The last barrel

The upstream industry has had a tough start to the year, and if you‘ve read World Oil’s 2016 industry forecast earlier in this issue (pages 43–69), you’ll see that things don’t look like they’ll be getting any better in the near term.

So far this year, we’ve seen oil drop to a 12-year low before rebounding (at least temporarily); thousands more job cuts reported by operators and service companies, alike; and the continued unveiling of operator budgets, which look to have been cut to the bone by the grim reaper’s scythe. 

And, as if none of that were enough to leave you rocking back and forth in a dark room, the U.S. federal government welcomed in the New Year by unveiling yet another round of potential regulations on Jan. 22 for the oil and gas industry to contend with.

The proposed rule, which was developed by the Department of the Interior’s Bureau of Land Management (BLM), has the noble-sounding aim of reducing the “wasteful release of natural gas into the atmosphere.” It is carried out under the dual auspices of ensuring that taxpayers receive a fair rate-of-return on public resources, and curbing methane’s detrimental impact on the climate.

This rule, which is open for public comment, would require operators to limit the rate of flaring at oil-producing wells on public and tribal land (it wouldn’t affect wildcats); it would require operators to periodically inspect their operations for leaks (twice-a-year at first); replace equipment that the agency deems outdated; and lift the royalty rate ceiling (it’s currently set at 12.5%, and BLM has no discretion to raise it). Operators also would be required to limit venting from storage tanks, and use best practices to limit gas losses when removing liquids from wells.

The Mineral Leasing Act requires the BLM to ensure that operators “use all reasonable precautions to prevent waste of oil or gas.” Currently, there is no upper limit on how much an operator can flare. The proposal would phase in, over several years, a flaring limit per each active oil well, averaged across all of the producing wells on a lease. However, given that existing BLM regulations already require conservation, and that the BLM’s own briefing sheet states that “many oil and gas operators” are already voluntarily “taking steps proposed in the rule to reduce wasted gas and improve operations,” one has to wonder about the necessity of the proposed regulations.

To be sure, flaring and venting pose serious challenges, which the industry needs to address. However, given the fact that the industry already has a built-in incentive to reduce emissions, one has to question how much the agency truly understands day-to-day operations in the field.

Let’s not forget that the industry has made considerable progress in curbing methane emissions of its own volition. After all, when an operator has spent millions of dollars drilling and completing a well, why would the firm willfully waste natural gas that could be sold—to the benefit of the company, customers and the U.S. federal government?

Far from encouraging the development of federally owned resources (and the ensuing economic benefits of such development), the proposed rule actually runs the risk of driving operators from federal land. This is a move that would bypass valuable resources, at least temporarily, which could have been safely, and sensibly, extracted for the benefit of all.

According to data cited by API, crude oil production on federally controlled land remained flat between 2009 and 2014, while natural gas output declined 35%. By way of contrast, crude oil and natural gas production increased 88% and 43%, respectively, on state and private lands.

Unsurprisingly, the proposed rule has elicited opposition from API and IPAA. “Another duplicative rule at a time when methane emissions are falling, and on top of an onslaught of other new BLM and EPA regulations, could drive more energy production off federal lands,” said API Director of Upstream and Industry Operations Erik Milito. Meanwhile, Dan Naatz, senior V.P. of government relations and political affairs at IPAA, warned that lifting the royalty rate would make it difficult for operators to plan projects. “Lifting the royalty rate ceiling simply leaves the door open for the federal government to increase rates on producers down the road,” he said. “This will change the predictability and certainty for operators on federal lands, making it harder to plan and commit to long-term projects.”

Well if not methane, what, you might ask, should BLM be focusing its attention on? Well, thankfully, the folks in the know have a couple of suggestions lined up. Senator Lisa Murkowski (R–Alaska), chairman of the Senate Committee on Energy and Natural Resources, and API have both pointed out more profitable uses for the bureau’s regulatory zeal.

According to Murkowski, a better place to begin to tackle flaring and venting would be with reformation of “the permitting process for natural gas pipelines and gathering lines that are critical to moving this important resource to market.” This is a suggestion echoed by API’s Milito, who said, “BLM should focus on fixing permitting, infrastructure and pipeline delays that slow our ability to capture more natural gas and get it to consumers.”

One has to admit, there is a certain touch of irony to the suggestions, given that BLM’s proposed rule would require operators, before they drill, to “evaluate opportunities for gas capture and prepare a waste minimization plan, which must be submitted with an Application for Permit to Drill.” The plan, BLM says, “must be shared with midstream gas capture companies to facilitate timely pipeline development.”

Perhaps BLM could redirect some of its time and resources toward these issues, which would actually benefit the industry, the environment and the government.

Editor’s Note: Please turn to page 7 for Kurt Abraham’s new column.