Drillers Say Costs Manageable From Pending Gas Emissions Rule

Devon Energy Corp.
Oklahoma City-based Devon Energy already uses systems to capture emissions on more than 90 percent of its wells. Source: Devon Energy Corp.

An Obama administration plan to cut air pollution from natural-gas wells that was delayed after a flurry of last-minute comments won’t slow the gas boom sweeping the U.S., some drillers and industry analysts said.

Southwestern Energy Co. and Devon Energy Corp. say they already use systems to capture methane and other fumes at wells, the key requirement of a rule that may be issued as early as today. Drilling hasn’t slowed in Colorado or Wyoming where technology to capture emissions has been required by the state since 2009 and 2010, Christine Tezak, senior policy analyst at Robert W. Baird & Co. in McLean, Virginia, wrote in a March 16 research note.

The new standards follow President Barack Obama’s pledge to “take every possible action” to see that gas drilling is done without putting the public’s health at risk. The American Petroleum Institute in Washington, which represents more than 500 oil and gas companies, warned that without changes, the rule will slow drilling and reduce U.S. gas production.

“What we do today with reduced emissions completions in our wells doesn’t cost us any more than just venting the gas into the atmosphere,” Mark Boling, president of Southwestern’s V+ Development Division, said in an interview. API’s “experience has not been our experience.”

A draft of the EPA rule proposed last year focuses on hydraulic fracturing, or fracking, in which millions of gallons of chemically treated water are forced underground to break up rock and free the gas. The method has opened up vast new shale-gas deposits and helped push natural gas prices to the lowest level in a decade.

Three Years

The rule would take effect about 60 days after it is issued. The American Petroleum Institute says it will take up to three years to manufacture equipment needed to comply and train people to use it.

Benjamin Salisbury, a senior energy policy analyst at FBR Capital Markets Corp. in Arlington, Virginia, said he expects the EPA to delay the effective date of the rule to prevent any “short-term dislocations.”

“We have every reason to believe that the Obama administration wants to ensure that they maintain a vibrant natural gas industry,” Salisbury said in an interview. “Assuming that EPA grants adequate phase-in time, then our read is that this is something that should be manageable for the industry.”

Potent Gases

Methane, a potent greenhouse gas, and volatile organic compounds that contribute to ozone escape from wells when drilling fluids come to the surface in the three to 10 days after fracking, according to the EPA. The draft rule would require a device at the well head to separate fluids, sand and gases.

Captured methane, the main component of natural gas, can then be sold, netting drillers $30 million a year after the expense of using separators, according to the EPA. Wells in areas with no pipelines to carry the gas would be exempt.

Industry groups such as the American Petroleum Institute and American’s Natural Gas Alliance say the rule should also exclude wells that emit low amounts of volatile organic compounds.

“The proposal took too much of a one-size-fits-all approach to regulating an industry that varies greatly in the type, size and complexity of operations,” Howard Feldman, research director at the American Petroleum Institute, said on an April 12 conference call with reporters.

Prohibitive Costs

The rule would impose prohibitive costs on drillers, Feldman said. As proposed, it would add $180,000 to the cost of a well and increase expenses across the industry by $783 million over four years.

Those costs combined with a lack of equipment needed to comply will lead to a reduction in drilling of as many as 21,400 wells, or 52 percent, from the estimated production in the first four years after the standards take effect, the industry group said. Gas output would fall by 9 percent to 11 percent.

“The industry is already leading efforts to reduce emissions,” Feldman said. “EPA can fix these rules so they reduce emissions in a way still compatible with oil and natural gas development.”

EPA says it will cost about $33,000 to use separators on wells that can cost more than $7 million in the Marcellus Shale, a formation that stretches from New York to Tennessee. The number of permits in Colorado more than doubled in the year after emissions-capturing systems were required, Tezak wrote.

‘Best Practice’

“Green completions may not be free but implementing them as a best practice may be worth the incremental costs, even with natural gas at decade-low prices,” Tezak wrote.

Last-minute lobbying by energy industry and environmental groups led the EPA to request a two-week extension of a court-ordered deadline to release the final rule. Emissions rules for oil and gas wells initiated in 1985 and 1989 haven’t been revised, according to Robin Cooley, an attorney with the environmental group Earthjustice.

The expansion of fracking has raised concerns over possible health impacts. Emissions from wells in sparsely populated areas of Wyoming helped increase ozone levels and may prompt the government to declare parts of the state as an ozone non-attainment area, a label typically applied to urban regions such as Los Angeles.

Arkansas Shale

In the past five years, Houston-based Southwestern, the biggest natural-gas producer in Arkansas’ Fayetteville Shale, has cut the cost of capturing stray emissions to zero from $20,000 a well, Boling said. Meanwhile, the company is capturing an average of 16 million cubic feet of gas that would otherwise have been released into the atmosphere or burned off.

Southwestern, which isn’t a member of the American Petroleum Institute, uses the emissions technology at almost all its wells in the Fayetteville and Marcellus shale. Even at $2 per million Btus, “we’re making money,” Boling said.

Natural gas futures for May delivery rose 3.5 cents, or 1.8 percent, to $2.016 per million British thermal units on the New York Mercantile Exchange. Gas is down 35 percent this year.

Devon Energy, an API member based in Oklahoma City, already uses systems to capture emissions on more than 90 percent of its wells, according to Bill Whitsitt, executive vice president.

“We are capturing value that would otherwise be lost,” Chip Minty, a Devon spokesman, said in an interview. “It does make good economic sense for us.”

Chesapeake Energy Corp. uses the technology on “a high percentage of our wells,” Jim Gipson, a spokesman, said in an e-mail.

Of wells drilled in 2011 by eight members of America’s Natural Gas Alliance, 93 percent used systems to capture stray gas, according to Sara Banaszak, chief economist with the Washington-based group. Methane from about half of the remaining wells was burned off instead of vented to the atmosphere, a technique that reduces the impact on climate change.

“This rule is a no brainer,” Cooley said in an interview. “It’s got the public health benefit. The rule is very cost effective.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE