the agency has completed a congressionally mandated review of the practice.” These claims are corroborated both by EPA’s premature TSCA rulemaking, and the Agency’s scientifically questionable interjection in both Dimock, PA (see e.g., Energy In Depth discussing the many problematic EPA actions at Dimock, PA and Pavillion, WY (see e.g., WY Governor Matt Mead questioning the objectivity of EPA’s Pavillion study and warning against predetermined outcomes). While elections are inherently uncertain, there is a good chance Rep. Issa will be chairing this oversight effort for several more years. As companies continue to face extreme pressure, and complex public relations environments, they should look to leverage this oversight.

#3 Clean Water Act Clues

As EPA embarks on setting pretreatment limits for wastewater generated at hydraulic fracturing operations, several clues have emerged as to where the Agency is going. EPA’s most recent comments [PDF] to New York’s revised Draft Supplemental Generic Environmental Statement (DGEIS) on Hydraulic Fracturing focused almost exclusively on levels of naturally occurring radioactivity in wastewater. EPA’s comments in 2009 [PDF], included a discussion of radioactivity in addition to total dissolved solids and metals. Notably, when similar concerns about levels of radioactivity in fracking wastewater were raised last spring in Pennsylvania, subsequent testing showed no elevated levels and no cause for concern. Regardless, EPA is committed to developing national pre-treatment standards.  Reading between the lines of the Agency’s comments in New York, industry should anticipate a focus on radioactivity, total dissolved solids, and other metals.

#4 Department of Interior

A day after the State of the Union speech, the Secretary of the Interior, Ken Salazar, announced in an e-mail statement that DOI’s new fracking regulations will focus on three areas: (1) public disclosure; (2) improving well-bore integrity; and (3) water-management plans for produced and flowback water. Juxtaposed with EPA’s schizophrenic reactions to hydraulic fracturing, Salazar and DOI appear to be taking a measured, reasoned approach. DOI’s focus seems to be appropriately limited and, at least initially, reflects an understanding of how oil and gas is extracted, where improvements may be needed, and where such improvements will actually provide public benefits in terms of risk reduction. While the upcoming DOI regulations are important, the bigger public lands/drilling issue is the time lag from lease procurement to actual production (up to a decade—as illustrated recently by Mark Green at API). Given the sizeable amount of oil and natural gas production on federal lands (roughly 30% and 38% respectively), there is no doubt that emerging new DOI regulations, and the continued debate over federal leasing, will have a large impact on the future of the industry.

The professionals in Kelley Drye’s Environmental, Energy, and Government Relations and Public Policy practice have years of experience navigating complex and time sensitive “Washington D.C.” regulatory, legislative, and litigation issues like those highlighted above for a broad swath of industrial and manufacturing clients. Feel free to contact any of the professionals affiliated with this blog should you have any questions or concerns.

As the Council recognizes, there will be those that decry government interference in the marketplace, as evidenced by the American Energy Alliance’s Thomas J. Pyle’s article on Wednesday. Regardless, the fact so many influential national security and economic leaders have formed this new bi-partisan group speaks to the potential game changing impact newly discovered shale gas resources are having on America's energy and national security policies.  The Council's formation should be welcome news for the natural gas sector and those investors concerned with creating an economically viable, domestic alternative fuels infrastructure.

It is too early to know the exact reason for the large discrepancy. For one, the precise methodologies and assumptions made by the USGS and EIA in their respective calculations are not fully understood. For example, it is unclear whether “technically recoverable undiscovered” gas described in the USGS report is the same as the “recoverable resources” noted in the EIA report. The answer to this question needs to be explored and may very well help explain the difference. Regardless, the EIA report makes abundantly clear that the estimates of shale reserves are riddled with uncertainty and assumptions “starting with the estimated size of the technically recoverable shale gas resource.” The EIA report goes on to note that the conclusions are best estimates (due to numerous uncertain technical and economic variables) and "embody many assumptions that might prove to be incorrect over the long term."  Yet, the NYT's article fails to note these statements, or acknowledge that these types of estimations are difficult, inherently uncertain, and perpetually dynamic. Indeed, EIA has already indicated it will revisit and update its estimates in light of the USGS report.

Recent discoveries of unconventional shale resources in this country have been an economic boon to several states—Pennsylvania and Texas in particular. Recently, the Marcellus Shale Coalition reported that a staggering 48,000 new people have been hired in jobs related to drilling for natural gas in Pennsylvania in the past year, and the numbers for the first quarter of 2011 are nearly double from the same time last year. On June 8, 2011 ExxonMobil announced a $1.69 billion purchase of 317,000 acres in the Marcellus Shale from Phillips Resources, Inc. and TWP Inc—a further indication of the promise the majors see in the Marcellus play.

Foreign companies are making significant investments to be part of the action. In the Eagle Ford alone, Korea International Oil Corp., China’s CNOOC, and Norway’s Statoil have collectively paid over almost $4 billion for access. In the Niobrara play, which stretches from Northeastern Colorado through Wyoming and parts of Kansas and Nebraska, China’s CNOOC paid Chesapeake over $1 billion for access and drilling rights. And just several weeks ago, Law 360 reported on multiple similar joint ventures with foreign companies in an article titled “It's A Gas: Foreign Cos. Dig The US Shale Market.”

Although the boom in unconventional resources is by no means confined to North America or the United States, a recent report by Markets and Markets states that the United States is the only active region with commercial shale gas production, and is slated to have almost 80% share of the global gas production by 2021. While challenges exist for widespread shale gas production—including not only regulatory and legislative uncertainty, but significant capital expenses associated with frack jobs—many industries are betting on a bright future for natural gas.

For example, Valero Energy Corp., one of the nation’s largest refiners, is designing new gas stations that can handle natural gas, with its first station housing natural gas dispensers to be built soon. In April, Encana Natural Gas, Inc. announced that it will provide Liquified Natural Gas (LNG) from its new mobile LNG fueling station to a fleet of Peterbilt Motors Corp. trucks that provide water hauling well services to Encana. Encana’s announcement comes as T. Boone Pickens continues to push natural gas, calling on the U.S. Government to provide a five-year subsidy for natural gas-powered trucks aimed at reducing the country’s dependence on imports. And the U.S. Department of Energy recently issued a conditional authorization approving an application to retrofit the Sabine Pass LNG Terminal in Louisiana to export LNG – raising the prospect, once thought dead, that the United States may become an LNG exporter.

Many other industries, indirectly related to natural gas and oil drilling, are also experiencing benefits. For example, the unconventional use and demand for sands used to prop open the micro-fissures in the shale are fostering boom times for mining companies specializing in high-quality silica sands. Indeed, some experts predict that demand for foundry sands will experience double-digit gains in a few short years, exceeding $7 billion by 2014. But the picture in this industry is not all rosy; the high demand for foundry sands for fracking applications has forced prices upward, resulting in higher input costs for the broader metal casting industry.

Other industries not yet directly involved in drilling operations are looking to make significant long-term investments around cheap, available natural gas supplies. Officials at Shell, which is currently completing the world’s largest gas-to-liquids (GTL) plant in Qatar, have stated that new shale discoveries in the United States may provide the supply necessary for GTL plants to become a reality in the United States (producing mostly diesel and jet fuel through the Fischer-Tropsch process). And while GTL production requires significant startup capital costs, the potential benefit in terms of reduced lifecycle greenhouse gases (GHGs) and traditional air pollutants could be a significant driver in a carbon-constrained economy.

Even though the economic activity directly and indirectly related to shale gas extraction noted above is undeniable, skeptics remain. On Sunday June 26, New York Times reporter, Ian Urbina (the same reporter that ran the three-part series in February warning of widespread environmental concerns with fracking, which has been widely discredited), ran a prominent story comparing the shale gas boom to recent financial bubbles. Energy In Depth, was quick to respond with a factual rebuttal of Mr. Urbina’s assertions, including the inescapable fact that production numbers across the country have risen steadily over the past two years as shale plays have been discovered and brought into production.

As the country struggles to climb out of a substantial economic depression, the premium on creating and preserving jobs has perhaps never been higher and is not likely to go away. There is no denying that unconventional natural gas development has been a major economic driver in many parts of the country. The large sums of investment capital, the consumption of resources such as sand and steel for drill pipe, all suggest that the fracking boom economic impacts will continue to be felt nationwide for some time to come—despite claims to the contrary.

In the absence of data comes spin and overstatement - and a reliance on advocates of one stripe or another, including scientists staking advocacy positions. None of this is a good thing.

The ball is in the industry’s court to acknowledge that there are bad actors and to move toward far deeper transparency and accountability on methods, or it will justifiably lose public faith and the prospect of stronger regulation. The shale gas rush (and a similar oil rush under way in other regions) is clearly in it[s] frontier days.

At the same time these shale reserves are being discovered, the price of natural gas has continued a steady decrease to its current price, which is hovering around $4.00 per thousand cubic feet. While a low  price may be good for consumers, including potentially attracting more electric utilities shifting to gas generation, it may prove to be too low to make widespread shale extraction economical or spur the development of advanced biofuels like gas-to-liquids. With so many variables at play, including the price of oil as impacted by world events, and legislative and regulatory pressure (both fracking-specific and climate change measures), the question of natural gas’s future role is a difficult one to answer.

For an optimistic outlook (not only in this country, but worldwide), see commentary by Jack Barnes: "Shale Gas Revolution Is Changing the Politics of Energy."  For an opposite viewpoint, see this blog post "Don't Count on Natural Gas to Solve US Energy Problems," and for a more middle of the road take see this New York Times article by Beth Gardiner "Is Natural Gas Good, Or Just Less Bad?"