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Global Gas Stories to Watch for in 2012

By Susan L. Sakmar, Adjunct Professor of Law, University of San Francisco School of Law, Independent Consultant, and Global Shale Gas Course Instructor, CWC School for Energy About the author Susan L. Sakmar Susan Sakmar is licensed to practice law in California and has over 15 years experience working in a variety of legal and corporate environments. Her experience includes working in the oil industry for Chevron Corporation in San Francisco, California and as an attorney in the commercial litigation department of a major San Francisco law firm where she represented clients in a variety of complex litigation cases. Professor Sakmar’s current research is focused on energy law and the environment and she has published and presented numerous papers on these subjects with a particular focus on global liquefied natural gas (LNG) markets and global shale gas development. She has also consulted on the regulatory and environmental challenges facing the shale gas industry.

As 2012 takes shape, there are a number of interesting global gas stories to watch for in the coming months, ranging from the booming petrochemical business in the US to the prospects of LNG exports from North America. The common theme for this segment is that all of the stories relate in someway to global shale gas production - a global story that will remain in focus for 2012 and beyond.

1 Which State in the Marcellus Shale will Win the Bid for Shell’s Ethylene Cracker? Which state in the Marcellus Shale will win the bid for Shell’s world-scale ethylene cracker?

One of the top stories to watch for in 2012, and one in which an announcement could be made any day, is which state in the Marcellus Shale will win the bid for Shell’s world-scale ethylene cracker? In June 2011, Shell issued a press release that it would build a world-scale ethylene cracker in the Appalachian region of the United States to process ethane from the Marcellus Shale, which spans states - New York, Pennsylvania, Ohio, West Virginia, Virginia, and Maryland.

Marcellus Shale Gas Play, Appalachian Basin

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Global Gas Stories to Watch for in 2012

By Susan L. Sakmar, Adjunct Professor of Law, University of San Francisco School of Law, Independent Consultant, and Global Shale Gas Course Instructor, CWC School for Energy

Regardless of which state wins, the decision could be a huge boost to the US economy.

Building an ethane-fed cracker in the region would unlock significant gas production in the Marcellus region by providing an outlet for the ethane content. The cracker would process ethane from Marcellus natural gas to produce ethylene, one of the primary building blocks for petrochemicals. Shell is evaluating derivative choices and the leading option is Polyethylene (PE), an important raw material for countless everyday items, from packaging and adhesives to automotive components and pipe. Most of the PE production would be used by northeastern US industries.

Shell’s Ethylene Cracker Complex in Singapore www.shell.com

In a subsequent update on its website, Shell indicated it was exploring sites in Pennsylvania, West Virginia and Ohio. Since that announcement, speculation about which state would win the bid has been rampant with the Marcellus Drilling News offering insight and informal polls favoring Pennsylvania to win the bid (see Figure 1). MDN, http://marcellusdrilling.com/?s=shell+cracker According to media reports, Shell has indicated it will announce a site for the plant early this year Where will Shell build its new cracker plant? but won't say which state has the lead. Regardless of which state wins, the decision could be a huge Figure 1 Results of Informal MDN Poll boost to the US economy. In a report issued last year,1 the American Chemistry Council estimated that a one-time $16.2 billion private investment over several years in new plant and equipment for manufacturing petrochemicals will result in a 25% increase in US petrochemicals capacity that will directly or indirectly lead to an additional $50.6 billion gain elsewhere in the economy. It will also create more than 17,000 jobs directly in the chemical industry and another 165,000 jobs would be created elsewhere in the economy from this chemical industry investment, totaling more than 182,000 jobs. The added jobs created and further output in turn would lead to a gain in federal, state and local tax collections, about $4.4 billion per year, or $43.9 billion over 10 years. For more information about Shell’s plans, see The Marcellus Cracker Project, available at http://www.shell.com/home/content/chemicals/aboutshell/our_strategy/marcellus_cracker_project/ Shell’s June 6, 2011 Press Release announcing the plan to build the cracker is available at http://www.shell.com/home/content/chemicals/aboutshell/media_centre/media_releases/media_rel ease_archive/2011/pr_plan_chemical_plant_usa.html

continued.... 1 American Chemistry Council (ACC), Shale Gas and New Petrochemicals Investment: Benefits for the Economy, Jobs and US Manufacturing, available at http://www.americanchemistry.com/ACC-Shale-Report


Global Gas Stories to Watch for in 2012

By Susan L. Sakmar, Adjunct Professor of Law, University of San Francisco School of Law, Independent Consultant, and Global Shale Gas Course Instructor, CWC School for Energy

2 The Big Environmental Debate Over Hydraulic Fracturing Continues In the United States and elsewhere, the development of shale gas has raised a number of environmental concerns. As drilling increases around the world, a harsher spotlight will fall on unconventional gas development with some countries already banning the development. For example, in January 2012, Bulgaria became the second European country after France to ban hydraulic fracturing and revoke a shale gas permit granted to Chevron.2 In 2012, expect to see more focus on regulatory efforts related to shale gas development with the US Environmental Protection Agency (EPA) leading the way with numerous studies, reports and rulemakings expected in the coming year. Just a few of the EPA’s efforts are highlighted below:

a. Hydraulic Fracturing Lifecycle Study While some of the shale gas wastewater is re-used or re-injected, a significant amount still requires disposal.

On November 2, 2011, EPA released details of the lifecycle study it was authorised by the US Congress to conduct on the potential impacts of hydraulic fracturing on drinking water sources.3 EPAs study will focus on the entire hydraulic fracturing water lifecycle, which includes water acquisition to wastewater treatment and disposal. EPA will use a case study approach and has selected seven case studies that EPA believes will provide the most useful information about the potential impacts of hydraulic fracturing on drinking water resources under a variety of circumstances. Two sites are prospective case studies where EPA will monitor key aspects of the hydraulic fracturing process at future hydraulic fracturing sites. Five sites are retrospective case studies, which will investigate reported drinking water contamination due to hydraulic fracturing operations at existing sites. The EPA is expected to issue its first report of findings in 2012 and its final report in 2014.

b. Effluent Guidelines for Shale Gas Extraction In October 2011, EPA initiated a rulemaking to set discharge standards for wastewater from shale gas extraction.4 In terms of background, according to the EPA, and based on information provided by industry, up to one million gallons of shale gas wastewater or “flowback” or “produced water,” may be produced from a single well within the first 30 days following fracturing. These produced waters generally contain elevated salt content (often expressed as total dissolved solids, or TDS), many times higher than that contained in sea water, conventional pollutants, organics, metals, and NORM (naturally occurring radioactive material). Additional data show that flowback waters contain concentrations of some of the fracturing fluid additives.

continued.... 2 Bulgaria bans shale gas drilling with ‘fracking’ method, BBC News Europe, 19 January 2012, available at

http://www.bbc.co.uk/news/world-europe-16626580 3 US EPA, Plan to Study the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources, available at

http://water.epa.gov/type/groundwater/uic/class2/hydraulicfracturing/upload/hf_study_plan_110211_final_508.pdf 4 EPA Fact Sheet, EPA Initiates a Rulemaking to Set Discharge Standards for Wastewater From Shale Gas Extraction,

http://water.epa.gov/scitech/wastetech/guide/upload/shalereporterfactsheet.pdf


Global Gas Stories to Watch for in 2012

By Susan L. Sakmar, Adjunct Professor of Law, University of San Francisco School of Law, Independent Consultant, and Global Shale Gas Course Instructor, CWC School for Energy

While some of the shale gas wastewater is re-used or re-injected, a significant amount still requires disposal. Some shale gas wastewater is transported to public and private treatment plants, many of which are not properly equipped to treat this type of wastewater. As a result, pollutants are discharged into surface waters such as rivers, lakes or streams where they can directly impact aquatic life and drinking water sources. The initiation of a rulemaking is the very start of the rulemaking process. In 2012, EPA plans to gather data, consult with stakeholders - including industry stakeholders - and solicit public comment on a proposed rule for wastewater discharges produced by natural gas extraction from coalbed methane and shale gas. While a final rule for shale gas is not expected until 2014, watch for notices of the rulemaking activities taking place in 2012.

c A special report on the “Golden Rules” will be released on May 29, 2012.

Guidance for Diesel Fuels

EPA is also currently working on guidance for hydraulic fracturing activities that use diesel fuels. Over the past year, there has been some confusion over whether the industry must disclose the use of diesel fuel in hydraulic fracturing and if so, how and when. EPA is now working on formulating those guidelines in response to uncertainties that have been raised over the past year. EPA is developing permitting guidance that is expected to be issued sometime in 2012. More information can be found at EPA, Underground Injection Control Guidance for Permitting Oil and Natural Gas Hydraulic Fracturing Activities Using Diesel Fuels, available at http://water.epa.gov/type/groundwater/uic/class2/hydraulicfracturing/index.cfm2

3 What Are the “Golden Rules” For Shale Gas Development?

The International Energy Agency (IEA) recently announced that it is working on a detailed analysis of the "Golden Rules" that are needed to support a potential "Golden Age of Gas." The IEA has indicated these rules will provide important insight into the environmental challenges linked to unconventional gas production and how best to deal with them. According to the IEA, as part of its work on the World Energy Outlook for 2012, a special report on the “Golden Rules” will be released on May 29, 2012. The IEA’s WEO 2012 is scheduled for release on November 12, 2012.5 While it is unclear how comprehensive the IEA’s “Golden Rules” will be, it is certainly worth watching since regulatory frameworks around the world are being adopted or modified to address the myriad of environmental issues that have been raised pertaining to shale gas development.

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5 IEA World Energy Outlook, http://www.worldenergyoutlook.org/


Global Gas Stories to Watch for in 2012

By Susan L. Sakmar, Adjunct Professor of Law, University of San Francisco School of Law, Independent Consultant, and Global Shale Gas Course Instructor, CWC School for Energy

4 Expect To See FID On At Least One North American Export Project in 2012 In the Top 10 Global Gas Stories of 2011, I noted that Cheniere’s Sabine Pass Liquefaction project had gained traction in 2011 with the US Department of Energy (DOE) granting approval to export LNG and the securing of two foundation customers (BG Group and Gas Natural Aprovisionamientos) to underpin the first phase of the project. Cheniere is advancing towards making a final investment decision (FID) on the first two liquefaction trains subject to obtaining regulatory approval from the Federal Energy Regulatory Commission (FERC) and obtaining financing. Cheniere estimates that the costs to construct the first two liquefaction trains will be approximately $4.5 billion to $5 billion, before financing costs. The company expects to finance the two trains with a combination of debt and equity.

Cheniere estimates that the costs to construct the first two liquefaction trains will

On February 27, 2012, Cheniere announced that it has entered into an exclusive arrangement with Blackstone Energy Partners L.P and affiliates (collectively, "Blackstone") to finalise and execute definitive agreements under which Blackstone would purchase newly issued CQP Senior Subordinated Paid-in-Kind Units ("CQP PIK Units") for $2 billion (the "Financing"). CQP would use the proceeds of the financing to fund the equity portion of the costs of developing, constructing and placing into service its Sabine Pass liquefaction project. Cheniere expects to obtain the remaining financing needed to fund the first two trains by the end of the first quarter and to commence construction in the first half of 2012. If so, then expect an announcement on FID sometime in the very near future!

be approximately $4.5bn to $5bn, before

Current Facility

financing costs.

• • • • • •

853 acres in Cameron Parish, Louisiana 40 ft shop channel 3.7 miles from coast 2 berths; 4 dedicated tugs 5 LNG storage tanks (17 Bcf of storage) 4.3 Bcf/d peak vaporization LNG re-export licenses approved

Liquefaction Espanxion • Four liquefaction trains, each 4.0 mtpa nominal LNG processing capacity • Additional Equipment to include: - ConocoPhilips’ Optimised Cascade® LNG Trains - Six GE LM2500 + G4 gas turbine drived refriderant compressors per train - SAC water injection for emissions control - Gas turbine inlet air humidification - BASF aMDEA acid gas removal unit

Sabine Pass Liquefaction Expansion Project Site Rendering, www.cheniere.com

Meanwhile, further North in Canada, people have been eagerly awaiting FID on the Kitimat LNG project.6 The project, which would export 5 million tones of LNG beginning in 2016 in its first phase and ramp up to 10 million tonnes by 2018, is the most advanced of several proposals taking shape in Canada.

continued.... 6 Kitimat LNG, http://www.kitimatlngfacility.com


Global Gas Stories to Watch for in 2012

By Susan L. Sakmar, Adjunct Professor of Law, University of San Francisco School of Law, Independent Consultant, and Global Shale Gas Course Instructor, CWC School for Energy

It was anticipated that FID on the Kitimat LNG export was looming back in mid-February 2012 when the project sponsors, Apache Corp, Encana Corp, and EOG Resources reported fourth-quarter earnings.7 But the earnings reports came and went without an announcement on FID. In a recent interview at CERA Week, a major energy conference being held in Houston, CEO of Apache, Steve Farris, indicated he expects a decision on Kitimat in 2012, but was reluctant to be tied to a timeframe.8 Who will win the race to take FID - Cheniere or Kitimat? It may not matter much from a market opportunity standpoint since there appears to be room for more than one North American LNG export project, but it’s an interesting race to follow nonetheless!

Kitimat LNG Site Rendering, www.kitimatlngfacility.com

7 Jeff Lewis, ‘Kitimat LNG investment decision looming’, Alberta Oil, Feb. 6, 2012, available at

http://www.albertaoilmagazine.com/2012/02/kitimat-lng-investment-decision-lurking/ 8 Edward Klump, ‘Apache CEO Says Kitimat LNG Project May Go Ahead This Year,’ Bloomberg, Mar 6, 2012, available at

http://www.bloomberg.com/news/2012-03-06/apache-ceo-says-kitimat-decision-possible-this-year-correct-.html

www.cwcschool.com

BAC

AC CR EDITED

global-gas-stories-to-watch-for-in-2012  

Susan L. Sakmar Which state in the Marcellus Shale will win the bid for Shell’s world-scale ethylene cracker? continued.... One of the top s...

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