produced water | session xii - david muchow

1

Fossil Fuel Produced Water: Asset or WasteAtlantic Council, June 24-25, 2013

Washington, DC

Increasing Investor and Public Support for Fracking

The Real Risks, Truth, and Public Trust

______________________________________________________________________________________

David J. MuchowPrincipal, Muchowlaw

David J. Muchow, PLC, [email protected] - 703.625.4115 - 4449 N. 38 St. Arlington, VA - 22207

2

Getting some questions and answers starts with:

• Finding and asking the right questions• Seeing what facts are there, where are the gaps;

getting more if necessary• Fairly evaluating the facts not running from them • Weighing the results• Communicating them so that they’re understood and

can be appropriately acted upon.


David MuchowPrincipal, Muchowlaw

• Attorney and Consultant – Corporate Attorney – Transactions, M&A, Due Diligence• Energy Association Counsel & Executive (NGSA, AGA, NRECA, BCSE) Oil, Gas, Renewables, Government Relations• Tech, Co. CEO, Serial Entrepreneur• Investor, Mutual Fund VP, Tech. Development• Former DOJ Prosecutor, Capitol Hill, NSC, OMB• International - NSC, International Development, Finance

3

Fracking – Risks, Truth, and Public Trust – Focus: fracking and operational issues. Some Questions::::

• If we assume that more gas is good and fracking provides that, then:• What are the real risks of fracking? • Investor and public support for fracking depends on TRUST.• TRUST is built on willingness to listen to and understand real facts not selected arguments• What are the facts about the risks?• How can we get enough facts about company proprietary operating processes, (some in confidentiality agreements & litigation settlements) to increase that trust to benefit investors and the public – while being fair to the companies?


4

Getting some questions and answers starts with:

• Finding and asking the right questions• Seeing what facts are there, where are the gaps;

getting more if necessary• Fairly evaluating the facts not running from them • Weighing the results• Communicating them so that they’re understood and

can be appropriately acted upon.


5

Investor’s Score Sheet for a Fracking Business – Similar to Public’s and Government Officials’ Score Sheet

• Market Forecast– Very Positive• Resource Base: EIA: 482 Tcf. unproved, technically

recoverable shale gas resources. 1 Tcf heats 15M homes for one year (100B kWh) 1.

• Sector growth – Rapid – e.g, Marcellus Shale daily production doubled during 2011. 2.

• Size of Market – very positive• Replicable? – Yes - US and internationally– with caveats

• Quality of Management and Operators

• Is it their first rodeo?• Are they hit and run players – leaving a mess behind?• Stand by you in crisis or run for cover?• Sufficient financial resources to handle the job right?• Expertise? David J. Muchow, PLC, [email protected] - 703.625.4115 - 4449 N. 38 St. Arlington, VA -

22207

6

Before Launching the Project What is Your Operator’s Performance Record?


7

Before Launching the Project What is Your Operator’s Performance Record?


8

Expertise – does the target company really understand things like this?

Clean Water ActSec. 402 Analytical Methods Sec. 316(b) Cooling Water IntakesSec. 304(m)(1)(B) and (C) Effluent Limitations GuidelinesSec. 402 National Pollutant Discharge Elimination System (NPDES) Rules

Concentrated Animal Feeding Operation (CAFO) Final RulePretreatment Streamlining Rule

Sec. 402 NPDES Permit ProgramIndividual PermitsGeneral Permits

Sec. 404 Regulations Discharges into the Waters of the United States, etc. Sec. 405 Sewage Sludge (Biosolids)

Sec. 303 (d) Total Maximum Daily Load (TMDL) and Impaired Waters Rules Sec. 101(a) Water Quality Standards and Implementation PlansSec. 303 Water Quality Standards Regulation, CFR Title 40 Part 131Sec. 303 Water Quality Guidance for the Great Lakes System: CFR Title 40 Sect. 401, Permits and Licenses Certification

ETC., Etc. Etc. Etc…… David J. Muchow, PLC, [email protected] - 703.625.4115 - 4449 N. 38 St. Arlington, VA -

22207

9

Financial goals • Vary with Type of Investor

• Strategic• Vertical/Horizontal Growth• Tax Benefits, etc.

• Investor: All I Want is: Guaranteed Rewards with Minimal Risk !• ROI: x return – at least as good as sector average• Money back in x years – payout period

• Risks - Don’t like those – they scare me – especially risks I don’t know about or understand.

• PR Potential Risk• Small incident but potential big story with legs • My pony – what’s in my Water?• Problems can have Long Tail - Gas Works Park – Seattle, MGP Opened

1975 David J. Muchow, PLC, [email protected] - 703.625.4115 - 4449 N. 38 St. Arlington, VA -

22207

10

• Political Uncertainty – More Regulation/Legislation - Closely Related to PR Risk Here’s what Public Sees – What’s the Truth?

• Risk Reduction: Energy Policy Act of 2005 – excluded hydraulic fracturing from “underground injection,” effectively exempting the process from the Safe Drinking Water Act (SDWA).3.

• Potential Risks: Fear of Federal, State, Local Legislation, Regulation (a few random examples):

• House Energy and Commerce Comm. 2011 finding – companies use over 2,500 fracturing products with 750 chemicals and components – 29 known or possible carcinogens; 1) regulated under Safe Water Drinking Act (SDWA) for risks to human health, or 2) listed as hazardous air pollutants under the Clean Air Act. 4. Contra: maybe only very few chemicals used and highly diluted.


11

• DOE Report – 2011 Recommendations on fracking “to avoid real risk of serious consequences.” 5.

• Dept of Interior – 2012 proposed rule requiring companies to disclose fracking chemicals on public and Indian Lands.• EPA Standards - 2012, for harmful air pollution from oil and natural gas production – first federal air rules for fracking

natural gas wells. • DOI – 2012 proposed rule requiring companies to disclose fracking chemicals on public and Indian Lands.6.

• EPA Standards - 2012 for harmful air pollution from oil and natural gas production – first federal air rules for fracking natural gas wells.7.


Potential Risks (cont’d.)

12

•Potential Risks (cont’d.) • State and Local Action: Many state, local bans (sample only):

NY: State legislation and 20+ town bans; 60+ temporary bans

Ohio: Earthquake concerns halt a drilling operation. WY: First state to implement regulations requiring disclosure

by fracking operators of the chemicals used in their wells. DE River Basin Comm.: Draft regulations for increased

bonding and financial assurance requirements for gas wells.VT : first state to ban hydraulic fracturing. But VT is outside the

boundaries of Marcellus Shale and didn’t produce any gas from 1960 to 2009.

Gas industry: NGPA 1978 - still continued fear of reregulation in competition for the utility market – some utilities preferred to stay w/coal and pay hundreds of millions more for pollution controls than to grow with cleaner natural gas.


13

A Cactus Trying to Describe the Interplay of Federal, State and Local Drilling Legislation & Regulations


14

• Potential Operating Risks/Questions• Fracking Fluids – Vary, but can be 95% water, 4.5% sand, .05%

chemicals – some chemicals are known carcinogenics – others can produce various health problems.

• Things can happen when operating at 15,000 psi and 100bbls/min.

• Hazardous chemicals in fluids – bringing fluids to the surface;

• Surface water pollution and run off• Clean up• Aquifer damage - hard to clean up

• Air Pollution – diesel or gas emissions from compressors, rigs, pumps, trucking, etc. Total well to burner emissions for fracking can be 3.5%-12% higher than for conventional gas production.• Subsidence – Sink Holes and Other• Water Consumption – Typical 1.2m – 3.5m gal./well –large projects up to 5m gal. More when refractured several times. Average well 3-8M gal. over its lifetime.8.

• Seismic – micro earthquakes – Alabama to Montana: 2009: 50 quakes 3.0 or greater; 2011: 134 quakes.


15

• Potential Operating Risks/ Questions (Cont’d.)

• Radiation – flowback (wastewater) – could contain uranium, radium, radon, thorium

• Methane Releases – Wyoming 2006, 7m cu. ft. of gas released from blown well

• Taxing Policies


16


• Spills, Chills and Litigation - Causes of Action Could Include:• Violation of Federal, state, local laws• Private nuisance• Strict Liability• Breach of Contract• Fraudulent Representation• Gross Negligence, etc., etc.

.

• Mitigating the Risk • Identify Specific Operational,

Technology, and other Needs and fix them. Just do it!

• Contracting Away the Risk to Others - who assumes what risk in the contracts?

• Insurance• Legislation to Limit Major Liabilities? • Are potential liabilities adding too

much to the cost of projects?

17


• Financial Risk• What’s the market competition?• What could happen to my price assumptions?

• Technology Risk• Will my technology become obsolete? • Solyndra – solar panels $8/W to $0.75 cents or less in a few

years• Will the new technology work?• The finding technology on the production side – 3D seismic,

fracking progress has been dramatic . What else is needed to make other operations more efficient?

• Customer Resistance: Often the customers prefers what they’ve used for years vs. more efficient equipment not fully vetted.

18

Technology Risk: “I remember you. You’re the guy that sold me this moat! (New Yorker May 2013)


19


Conclusion: Building Trust is Essential to Enhance Support From Investors, the Public and Public Officials.

• Built Trust with Truth. But how can we get more of that?

• Balance Disclosure with Company’s Proprietary Information Needs .

• Disclosure: Very fact specific, how critical it is to operations, third party agreements preventing disclosure, etc.

• Some companies may be better off disclosing a few secrets, ending unfounded rumors, showing industry leadership, getting more public and investor support and avoiding more regulation. Virtuous Circle: More disclosures could lead to best practices and better operations, less risk, and more support .

• Companies & Opponents: Check Your Facts & Don’t Over Play Your Arguments.

• Companies: Stay Ahead of Problems. Acknowledge Problems Quickly; Don’t let the Problems Control you.

20

• If Better Operating Practices or Technology is Needed, let’s Focus more on that and not so much on Legislation, Regulation and Litigation.

• Better Federal, State, Local Coordination on Regulation and Right Amount of it.

• Industry Associations Should Lead : • Continue to Develop Appropriate Industry Standards that Reduce the Risks from Bad Operators• Water + Oil/Gas + Technology Companies/Assns. work Together w/Govt. Officials

• Companies Should Continue to Provide Appropriate Information to the Public – More if Necessary.

• Finally, CEOs Need to be the Public Face of the Company – Don’t Hide. Lead.

The end David J. Muchow, PLC, [email protected] - 703.625.4115 - 4449 N. 38 St. Arlington, VA -

22207

Conclusion Cont’d. Building Trust is Essential to Enhance Support From Investors, the Public and Public Officials

21

Footnotes

1. EIA Annual Energy Outlook 2012 Early Release Rept, 9, (Dec 1, 2011)

2, Id.

3, EPAct ’05, sec. 322, Pub. L. 109-58 (42 U.S.C. Sec. 300h). Some argue that that’s not the case.

4. Chemicals Used in Hydraulic Fracturing, House Comm. on Energy and Commerce at 1,

April 2011.

5. SEAB, Shale Gas Production Subcommittee Second Ninety Day Report, at PP 7-9 (Nov. 18. 2011),

http://www.shalegas.energy.gov/resources/111811_final_report.pdf.

6. Interior Releases Draft Rule Requiring Public Disclosure of Chemicals Used in Fracturing on Public

and Indian Lands, DOI (May 4, 2012).

7. EPA Issues Updated, Achievable Air Pollution Standards for Oil and Natural Gas, EPA (Apr. 18,

2012).


produced water | session xii - david muchow

Education