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December 24, 2012
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The Interior Department's Bureau of Land Management (BLM) said it conducted 31 onshore oil and natural gas auctions in fiscal year (FY) 2012, generating $233 million for U.S. taxpayers. In the FY 2012 lease sales, BLM estimated that it received bids on more than 1.4 million acres of public land in 1,707 parcels. It offered 2,315 parcels of land (covering six million acres) during the year, which is 32% more than in 2011 and 41% more than in 2010. The largest onshore oil and gas sale during FY 2012 was held in Billings, MT, in which 59 parcels covering 14,762 acres of public land brought in more than $36 million at an average price of $2,437/acre. BLM has scheduled 33 oil and gas lease sales in FY 2013, including in California, Colorado, the eastern states, Montana, New Mexico, Nevada, Utah, Wyoming and Alaska. Revenues from domestic output on public lands and federal offshore areas, totaling more than $12 billion this year, are shared among federal, state and tribal governments and represent one of the largest nontax sources of U.S. government funds. Revenue generated by BLM's onshore parcels has more than tripled in the past three years, compared to the last 25 years, the agency said. Since 1988, the average price paid per acre was $55, while over the past three years the average has climbed to $210/acre. Moreover, the percentage of leases protested declined in FY 2012, continuing a trend that began in 2009. Protests were lodged on fewer than 18% of the parcels offered for sale during the year, the lowest percentage since 2003.

Environmentalists are challenging the Interior Department's final 2012-2017 oil and natural gas leasing plan for Outer Continental Shelf (OCS), which focuses primarily on the Gulf of Mexico (GOM) and potentially offshore Alaska. Sante Fe, NM-based Center for Sustainable Economy (CSE) filed a lawsuit in the U.S. Court for the District of Columbia Circuit, arguing that an incomplete and flawed economic analysis led the Bureau of Ocean Management (BOEM) to rush ahead with new offshore lease sales that may not be economically justified in violation of the National Environmental Policy Act, Outer Continental Shelf Lands Act and Administrative Procedure Act. The lawsuit contends that the BOEM has subjected the American public to a higher risk of catastrophic spills while failing to maximize benefits from lease sales. The final OCS plan, released in June, is the first OCS program to be issued since the blowout of the deepwater Macondo well (see NGI, July 2). BOEM proposes 15 lease sales in six offshore areas, three of which are in the GOM, including the Western and Central GOM, and the portion of the Eastern GOM not currently under a Congressional moratorium. The program also has scheduled three potential lease sales in offshore Alaska: Cook Inlet, Chukchi Sea in 2016 and Beaufort Sea. No sales are scheduled for the Atlantic or Pacific coasts.

Colorado U.S. District Court Judge Richard Matsch has rejected a proposed settlement between the U.S. Department of Justice (DOJ) and two producers over alleged rigged bidding in a government lease sale, saying the punishment did not fit the crime and made clear that a $550,000 fine was inadequate, calling it a "slap on the wrist." The settlement reached in February, between DOJ and Gunnison Energy Corp. and two SG Interests Ltd. entities required the companies to pay the fine for antitrust and False Claims Act violations related to an alleged noncompete agreement in a 2005 lease sale by the Bureau of Land Management (BLM) in Colorado. In refusing to approve the settlement, Matsch said the producers had gamed the BLM leasing process and exhibited "unrepentant arrogance." Nevada explorer Buccaneer Energy Corp. filed a complaint against Gunnison and SGI alleging that it was blocked from obtaining takeaway capacity it needed in western Colorado by the producers' control of gas pipelines in the area.

The Pennsylvania Public Utility Commission (PUC) voted unanimously to clarify several portions of Act 13, the state's Marcellus Shale law, as to how it pertains to levying an unconventional natural gas drilling impact fee. Against the arguments of Anadarko Petroleum Corp. and Talisman Energy Inc., the PUC ruled that setting conductor pipe triggers the impact fee, a review of wells reclassified from horizontal to vertical is not necessary, and the impact fee will cease one calendar year after a well is plugged. The PUC also said budget reports from local governments receiving money from the impact fee are due every year by March 1.

The Federal Energy Regulatory Commission has issued a certificate to Dominion Transmission Inc. (DTI) to expand its pipeline and storage system in Maryland, Ohio, West Virginia and Pennsylvania that is to provide an additional 115,000 Dth/d of firm transportation, 7.5 Bcf of firm storage capacity and increase system-wide maximum storage withdrawal by 125,000 Dth/d. The $112 million project calls for building the 16,000 hp Myersville Compressor Station and a 30-inch diameter suction and discharge pipeline in Frederick County, MD; a 3,550 hp Mullett Compressor Station and associated pipeline facilities in Monroe County, OH; and installing replacement pipeline facilities and ancillary equipment at the existing Sabinsville Storage Station in Tioga County, PA. The Commission approved the project over a number of objections [CP12-72]. "All the proposed capacity has been subscribed under long-term contracts, demonstrating the existence of a market for the project," and it will have "minimal adverse effects" on the economic interests of existing shippers, other pipelines and their captive shippers, the agency order said. The order noted that "there is no indication in the record that any of the customers that have subscribed to the capacity created by the proposed facilities contemplate using that capacity to export natural gas."

Transcontinental Gas Pipe Line's (Transco) request to place into service some of its Mid-Atlantic Connector expansion facilities to meet the growing demand for natural gas in Virginia, Maryland and Washington, DC, has been approved by the Federal Energy Regulatory Commission. The Williams pipeline may start up service on the Bull Run loop and replacement in Prince William and Fairfax counties, VA, and install a 3,550 hp internal combustion-driven compressor unit at Compressor Station 165 in Pittsylvania County, VA [CP11-31]. The project, approved in July, adds 142,000 Dth/d of firm service; Transco plans to file in 1Q2013 for authorization to place into service the remaining project facilities, which include a 33,000 hp electric motor-driven compressor unit and replacing an existing compressor at Compressor Station 175 in Fluvanna County, VA, resulting in a net addition of 15,400 hp at Station 175. Transco also has proposed expanding to serve gas demand in Virginia and other markets. The Virginia Southside Expansion Project would provide 270,000 Dth/d of incremental firm transportation to Virginia Power Services Energy Corp. Inc. and Piedmont Natural Gas Co. Inc. It would involve the construction of about 91 miles of 24-inch diameter pipeline facilities along Transco's existing South Virginia Lateral "A" in Virginia's Pittsylvania, Halifax, Charlotte, Mecklenburg and Brunswick counties; about seven miles of greenfield pipeline to extend to Virginia Electric and Power Co.'s proposed power station in Brunswick County; and a compressor station for two 10,915 hp gas turbine compressors. The cost is estimated at $298 million.

Moody's Investor Service has changed its outlook for Rockies Express Pipeline LLC (REX) from "stable" to "negative," citing concerns over a possible decline in the natural gas pipeline company's earnings in late 2014 and its long-term competitiveness. The credit ratings analyst affirmed at "Ba1" REX's corporate family rating. Moody's said REX's competitive position would be adversely affected by increasing gas production in the Marcellus Shale, and it said it was concerned that $500 million of the company's debt is scheduled to mature in July. Last month Tallgrass Energy Partners LP paid $1.8 billion to purchase Kinder Morgan Energy Partners LP's (KMP) 50% interest in REX and other assets (see NGI, Nov. 19). Including REX's debt, the deal is worth an estimated $3.3 billion. Subsidiaries of Sempra Energy and Phillips 66 each own a 25% stake in REX (see NGI, Aug. 13).

Republican leaders in the Ohio General Assembly may give some consideration to Gov. John Kasich's proposal to impose severance taxes on on oil and natural gas output in 2013, after declining to do so in 2012, according to a spokesman for Ohio House Speaker William Batchelder. Last March, Kasich proposed taxes, with the revenue passed along in the form of a personal income tax cut; the measure was never taken up (see NGI, March 26; March 12). Kasich's plan would have taxed unconventional wells at a rate of 1.5% of gross receipts for the first year. Producers that didn't recoup their investment in the first year could apply to extend the 1.5% rate for a second year, but otherwise they would pay a standard rate of 4% of gross receipts annually for the remainder of the life of the well (see NGI, March 19).

In its Fall 2012 North American Natural Gas Market Outlook, which Navigant publishes twice a year, analysts see changing demand patterns emerging, as well as higher expectations for liquefied natural gas (LNG) exports. Most of the projected growth over the medium term is forecast to follow increased coal-to-gas substitution in the power sector over the next five to seven years. Gas use in the power generation sector is forecast to increase 55% to 44.8 Bcf/d in 2035 from 28.9 Bcf/d in 2012. A 37% increase in total North American gas demand is projected by 2035 to 104.6 Bcf/d from 76.4 Bcf/d. A "modest revival" is expected in the industrial sector, including petrochemicals, which should stimulate gas demand to 34 Bcf/d by 2035 from 24.7 Bcf/d this year. Navigant also has a more optimistic view on future North American LNG exports, with a projected total of 6.8 Bcf/d by 2020.

Once a high-flying global merchant power plant developer/operator, Edison Mission Energy (EME) crash landed with a Chapter 11 bankruptcy filing citing "depressed energy and capacity prices and high fuel costs affecting coal-fired generation plants." EME said it had reached an agreement parent Edison International (EI), and the majority holders of its $3.7 billion in debt, subject to approval of the U.S. Bankruptcy Court for the Northern District of Illinois in Chicago. EME said operations would continue throughout the bankruptcy process in 11 states where it has 43 generation sites involving wind, natural gas, biomass and coal.

The New York Independent System Operator (NY-ISO) said it expects to operate "in an environment of expanded dependency on natural gas-fired generation, renewable generation and retirements of less efficient generation" over the next five years, according to its 2013-2017 Strategic Plan. Central to its plans through 2017 is an initiative to expand gas-electric coordination, including increasing NY-ISO Control Room visibility "into the operations and maintenance of the gas pipeline system serving New York generation," NY-ISO said. The grid operator would also seek to enhance maintenance coordination between gas and electric systems, and initiate an interregional gas/electric study to examine the impacts of natural gas expansion on bulk power systems. And NY-ISO said it would develop a market design for electric energy storage "to address generator intermittency and gas pipeline contingencies." NY-ISO said it envisions "developing a shared understanding of regional gas delivery constraints for power generation as well as a commitment to address them collaboratively."

Statoil ASA has snapped up another 70,000 net acres in the Marcellus Shale for $590 million in cash, giving it full or joint partnership in close to 750,000 net acres in the play. Statoil plans to operate the leaseholds, which it acquired from Grenadier Energy Partners LLC, PetroEdge Resources II LLC and Protege Energy II LLC. A gathering system is included in the purchase, which has been completed.

Gulfport Energy Corp. plans to acquire 37,000 net acres in the Utica Shale in eastern Ohio from Windsor Ohio LLC, an affiliate of Wexford Capital LP, in a transaction valued at $372 million. The Oklahoma City-based company also said that in 2013, it plans to spend $415-425 million on capital expenditures, with production of around 7.6-7.9 million boe, averaging 20,822-21,370 boe/d. Most of its 2013 spending is to be in the Utica Shale, at $347-351 million. The company's position in the Utica will increase to about 137,000 gross acres (106,000 net).

The petrochemical industry in the United States is poised for a "spectacular comeback," thanks to an abundant supply of feedstock from shale reserves, industry analysts with GlobalData said in a 62-page report. The firm's petrochemical research group found that operators are targeting liquids-rich areas of Eagle Ford, Barnett, Bakken and Marcellus shales. Natural gas liquids production in the United States increased from 620 million bbl in 2005 to 809 million bbl in 2011. Ethane production rose during that time frame, from 236 million bbl to 338 million bbl.

Sempra Energy's Cameron Interstate Pipeline LLC has applied to loop a 21-mile segment of its gas pipeline system in Hackberry, LA, to accommodate liquefied natural exports (LNG). Cameron plans to build 21 miles of 42-inch diameter pipeline that would parallel existing pipeline and extend from Florida Gas Transmission and Trunkline Gas. The expansion would increase the firm capacity of Cameron's facilities to 2.35 Bcf/d. Sempra has applied with the Federal Energy Regulatory Commission to construct LNG export facilities at Cameron (see NGI, Dec. 17).

Royal Dutch Shell plc has dropped plans to develop coalbed methane in British Columbia (BC) and instead will focus on other gas opportunities following the provincial government's decision to ban natural gas and oil exploration in the Klappan, an aboriginal area in the northern part of the province. BC authorities said they plan to issue no more drilling leases in the Sacred Headwaters of the Klappan, a Tahlta First Nation community, which had led to an eight-year fight to prevent energy development. Shell agreed to relinquish its leases in the region and plans to use an estimated US$20.3 million in royalty credits to build a water recycling plant at its Gundy natural gas field.

Scotland-based oilfield services provider The Weir Group plc has acquired its third U.S.-based unconventional operator in a little more than a year with the purchase of El Reno, OK-based Mathena Inc. Initially Weir would pay $240 million, with deferred payments of up to $145 million over two years, "contingent upon meeting profit growth targets." The El Reno, OK, operator provides pressure control rental equipment and services for onshore oil and gas drillers, supported by 12 service facilities in unconventional U.S. basins. In January Weir bought Dallas-based Novatech LLC; two months earlier it acquired Houston's Seaboard Holdings Inc. (see NGI, Jan. 30; Dec. 5, 2011).

Total Gas & Power North America Inc. agreed to buy the equivalent of 91.250 billion Btu of liquefied natural gas (LNG) annually plus 13.5 billion Btu of seasonal volumes when train five operations begin at the Sabine Pass Liquefaction LLC project in Louisiana, representing about 2 million tonnes/year (mtpa) of 4.5 mtpa of the train's nominal capacity, project developer Cheniere Energy Partners LP said. Total would buy LNG on an free on board basis for prices indexed to the monthly Henry Hub price plus a fixed component. The 20-year agreement has an extension option of up to 10 years. Deliveries could occur as early as 2018.

BP plc plans to begin drilling the first of 10 appraisal wells in Trumbull County, OH, in April. According to reports, the first appraisal well is planned on a 500-acre parcel on the east side of Mosquito Creek Lake. BP gained entry to the Utica Shale by acquiring 84,000 acres for $331 million in Trumbull County from the Associated Landowners of the Ohio Valley. The cost equated to $3,900/acre and with a 17.5% production royalty (see NGI, April 2).

The Allegheny County Airport Authority (ACAA), which runs Pittsburgh International Airport and Allegheny County Airport, has accepted the lower of two bids it received to drill Marcellus Shale natural gas wells on airport property. The ACAA's board accepted a bid of $2,250/acre ($20.8 million total) submitted by Consol Energy Inc. Although Consol's bid was less than half of one proposed by EQT Corp. (which had offered $4,750/acre, $44 million total), Allegheny County Executive Rich Fitzgerald told NGI that Consol "put some options in [their bid] that, if they are able to do them, would benefit the taxpayers much more than the [EQT bid]." The ACAA said bidders had to agree to an 18% landowner's royalty on all oil, liquid hydrocarbons and natural gas produced by the leasehold. The request for bids also required bidders to operate at least 25 horizontal wells, have pipeline access or a plan to provide access and have at least 5,000 net mineral acres under lease.

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