Basin. Oil Gas. January Proppant Technology. Wetlands Mitigation. Lease Negotiation Rules

Transcription

1 Basin & Oil Gas January 2010 Proppant Technology Wetlands Mitigation Lease Negotiation Rules

2 E&P Expansion in Haynesville Shale area may increase need for wetlands mitigation credits At the lowest elevation of the Martin Creek Mitigation Bank near Tatum, Texas, the creek itself meanders through the wetlands on its way to unite with the Sabine River. The mitigation bank shares a boundary line with Martin Creek State Park and the dam at Luminant Energy Generating Plant. Neva Hand photos. 2 January

3 Yellow guard rails provide surface evidence of the underground petroleum pipeline that cuts through a portion of the Martin Creek Mitigation Bank. White poles allow officials from Luminant Energy Generating Plant to check water depth on the wetlands as a means of monitoring the integrity of the nearby dam. Accessing the vast energy sources that lie far beneath the wetlands--earth s natural water-filtering system--has long created more than a minor obstacle, but the Haynesville Shale play has placed even greater emphasis on removing the snags. Even with the utmost care and planning, constructing a well pad site, building access roads, drilling the well and laying the pipeline often cannot be accomplished without impacting the delicate ecosystem of the wetlands. Much like one domino will bring down countless others standing in a line, changing the route of water on its journey to the ocean can have adverse effects on the plant life and wildlife that depend upon that water for survival. The Haynesville Formation--underlain by the Smackover Formation and overlain by rocks of the Cotton Valley Group--was deposited about 150 million years ago in a shallow offshore environment, according to geology.com, Web site of the Geological Society of America. Shale itself is soft, finely stratified sedimentary rock that formed from consolidated mud or clay and can be split easily into fragile slabs. Put simply, the flow of water through the ages created the blanket of shale between the quilts of rock and stone. Today, the water continues to flow over the surface wetlands of the Haynesville Shale on its way to the creeks and rivers and eventually to the Gulf of Mexico. As it makes the trip, it continues to deposit silt as sediment, filtering itself through the hardwood root systems of the lowlands. The federal government--through the Clean Water Act, the Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (Corps) --regulates the discharge of dredged and fill material into waters of the U.S. As exploration and production increases in new shale plays such as the Haynesville, where wetlands are more common than in the Barnett Shale or the Permian Basin, operators are more frequently performing unavoidable work in United States waters, including wetlands. Such work requires operators to obtain Section 404 permits and mitigate for adverse impacts to waters of the U.S., according to the Corps. But the necessary steps that petroleum companies must take to meet those regulations can create a bog of their own, especially when additional time leads to extra overhead costs. For a company to satisfy established environmental requirements, it might need to hire environmental consultants and tree planters and continuously monitor the health and growth of trees planted on lands purchased to replace, or mitigate, the lands affected by their drilling. Or, the company can opt to purchase credits from a wetland mitigation bank. Mitgation adds cost to your project and the bottom line of your well, so normally we try to avoid Basin Oil&Gas Magazine 3

4 Terry McKenzie on the site of his family s Martin Creek Mitigation Bank. Feeling the effects of cool autumn nights, the young hardwood trees of the mitigation bank begin to drop their leaves as they begin the second year of their growth. The formal agreement permitting the Martin Creek Mitigation Bank stipulated that 400 hardwood trees had to be planted per acre in the rich bottom land to provide uplift, or water cleaning potential, to the soil. wetlands, said Donny Worthington, a wildlife biologist and corporate EHS (environmental health and safety) advisor with Fort Worth-based XTO Energy. Even so, sometimes the only way to get to the target location for drilling involves crossing a stream, building a lease road through wetlands to access a site, or even building an actual pad site in a wetland area, especially in wetter areas of east Texas, Louisiana or Arkansas, Worthington said. And shale plays also require lots of water for hydraulic fracturing, with the water sometimes coming from ponds built on creeks, which can result in a mitigation situation. In addition, pipeline crossings can bring a need for wetlands mitigation. East Texas land owner Terry McKenzie began to recognize the need for mitigation banks as he surveyed his family-owned 300 acres near Tatum, in northeast Texas. He and an environmental firm representative from Katy were discussing the land in terms of what was upland and what was lowland, or bottom land. He (the representative) said, you really need to look up land mitigation banks to find out as much information as you possibly can about it and call me back in 30 days, McKenzie said. He said he called the Corps, the EPA, did everything he could on the Internet, absorbed it all, then decided to let the environmental firm take the lead. McKenzie and the Katy firm then worked out a wetland mitigation bank plan to present to the Corps in Fort Worth. McKenzie said the process of creating the mitigation bank, including permitting from the Corps, took almost four years. After completing the complex mitigation banking process, the bank began selling credits in early A mitigation bank, such as the Martin Creek bank, is privately or publicly owned land managed for its natural resource values. In exchange for permanently protecting the land, the bank operator is allowed to sell habitat credits to developers, such as oil and gas companies, who need to satisfy legal requirements for compensating environmental impacts of development projects. Mitigation banks typically involve the consolidation of many small wetland mitigation projects into a larger, potentially more ecologically valuable site, according to Mitigation Solutions USA (www. mitigationsolutionsusa.com), an environmental mitigation banking firm of which McKenzie is president. The company has developed a nationwide plan for the creation, marketing, selling and purchasing of credits for wetlands, streams and endangered species. MSUSA can develop a phased plan for landowners to determine the suitability of their property as a viable banking development site, plus market the mitigation bank and act as a clearinghouse for the mitigation credit process. The Martin Creek Mitigation Bank is, of course, named for Martin Creek and its service area is a portion of the area for the Sabine River. As the 4 January

5 Benefits of Mitigation Banking Mitigation banking has a number of advantages over traditional permittee-responsible compensatory mitigation because of the ability of mitigation banking programs to: Reduce uncertainty over whether the compensatory mitigation will be successful in offsetting project impacts; Assemble and apply extensive financial resources, planning, and scientific expertise not always available to many permittee-responsible compensatory mitigation proposals; Reduce permit processing times and provide more cost-effective compensatory mitigation opportunities; and Enable the efficient use of limited agency resources in the review and compliance monitoring of compensatory mitigation projects because of consolidation. Source: EPA Web site, Wetlands Terminology Clean Water Act (CWA), Section 404--The Clean Water Act is a 1977 amendment to the Federal Water Pollution Control Act of 1972, which set the basic structure for regulating discharges of pollutants to waters of the United States. ( epa.gov/owow/watershed/laws.html) Wetlands--Wetlands subject to Clean Water Act Section 404 are defined as areas that are inundated or saturated by surface or ground water at a frequency and duration sufficient to support, and that under normal circumstances do support, a prevalence of vegetation typically adapted for life in saturated soil conditions. Wetlands generally include swamps, marshes, bogs, and similar areas. ( Sedimentary rock--particles of matter carried by water or wind and deposited on a land surface or the bottom of a body of water that has over time become consolidated into rock Shale--soft, finely stratified sedimentary rock that can be split easily into fragile slabs Watershed-- a land area that drains to a common waterway, such as a stream, lake, estuary, wetland, or ultimately the ocean. Authorized impact -- the loss of wetlands or other waters authorized by a permit issued by the USACE. Compensatory mitigation -- the restoration (re-establishment or rehabilitation), establishment (creation), enhancement, and/or in certain circumstances preservation of aquatic resources for the purposes of offsetting unavoidable adverse impacts which remain after all appropriate and practicable avoidance and minimization has been achieved. Credits -- a unit of measure (e.g., a functional or areal measure or other suitable metric) representing the accrual or attainment of aquatic functions at a compensatory mitigation site. Mitigation bank -- a site, or suite of sites, where resources (e.g., wetlands, streams, riparian areas) are restored, established, enhanced, and/or preserved for the purpose of providing compensatory mitigation for impacts authorized by DA permits. In general, a mitigation bank sells compensatory mitigation credits to permittees whose obligation to provide compensatory mitigation is then transferred to the mitigation bank sponsor. The operation and use of a mitigation bank are governed by a mitigation banking instrument. Permittee-responsible mitigation -- an aquatic resource restoration, establishment, enhancement, and/or preservation activity undertaken by the permittee (or an authorized agent or contractor) to provide compensatory mitigation for which the permittee retains full responsibility. Required ecological functions--the role that a particular area of land is expected to perform when it has not been impacted by human interference Basin Oil&Gas Magazine 5

6 Years old storm debris along Martin Creek provides habitat for small fish and tadpoles. The creek--flowing lazily along here--becomes torrential under heavy rains, and plant growth along with fallen trees and decaying brush help to keep the bank s soil from eroding. Neva Hand photos. The IRT also evaluates bank success, including parameters such as hydrology and planting success. They audit the survivability of my trees every year for 10 years, McKenzie said, and submit that report to the Corps because the Corps doesn t just let you put your mitigation plan together; they release a certain amount of credits by your survivability rate each year, so they want a full functioning wetlands by the end of 10 years. McKenzie said he brought a team in to plant the trees in creek runs through the lowlands of East Texas, it feeds Martin Lake at Martin Lake State Park and provides a water source to the Luminant Energy Generating Plant near Tatum. The lake s dam abuts Martin Creek Mitigation Bank, and when the water level of the dam rises to a pre-determined height, the power plant releases water that floods the bank, up to four feet high in some places. As it recedes back to the creek bed, it leaves four large sloughs across the lowest portion of the acres of the mitigation bank property, the bottom of the wetland, Mother Nature s water filter, McKenzie explained. Now, we re introducing the native wetland species (of plant life) that were here hundreds of years ago, he said, and we put it back to what it was originally so we can let Mother Nature do her thing. After McKenzie s environmental consulting team determined what native hardwood species are specific to the area, he bought and planted 160 acres of the hardwood bottomland trees that his mitigation banking instrument specified. The instrument, overseen by the Corps, also set the number of trees to be planted per acre at 400. The environmental costs to permit a mitigation bank like this (Martin Creek Mitigation Bank) would run anywhere from $400,000 to $750,000, McKenzie said. Typically, bankers hire an environmental consulting firm to help them navigate through the mitigation bank review approval process and interact with the Interagency Review Team (IRT), according to the Corps. Palm-like fronds spontaneously growing along the edge of a slough indicate the success of the wetlands restoration. 6 January

7 Within 10 years, they will be three times the size they are now, he said. The larger the trees and the more brush there is on the property, the more uplift--or the more cleaning (potential) -- that your mitigation bank has for water coming through here. The EPA places compensatory mitigation into four categories: restoration, establishment, enhancement and preservation, McKenzie said. When we took what was pasture land and restored it to what it was by planting trees, that s called a restoration wetland, McKenzie said. You get a lot more credit for restoration from the Corps because you re taking wild land that has low cleaning value and you re adding that restorative process to where you make it a better functioning piece of property, from a wetland standpoint, so they give you more credit for doing that. The environment benefits from mitigation banks, but so can oil and gas producers. If someone put a well pad site on a wetland area like where the Sabine River crosses Highway 43, all that area is wetland lowland bottomland area, McKenzie said. It s a prime area to put well pad sites. The Haynesville Shale, they think, is coming over from Shreveport and coming down this way (into northeast Texas). Those wells are deep, but they produce a lot of natural gas. So if it shows that there s going to be a lot of activity around that area, (the companies that own the gas leases for that area) are going to need a lot of wetland mitigation credits because they re going to put pad sites in and around that wetland area. The team also determines the quality of the impacted lands, from high to low quality impacts. Down on the Sabine, that s lowland, bottom land hardwood area. That would be high quality wetlands, McKenzie explained. So for every acre that they impact, they would have to buy 4.3 acres from a mitigation bank. So not only are you mitigating one to one, you re actually taking one acre of impact and replacing it with 4.3 acres to offset. They want to replace it with more than is impacted. He said the reason why mitigation banks are so popular is that we re under such scrutiny--we have to jump through a lot of hoops--to get this whole thing approved. There s a financial assurance aspect to it, and then we re monitored every year for the success of it. What the Corps wants is to take a large area that s in a mitigation bank to where those pieces of property are more successful than if the oil and gas company just went out and did their own five acres of mitigation to offset the impact of one acre. The Corps couldn t monitor 150 five-acre parcels all around the area. It s easier for them to come to a mitigation bank where it s 200 acres or more. It makes sense. The Martin Creek Mitigation Bank was established and still remains on a one acre equals one credit basis. McKenzie said a different ideology that takes more of the function of the wetland into account has recently come into play, called Functional Credit Units or FCUs. He indicated that it started at the Galveston Corps District and has spread to the Fort Worth Corps District and beyond. The family-owned Martin Creek Mitigation Bank is currently completely sold out of credits. I just submitted a survivability report to the Corps and I get 15 percent of my overall credits for this year, so I m going to get 21.6 credits from the Corps just because my trees survived another year, Basin Oil&Gas Magazine 7

8 McKenzie said. I almost have all those pre-sold already so whenever I get a release of credits, I let all the people (with whom I ve previously done business) know that I have available credits to sell. However, McKenzie s Mitigation Solutions USA (MSUSA) can develop a phased plan for landowners to determine the suitability of their property as a viable banking development site, plus market the mitigation bank and act as a clearinghouse for the mitigation credit process. The need and the number of available credits, or the location of the credits, don t always match up. For example, XTO Energy built its own mitigation bank in Robertson County, Texas, several years ago to service its activities in the Freestone trend. The bank is still under development and has remaining credits. But that bank is only a secondary service area to where many of XTO s new wells are drilling in the Haynesville Shale play. And it can cost more credits to trade between locations. It costs more credits in trade if you go outside your primary service area (for the mitigation bank), Worthington explained. If we need to trade from our bank in Robertson County to Sabine County, there s a multiplier of 1.5 because the bank is not in the primary service area. The trick is to get banks in the area where you re working. I ve been working in the oil and gas industry for 20-plus years now, and it just seems as we explore more, the easier places to drill are gone, Worthington continued. The Corps in the last couple of years has come up with formulas to determine the impact and what amount of mitigation credit that you need or the uplift you need. It s getting a lot more complicated. We have contractors that go out and basically examine our roads, pipelines and pads and say if we build here, we ll need a wetlands permit from the Corps and this will be the amount of credits we will need over time. For example, if our company is going to drill on the Wilson tract in three weeks and we need a permit and we need to mitigate it, we can t build our own bank quickly enough, so we have to find a place to mitigate it or buy in a credit. In addition, the cost for a company to build its own mitigation bank must be factored in. Worthington estimates new mitigation banks today can cost from $200,000 to more than $1 million to establish, in addition to land acquisition costs. Then the bank has to be maintained and monitored. Sometimes it happens that credits are just not available in an area where a company wants to drill. This happened near the Red River, McKenzie said. When they began their planning, there were available credits, but when they were at the point where they were ready to drill, those credits were no longer available. So we put together an off-site mitigation plan (now called a permittee responsible mitigation plan). We submitted it to the Corps and the Corps accepted it. The individuals in the Corps of Engineers that I ve worked with have been great. They are quality people. But they need more people. They do the best they can, God bless em. Worthington said he gets calls every week from people trying to get XTO to participate in or bankroll a mitigation bank. It s something that s expanding all across the South, he said. Investment people are getting involved with it. I ve been in this business a long time and things have definitely taken a turn towards a greater demand for mitigation banks. O By Neva Hand, Special Contributor. Reprint prepared for Terry McKenzie of Mitigation Solutions with the permission of: Basin Oil & Gas Magazine Zachry Publications, LP For advertising information, contact us at ext January