Eleventh Annual Hydraulic Fracturing Symposium

Eleventh Annual

Hydraulic Fracturing

Symposium

October 14, 2021

Confidential & Proprietary ©2021 Vinson & Elkins LLP velaw.com 2

I. Opening Remarks

− Larry Nettles, Vinson & Elkins, Environmental and Natural Resources

II. Where Are We Going? Federal Resource Development Policy Under the Biden Administration

− Corinne Snow, Vinson & Elkins, Environmental and Natural Resources

III. Environmental Enforcement in the Biden Administration

− Patrick Traylor, Vinson & Elkins, Environmental and Natural Resources

IV. Litigation Developments and Future Directions

− Nick Shum, Vinson & Elkins, Energy Litigation

V. Labor Issues in a Pandemic and Post-Pandemic World

− Chris Bacon, Vinson & Elkins, Employment, Labor and OSHA

VI. What a Difference a Year Makes – 2021 Transactional Update

− John B. Connally, Vinson & Elkins, Energy Transactions and Projects

VII. Q&A

Today’s Agenda


January 2010 – June 2021

U.S. Production Trends

Source: U.S. EIA

0

2

4

6

8

10

12

14

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

CR

UD

E O

IL P

RO

DU

CT

ION

(M

MB

D)

U.S. Crude Oil Production


January 2010 – June 2021

Global Production Trends

0

2000

4000

6000

8000

10000

12000

14000

Jan

-10

Ma

r-1

0

Ma

y-1

0

Jul-

10

Se

p-1

0

No

v-1

0

Jan

-11

Ma

r-1

1

Ma

y-1

1

Jul-

11

Se

p-1

1

No

v-1

1

Jan

-12

Ma

r-1

2

Ma

y-1

2

Jul-

12

Se

p-1

2

No

v-1

2

Jan

-13

Ma

r-1

3

Ma

y-1

3

Jul-

13

Se

p-1

3

No

v-1

3

Jan

-14

Ma

r-1

4

Ma

y-1

4

Jul-

14

Se

p-1

4

No

v-1

4

Jan

-15

Ma

r-1

5

Ma

y-1

5

Jul-

15

Se

p-1

5

No

v-1

5

Jan

-16

Ma

r-1

6

Ma

y-1

6

Jul-

16

Se

p-1

6

No

v-1

6

Jan

-17

Ma

r-1

7

Ma

y-1

7

Jul-

17

Se

p-1

7

No

v-1

7

Jan

-18

Ma

r-1

8

Ma

y-1

8

Jul-

18

Se

p-1

8

No

v-1

8

Jan

-19

Ma

r-1

9

Ma

y-1

9

Jul-

19

Se

p-1

9

No

v-1

9

Jan

-20

Ma

r-2

0

Ma

y-2

0

Jul-

20

Se

p-2

0

No

v-2

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Jan

-21

Ma

r-2

1

Ma

y-2

1

CR

UD

E O

IL P

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ION

(M

MB

D)

Russia Saudi Arabia United States Source: U.S. EIA


Looking Forward

Increasing Global Oil Demand


Increasing Well Completions


January 2010 – October 2021

U.S. Rig Count v. Crude Oil Prices

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200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

20

40

60

80

100

120

Jan

-10

Ap

r-10

Jul-

10

Oct-

10

Jan

-11

Ap

r-11

Jul-

11

Oct-

11

Jan

-12

Ap

r-12

Jul-

12

Oct-

12

Jan

-13

Ap

r-13

Jul-

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Oct-

13

Jan

-14

Ap

r-14

Jul-

14

Oct-

14

Jan

-15

Ap

r-15

Jul-

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Oct-

15

Jan

-16

Ap

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-18

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Oct-

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Jan

-19

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Jan

-20

Ap

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Oct-

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Jan

-21

Ap

r-21

Jul-

21

Oct-

21

RIG

CO

UN

T

CR

UD

E O

IL P

RIC

E (

US

D)

Crude Oil Prices Rig Count Across Primary US Producing Regions Source: U.S. EIA


July 6, 2021

Energy and Gas Prices: The Biden Administration is Working on It


August 11, 2021

President Biden: Call for OPEC to Increase Production

10Confidential & Proprietary ©2021 Vinson & Elkins LLP velaw.com

Where Are We Going?

Federal Resource Development Policy

Under the Biden Administration


Areas of

Focus

Areas Where it

Could Come Up

Climate/Air

Environmental

Justice

Permitting

New Regulatory

Requirements

Enforcement

Access to Capital


Climate/Air: Permitt ing

Expectations Recommendations

More probing look into GHG emissions

Slow-downs in processing

Outside groups challenging before

agency or in court

Start the process earlier and be realistic

about the timeline

Proactively engage with agency and

outside groups

Internal assessments of data you may

need


Climate/Air: New Regulatory Requirements


EPA’s Methane Rule

SEC’s Climate Disclosure Rule

Start tracking proposed rules and

understand the operational concerns

Consider filing public comments or

otherwise engaging with the

agencies/executive branch to address

specific concerns

Understand timelines and prepare

for implementation


Facilities near low-income /

minority communities

Facilities whose emissions

could impact low-income /

minority communities

Increased Risk

Becoming targets for groups seeking to

block permits

Negative press

Slower permitting review process

Additional requirements or restrictions in

the permit

Potential challenges to the permit before

the agency or in the courts

Environmental Justice: Permitting


Environmental Justice: Permitting and Enforcement


NEPA Regulations

DOI Regulations

Enforcement Policies (EPA/DOJ)

Be proactive

Determine what EJ communities are

in your area and how your

operations might impact them

Consider legal risks during

community engagement


Environmental Enforcement

in the Biden Administration


• Quick summary of increasing EPA enforcement in

the onshore oil and gas production sector

• The thinning out of political support for past

practices

• What is the EPA doing in its enforcement actions

that poses a danger to past practices?

• What happens if one of these cases gets referred

to the Department of Justice?

• What are the opportunities right now for

companies to minimize or avoid enforcement?

Overview of Presentation

18


• The EPA is focused on emissions of volatile

organic compounds (VOCs) and methane from

upstream tank battery vapor control systems

• The EPA is using state Clean Air Act provisions to

compel reductions in vapor emissions

• Where possible, the EPA is using the Clean Air

Act’s New Source Performance Standards

applicable to onshore oil and gas production to

compel reductions in vapor emissions—these are

the NSPS Subpart OOOO and OOOOa standards

Quick summary of the EPA’s

enforcement actions

19


• Political support is thinning out for past practices

in the O&G sector

• Executive Order on Tackling the Climate Crisis at Home and

Abroad (January 27, 2021)

• Acceptance of Paris Agreement (January 20, 2021)

• Abrogates President Trump’s Executive Order on Promoting

Energy Infrastructure and Energy Growth (April 10, 2019)

• Congressional Review Act repeal of Trump Administration

“Policy Amendment” to NSPS Subpart OOOOa that removed

methane as a pollutant

• American Petroleum Institute shift on methane

Political Support is Shifting

20


• Energy Extraction National Enforcement Initiative

• 2015 Compliance Alert

• Early enforcement cases in the Obama

Administration (Noble Energy, Slawson)

• Ongoing enforcement in the Trump Administration

(PDC Energy, High Point Energy, KP Kaufman,

and Gulfport)

• Additional more recent enforcement in NM, PA,

and TX

• New owner audit program/existing owner audit

program (carrots and sticks)

What has the EPA done?

21


• Evidence of inadequate operations and

maintenance

• Evidence of inadequate vapor control system

design

• Evidence of noncompliance with SIP and NSPS

OOOO/OOOOa requirements

What is the EPA looking for?


• Factual predicate is higher-than-expected actual

emissions

• NSPS OOOO/OOOOa applicability

• Applicability of old-style and newer SIP provisions

• The previously “special” case of Texas

What are the EPA’s typical legal

claims?

23


• Representative pressurized fluid samples

• Modeling guideline

• Engineering design standard

• Vapor control system engineering

evaluation

• Vapor control system verification

What are the corrective actions the

EPA imposes?


• Preparing for post-COVID on-site inspections

• Use of information collection requests about vapor

control design prior to on-site inspections

• Overflight optical gas imaging inspections

• Training Department of Justice litigators on how to

develop these cases and conclude them through

negotiations or trial

• Expanding geographic scope of investigations

(TX, NM, PA) and planning “second passes”

through CO and perhaps ND

What is the EPA doing right now to

prepare for increased enforcement?

25


• Core injunctive remedies ($14k-$66k per facility)

• Civil penalties ($2.5k-$15k per facility, at a

minimum)

• Environmental mitigation projects ($500k-$4.5MM)

• Supplemental environmental projects ($250k-

$3MM)

When DOJ Gets Involved:

Key elements

26


• Independent settlement auditors

• Directed inspection and preventative maintenance

program

• Storage tank emission management plans

• Advanced monitoring and corrective action

• Tank pressure monitoring

• Expensive and disruptive settlement negotiations

Elaborate and intrusive compliance

assurance mechanisms

27


• Use EJSCREEN—EPA enforcement will be

• No unlit or smoking flares

• Dogged down thief hatches

• PRV/thief hatch weight calibration

• PRV/thief hatch O&M

• VRU O&M

Minimize the likelihood that your

facility will be selected for closer

attention


• Information collection request policy

• Vapor control system O&M records

• SOPs for VCS O&M

• Complete permitting/registration file

• LDAR records

• These give you a starting point for negotiating the

scope of an information request

Position yourself to avoid the most

intrusive information requests


• Informal internal audit of representative facilities,

using a “red team” approach to outside resources

• Formal audit and self-disclosure under federal or

state audit statutes/policies using outside

resources

• Consider attorney-client privilege

• Consider the danger that procedural missteps with

audit statutes/policies could disqualify the

disclosure

• Scope of audit and corrective action

Position yourself to realistically

evaluate your compliance

30


Litigation Developments and

Future Directions


• U.S. Supreme Court Declines to Hear Fracking Moratorium Case

• Climate Change Litigation Update

• Royalty Lawsuits

• Operator/Non-Operator Disputes

Overview – Lit igation Topics


• Next Energy LLC v. Illinois Department of Natural Resources

− In June 2021, the U.S. Supreme Court denied Next Energy’s petition for review of its claim that Illinois’s

burdensome fracking regulations amounted to a regulatory taking of Next Energy’s leases

− The 2013 Hydraulic Fracturing Regulatory Act imposed severe restrictions on fracking in Illinois

− Next Energy claimed that these restrictions were so onerous as to make its leases worthless

− Denied on ripeness grounds: Illinois state courts held that because Next Energy had not applied for a permit—

however expensive—it could not claim a taking

Fracking Moratoria and Takings Lit igation


• In April 2021, building on Executive Order N-79-20, Governor

Newsom directed the California Department of Conservation’s

Geologic Energy Management Division (“Cal GEM”) to initiate

regulatory action to end the issuance of new permits for

hydraulic fracturing by 2024

• California already has one of the nation’s most stringent permitting

processes for fracking

• What regulations will Cal GEM implement? Will challenges to

these laws have different result?

California Fracking Moratorium Next?

34


• Over 1,000 “Climate Change” cases pending in

U.S. courts

• Recent trend toward state-law fraud and

consumer protection-type claims, alleging

companies misled consumers about the dangers

posed by their products

• Plaintiffs typically file in state court

• No clear answer on whether state or federal

jurisdiction applies

Climate Change Lit igation Update


• BP P.L.C. et al. v. Mayor & City of Baltimore

− After the U.S. Supreme Court’s decision, the appropriate

jurisdiction for Climate Change litigation remains

unsettled

− Sued in Maryland state court, BP and 25 other energy

companies removed, arguing that fossil fuel production

involved federal law and federal officials

− Fourth Circuit affirmed remand

− U.S. Supreme Court reversed, holding that the Fourth

Circuit had to consider every ground for removal, not just

the federal-officer removal statute (28 U.S.C. §

1442(a)(1))

Climate Change Lit igation: Jurisdictional Wrangling Continues


• BlueStone Natural Resources II LLC v. Randle (Texas Supreme Court, March 2021)

− The Texas Supreme Court held that BlueStone had wrongfully deducted postproduction costs from royalties

− Pre-printed lease form language – “market value at the well”

− Lease addendum language – “Lessee agrees to compute and pay royalties on the gross value received”

− Lease addendum contained a superseding clause

− Court found that “gross value received” conflicted with “at the well” language in the pre-printed lease form such that

the lease addendum controlled

− Bottom Line: “At the well” language isn’t a trump card—a departure from the trend established by Heritage

Resources and Burlington Resources

Royalty Lit igation Update: The BlueStone case


• Nettye Engler Energy, LP v. BlueStone Natural Resources II, LLC (Texas Supreme Court)

− Last month, the Texas Supreme Court agreed to review a Fort Worth Court of Appeals decision confirming

BlueStone’s right to deduct postproduction costs from a 1/8th NPRI

− Mineral deed language – “to be delivered to Grantor’s credit, free of cost in the pipeline, if any, otherwise free of

cost at the mouth of the well”

− Petitioner’s argument – a gathering line isn’t a pipeline

− Respondent’s argument – Burlington, which held that “into the pipelines, tanks, or other receptacles” established an

at-the-well valuation point, squarely addresses this issue

− Oral argument scheduled for October 28, 2021

Royalty Lit igation Update: Another BlueStone case


• For the first time, the North Dakota Supreme Court

addressed deducting postproduction costs from oil

royalties

− On certified question from North Dakota federal court,

implicating 5 proposed federal class actions

− Lease language – “free of cost, in the pipeline to which

lessee may connect wells on said land”

− Following Texas’s lead, the North Dakota Supreme Court

held that such language establishes an at-the-well

valuation

Royalty Lit igation Update: Blasi v. Bruin E&P Partners


• Removal of Operatorship Rights

• Failure to Develop Claims

− Does RPO have a duty to drill an uneconomic well?

− Different companies view economics differently

− Develop acreage before new regulations implemented?

• What does the Contract say?

− Joint Operating Agreement

− Joint Development Agreement

Operator v. Non-Operator Disputes


Labor Issues in a Pandemic and

Post-Pandemic World


• WHAT WE KNOW: On September 9, 2021, President Biden directed OSHA to draft an Emergency

Temporary Standard (ETS) requiring all employers with more than 100 employees to require all

employees to be either fully vaccinated or tested weekly for COVID-19.

• WHAT WE DON’T KNOW:

− When will the ETS be issued and when will it go into effect?

− How will the 100-employee threshold be counted? (Enterprise-wide or site-based?)

− Will PTO be required for vaccinations, testing and recovery from vaccination side effects?

− Who will be responsible for cost of testing?

− Will religious or medical exemptions be allowed?

− What record-keeping requirements will employers have to follow?

− What will be the penalties for non-compliance?

− Will the ETS survive legal challenges?

Vaccine Mandate for Large Employers is Coming


• “No entity in Texas can compel receipt of a COVID-19 vaccine

by any individual, including an employee or a consumer, who

objects to such vaccination for any reason of personal

conscience, based on a religious belief, or for medical reasons,

including prior recovery from COVID-19”

• No private cause of action

• Maximum fine $1,000

• Preempted by federal law?

Governor Abbott Issues Executive Order GA 40


• Federal contractors must mandate vaccinations.

• Requirements go into effect on the later of December 8, 2021, or the first day

of performance on a newly awarded covered contract.

• No testing alternative but contractor employees may request exemptions for a

sincerely held belief, or a medical condition that affects their ability to receive a

vaccine.

• Covered employees and visitors must follow CDC guidance for masking and

physical distancing which are based, in part, on community transmission at a

given location.

Vaccine Mandate already applies to Federal Contractors and

Subcontractors


• General duty clause applies: All employers must provide their employees a place of employment that is "free from recognized hazards that are causing or are likely to cause death or serious physical harm."

• All employers should develop protocols to prevent the spread of COVID-19.

− Implement screening for employees and require employees to stay at home if they have symptoms.

− Conduct hazard assessments. COVID-19 exposure should be the part of the JSA process.

− Develop administrative controls (policies and work rules) to prevent exposure

• Distancing and mask requirements

• Employee training (post signs to remind employees of respiratory etiquette, masks, handwashing)

• Limit use of shared work stations

• Cross-train employees to ensure critical operations can continue during worker absence

− Develop engineering controls

I f an employer is not a federal contractor and has fewer than 100

employees, what is the employer required to do?


What a Difference a Year Makes –

2021 Transactional Update


• Setting the stage – prices

• What factors are influencing deal activity?

• What’s been happening? – deal activity

• Where do we go from here?

Market Update

Agenda


Market Update

Sett ing the Stage – Prices


Market Update

What factors are inf luencing deal activity?


Market Update



Market Update

What’s been happening? – deal activity


Market Update



Market Update

Where do we go from here?


Market Update



Questions?

Larry NettlesPartner – Environmental & Natural

Resources

Houston

+1.713.758.4586

[email protected]

Corinne SnowCounsel – Environmental &

Natural Resources

New York

+1.212.237.0157

[email protected]

John B. Connally IVPartner – Energy Transactions &

Projects

Houston

+1.713.758.3316

[email protected]

Nick Shum

Partner – Energy Litigation

Houston

+1.713.758.2109

[email protected]

Chris Bacon

Counsel – Labor & Employment

Houston

+1.713.758.1148

[email protected]

Patrick TraylorPartner – Environmental & Natural

Resources

Washington & Houston

+1.202.639.6734

[email protected]

Thank You

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Eleventh Annual Hydraulic Fracturing Symposium

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Transcript of Eleventh Annual Hydraulic Fracturing Symposium