10.15.20 - Presentation - 10th Annual Hydraulic Fracturing … · 2020. 10. 15. · &rqilghqwldo...
Transcript of 10.15.20 - Presentation - 10th Annual Hydraulic Fracturing … · 2020. 10. 15. · &rqilghqwldo...
-
Tenth Annual Hydraulic Fracturing SymposiumThursday, October 15, 2020
velaw.com │ fracking.velaw.com
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 2
I. Opening Remarks
− Larry Nettles, Vinson & Elkins, Environmental and Natural Resources
II. Hydraulic Fracturing and the Election
− Corinne Snow, Vinson & Elkins, Environmental and Natural Resources
III. Environmental Enforcement and Regulatory Update
− Patrick Traylor, Vinson & Elkins, Environmental and Natural Resources
IV. Litigation Update
− Nick Shum, Vinson & Elkins, Energy and Commercial Litigation
V. Labor, Employment and Safety
− Chris Bacon, Vinson & Elkins, Employment, Labor and OSHA
VI. Transactional Update
− John B. Connally, Vinson & Elkins, Energy Transactions and Projects
VII. Q&A
Today’s Agenda
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 3
July 2010 – July 2020
U.S. Production Trends
0
2
4
6
8
10
12
14
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
CR
UD
E O
IL P
RO
DU
CT
ION
(M
MB
D)
U.S. Crude Oil (MMbd) Source: U.S. EIA
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 4
July 2010 – June 2020
Global Production Trends
0
2
4
6
8
10
12
14
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Russia Saudi Arabia United States
CR
UD
E O
IL P
RO
DU
CT
ION
(M
MB
D)
Source: U.S. EIA
2010
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 5
OPEC + Production Reductions
Rebalancing the Market
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 6
2021 Projections
Rebalancing the Market
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 7
Election 2020
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 8
President Donald Trump
Election 2020
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 9
Election 2020
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 10
• A President cannot ban hydraulic fracturing, or end oil and gas leases onfederal lands by executive order alone.
• President Obama’s attempted six-month moratorium on pending, current,or approved offshore drilling in 2010 was tossed by a federal district courtas an unjustified “blanket, generic, indeed punitive, moratorium.”
• Any effort to ban hydraulic fracturing at the federal level would have toovercome a robust administrative record of prior determinations relating tohydraulic fracturing. For example:
− EPA 2016 final report regarding impacts to water resources deleted the draftreport’s conclusion of no “widespread, systemic impacts,” but still containsfavorable findings regarding the ability to reduce the frequency or severity ofpotential impacts in almost all cases.
− 2015 BLM rule preamble includes a detailed response to comments seeking aban on hydraulic fracturing, stating “A ban or moratorium would not satisfy theBLM’s multiple-use responsibilities under the FLPMA when regulations canadequately reduce the risks associated with hydraulic fracturing operations.”
The Limits of Executive Power
Election 2020
-
11Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com
Hydraulic Fracturing and the Election
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 12
How Do Elections Impact Federal Regulations?
Campaign Promise
Executive order
Proposed RulePublic
Comment
Final Rule
Court challenges
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 13
• Bureau of Land Management (BLM) regulates oil and gas activities on federal and tribal lands
• 245 million acres and 700 million subsurface acres
• 9% of natural gas production, 5% of natural gas liquids production, and 5% of oil production
• Obama Era Hydraulic Fracturing Rule (never in effect)
• Trump Era “Roll-Back” Rule (currently in effect)
• Challenged in federal court in California (upheld)
• Decision appealed to appellate court
Hydraulic Fracturing on Federal Land: Case Study for the Election
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 14
• No immediate changes to regulations
• Keep an eye on courts
• Federal government has limited authority on state and private land
More in-depth look: https://www.velaw.com/insights/what-will-the-election-mean-for-hydraulic-fracturing/
Election Impacts: What to Expect
-
15Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com
Environmental Enforcement and Regulatory Update
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 1616
• Overview of federal environmental enforcement
• Overview of EPA audit and self-disclosure policies
• Thoughts on the impact of the upcoming election on enforcement
Environmental Enforcement Update
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 17
• The upstream sector is covered by the EPA’s National Compliance Initiative focused on Creating Cleaner Air for Communities by Reducing Excess Emissions of Harmful Pollutants
• Settlements in this administration show continued focus on reducing VOC emissions from tank batteries
− PDC Energy (CO)
− K.P. Kauffman (CO)
− HighPoint (CO)
− Gulfport (OH)
− Previous settlements (Noble Energy (CO) and Slawson (ND))
• Ongoing investigations show continued focus on VOCs from tank batteries
Federal Environmental Enforcement
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 18
• New owner audit program (March 2019)
− Provided additional flexibility for companies that have acquired upstream assets
− Notify the EPA of intent to conduct an audit nine months after closing
− Six months (plus extensions) to correct violations of tank battery VOC controls
− Complete civil penalty mitigation
• Existing owner audit program (December 19, 2019)
− Provided significant flexibility to owners of existing assets
− Notify the EPA of intent to conduct an audit by December 18, 2020
− Six months (plus extensions) to correct violations of tank battery VOC controls
− Complete civil penalty mitigation
• Recent audit memoranda of understanding with states
− WY (2018), ND (2019), UT (2020)
Audit and self-disclosures are highly favored
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 19
• In a second Trump term:
− Continued enforcement in partnership with some states
− Continued enforcement where states are not acting in the face of what the EPA believes are clear violations
− Continued deferral to states that are taking some action, though perhaps not as vigorously as the EPA would perhaps prefer
• In a Biden administration:
− Same approach as Trump for the first two bullets, above
− Likely less deference to states that are not taking an aggressive enough stance toward VOC reductions at tank batteries
• These cases are not easy to develop, so the number of cases will likely not be high, but once EPA gets a company in its sights, the case is very painful
Thoughts on election impact
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 2020
• Navigable Waters Protection Rule (the WOTUS replacement)
• Uinta and Ouray Reservation federal implementation plan proposal
• Produced water studies and very early planning
• OOOO/OOOOa technical and policy final rules
− Policy rule shift to not regulating methane
− Technical rule changes to alternative means of emission limitations for fugitive monitoring and a revised applicability approach to calculating the 6 ton per year regulatory threshold
Environmental Regulatory Update
-
21Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com
Litigation Update
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 22
• Trespass and the Rule of Capture
− Pennsylvania Supreme Court’s Briggs decision
• Royalty Developments
− “Market value at the well” language superseded by addendum
• Purchase and Sale Agreement Disputes
− Binding agreement by email?
• Joint Venture Disputes
− Operatorship and development decisions
Litigation Update
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 23
• Protects producer from liability for draining migrating oil and gas from across lease lines
Rule of Capture
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 24
• Pennsylvania intermediate court of appeals said:
− Rule of Capture does not protect operators fracing wells because the fractures may propagate across lease lines
• Hydraulic fracturing was “forced extraction” of gas in trapped areas
• Conflicted with Texas Supreme Court’s Coastal Oil v. Garza Energy Trust decision
Briggs v. Southwestern Energy
Property Line
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 25
• Held: the Rule of Capture applies to hydraulic fracturing
− Rule of Capture protects producers from liability for minerals extracted by fracking, so long as there has been no physical trespass
• The Court left open the possibility of liability where plaintiffs can prove actual physical invasion
− Inconsistent pleadings
− Insufficient record
− Expert evidence
• Declined to hold that fracking-related subsurface invasions are not per se trespasses
Pennsylvania Supreme Court’s Decision
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 26
• Under Texas law, royalty clause that specifies “market value at the well” valuation point permits lessee to deduct post-production cost from royalty, even if no-deduct clause in same lease (Heritage Resources)
• BlueStone Natural Resources II LLC v. Randle et al., 601 S.W.3d 848 (Tex. App.—Fort Worth, 2019)
− Lease addendum language – “Lessee agrees to compute and pay royalties on the gross value received”
− Lease addendum contained superseding clause
− Court found that “gross value received” conflicted with “at the well” language in pre-printed lease form such that addendum controlled
• But addendum did not specify point of valuation, so “at the well” valuation should have remained operative? Is there really a conflict?
Royalty Litigation Update
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 27
• BlueStone decision seems inconsistent with general trend that once an “at the well” valuation point is set in a lease, later no-deduct language is surplusage (Heritage Resources, Burlington)
• BlueStone also currently conflicts with GLO v. Sandridge Energy decision (El Paso Court of Appeals)
• Conflict between “at the well” and “gross value received”?
• Oral Arguments heard in September (via Zoom)
• Bottom line – Specific lease language matters
Texas Supreme Court Reviewing BlueStone
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 28
• Variety of disputes can arise once PSA signed and after Closing
− Breach of representations/warranties
− Post-Closing purchase price adjustments (including title and environmental defect issues)
− Indemnity disputes
• But did the Parties reach a binding deal in the first place?
− Can result in significant, costly litigation
− Can email exchange constitute a definitive agreement?
Purchase and Sale Agreement Disputes
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 29
• Court held that email exchange between parties in a $230 million oil and gas deal did not constitute a final sale agreement
− Chalker Energy Partners III, LLC v. Le Norman Operating Partners, 595 S.W.3d 668 (Tex. 2020)
• Binding agreements can be reached over email (or series of emails)
• In Chalker, however, Confidentiality Agreement signed prior to bidding process created a condition precedent for an enforceable contract that the email exchange did not satisfy
• Key takeaways:
− Specific attention must be paid to what email agreements will and will not accomplish
− Parties have the right to define the sale process (winning bid v. executed agreement)
Texas Supreme Court’s Chalker Energy Decision
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 30
• When expectations are not met, disputes have been known to follow
• Joint Operating Agreements and Joint Development Agreements
• Operatorship and the right to dictate development decisions
Joint Venture Disputes
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 31
• Parties entered into Joint Development Agreement (“JDA”) in connection with joint purchase of $2.3 billion of Anadarko’s operated Eagle Ford shale assets
• JDA created Operating Committee framework with yearly Budget and Work Plans to be approved by Operating Committee
− Completion designs were key component of Approved Budget and Work Plan
• In 2018, Sanchez, as operator, deviated from approved Budget and Work Plans by completing wells the way that they wanted
• Gavilan claimed Sanchez was in Default under JDA
Gavilan Resources v. Sanchez Energy
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 32
• After six-day virtual trial, the Court found Sanchez in Default by materially deviating from approved Budget and Work Plans
• Some key issues litigated:
− Reasonably Prudent Operator defense
− Materiality of completion designs
− Course of performance
Sanchez in Default under JDA
-
33Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com
Labor, Employment and Safety
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 34
1. The Risks of Employee Exposure
2. The Risks of Legal Liability
3. The Risks of OSHA penalties
4. Reporting Obligations
COVID-19 Concerns for the Fracking Industry
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 35
1. Conduct hazard assessments. (COVID-19 exposure should be a part of the JSA process)
2. Develop protocols
− www.osha.gov/SLTC/covid-19/oil-gas.html
− Engineering Controls
− Administrative Controls
− Safe Work Practices
3. OSHA’s guidelines
4. Waivers?
What should employers do?
-
36Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com
Transactional Update
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 37
• Setting the Stage
• Upstream deal activity summary
• Restructurings
• What types of deals are we seeing?
Tenth Annual Hydraulic Fracturing Symposium
Agenda
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 38
Setting the Stage
World Liquid Fuels Production and Consumption
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 39
Setting the Stage
Surplus Crude Oil Production Capacity
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 40
Setting the Stage
Crude Oil and Natural Gas Production
Source: U.S. Energy Information Administration, Drilling Productivity Report, September 2020
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 41
Setting the Stage
Crude Oil Front-Month Futures Prices
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 42
Setting the Stage
Natural Gas Prices and Year-Over-Year Change in Inventory
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 43
Upstream Deal Activity Summary
Upstream M&A Deal Value and Count, August 2019 – August 2020
Figure 1: Upstream M&A Deal Value and Count, August 2019 – August 2020
Source: GlobalData, Upstream M&A Deals Review – August 2020
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 44
Upstream Deal Activity Summary
Upstream Oil & Gas Deal Share and Value, YTD 2020
Figure 3: Upstream Oil and Gas Deal Share and Value by Terrain, YTD 2020
Source: GlobalData, Monthly Upstream M&A Deals Review – August 2020
Figure 2: Upstream Oil and Gas Regional Deal Share and Value, YTD 2020
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 45
Upstream Deal Activity Summary
Upstream Oil and Gas North America Deal Value and Count, August 2019 – August 2020
Source: GlobalData, Monthly Upstream M&A Deals Review – August 2020
Figure 4: Upstream Oil and Gas North America Deal Value and Count, August 2019 – August 2020
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 46
Upstream Deal Activity Summary
Upstream Oil and Gas North America Top 10 Buyers, March 2020 –August 2020
Figure 5: Upstream Oil and Gas North America Top 10 Buyers, March 2020–August 2020
Source: GlobalData, Monthly Upstream M&A Deals Review – August 2020
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 47
Upstream Deal Activity Summary
Upstream Oil and Gas North America Top 10 Sellers, March 2020 –August 2020
Source: GlobalData, Monthly Upstream M&A Deals Review – August 2020
Figure 6: Upstream Oil and Gas North America Top 10 Sellers, March 2020–August 2020
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 48
Upstream Deal Activity Summary
M&A in Gulf of Mexico, Number of Deals
Source: GlobalData, M&A Activity in US – August 2020
Figure 8: M&A in Gulf of Mexico, Number of Deals, Q3 2019 – YTD Q3 2020
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 49
Restructurings
North American Upstream Bankruptcy Debt
Source: Haynes & Boone Oil Patch Bankruptcy Tracker and Mercer Capital Research
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 50
Restructurings
2015 – 2020 Cumulative North American E&P Bankruptcy Filings
Source: Haynes & Boone Oil Patch Bankruptcy Monitor
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 51
Restructurings
2015 – 2020 E&P Secured and Unsecured Debt by Fil ing Location
Source: Haynes & Boone Oil Patch Bankruptcy Monitor
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 52
Restructurings
List of North American Oil and Gas Producer Bankruptcies*January – August 2020
Source: Haynes & Boone Oil Patch Bankruptcy Monitor
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 53
• Corporate
• Restructuring context
• Minerals
• Royalties
• VPPs
Tenth Annual Hydraulic Fracturing Symposium
What types of deals are we seeing?
-
Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 54
Questions?
Larry NettlesPartner – Environmental & Natural Resources
Houston
+1.713.758.4586
Corinne SnowCounsel – Environmental & Natural ResourcesNew York
+1.212.237.0157
John B. Connally IVPartner – Energy Transactions & ProjectsHouston+1.713.758.3316
Nick Shum
Partner – Energy Litigation
Houston+1.713.758.2109
Chris Bacon
Counsel – Labor & Employment
Houston
+1.713.758.1148
Patrick TraylorPartner – Environmental & Natural Resources
Washington D.C. & Houston
+1.202.639.6734
-
Thank You
velaw.com │ fracking.velaw.com