Colorado Tried Methane Caps on Drillers, And They Worked

Updated on

For an idea of how the U.S. government’s proposed methane rules will affect drillers, look no further than Colorado.

The state became a test case for similar controls last year when a coalition of energy companies and environmental groups agreed on measures to cut the pollution. In a bid to address smog, regulators there adopted the nation’s first requirements for oil and natural gas companies to find and fix methane leaks.

Drillers who were already voluntarily curbing emissions accepted Colorado’s rules with little opposition. Gas production in May was up 1.5 percent from the same period two years earlier, Energy Information Administration data show. A state analysis estimated that the rules cost drillers about 0.4 percent of their annual revenues.

“Methane is a product we sell, so it’s in our business interest as well as in our general interest as environmental stewards to make sure every molecule goes into the sales line,” John Christiansen, a spokesman for Anadarko Petroleum Corp., said by phone Tuesday.

Industry groups such as the American Petroleum Institute criticized rules proposed by the Environmental Protection Agency on Tuesday to curb methane emissions in the country, saying they would exacerbate an already painful price crash. Crude oil has slumped by about half in a year, while gas prices have dropped 30 percent.

“The administration is proposing a costly and complicated regulatory program for few environmental benefits,” Barry Russell, president of the Independent Petroleum Association of America, said in a statement.

Selling Methane

But so far, such a powerful impact hasn’t been felt by companies that have taken steps to detect and plug leaks. Because the drillers can sell the extra gas they capture, the methods will pay for themselves in 12 to 15 months, Mark Boling, general counsel for Southwestern Energy Co., said in an interview.

“It has been very effective at identifying leaks and cost-effectively eliminating them,” said Boling, who worked with the Environmental Defense Fund to develop a set of recommendations for reducing methane emissions and preventing possible water contamination from drilling.

Colorado’s measures are more stringent than those proposed Tuesday by the EPA, which would require producers to upgrade pumps and compressors on new wells and expand the use of methane-capturing equipment for gas and oil wells.

The EPA’s plan is “manageable from a cost perspective and unlikely to materially affect natural gas production levels in the U.S.,” Nicholas Potter and Michael Cohen, analysts at Barclays Plc in New York, said in a note to clients Wednesday.

Most of the technology that can be used to detect and repair methane leaks will pay for itself in less than three years, according to Barclays.

Potent Gas

The EPA’s proposal is part of an initiative to reduce leaks of methane, a more potent greenhouse gas than carbon dioxide, 40 percent to 45 percent from 2012 levels by 2025. While the federal mandates would apply to new wells, Colorado’s regulations cover existing sources.

“Colorado is ahead of the pack because it already has rules for reducing methane and other air pollutants from across the oil and gas value chain, including production and processing,” Cheryl Wilson, an analyst with Bloomberg Intelligence in Washington, said Tuesday.

Noble Energy Inc., Colorado’s second-largest oil driller, said last year that the state’s methane regulations would cost the company $3 million annually. That compares with its $1.8 billion capital budget this year for the Denver-Julesburg Basin and the Marcellus shale in the eastern U.S.

Anadarko and other producers are using infrared cameras to detect methane releases and have upgraded pneumatic valves.

‘Zero Complaints’

“Since the implementation, we’ve heard zero complaints about the cost and practicality,” Dan Grossman, Rocky Mountain regional director for the Environmental Defense Fund in Boulder, Colorado, said by phone Tuesday. There has been no court challenge to the mandates, Grossman said.

The API has meanwhile described the EPA proposal as duplicative and costly, warning that it will “undermine America’s competitiveness.” The EPA estimates methane accounted for about 10 percent of total U.S. greenhouse-gas emissions in 2012, with the oil and gas industry responsible for almost a third of the emissions.

U.S. methane emissions have fallen 38 percent since 2005, gas producers say citing EPA data. Over the same period, production is up 35 percent.

Without new restrictions, emissions are set to rebound in coming years, according to the agency. The EPA plans to finalize the rules in 2016.

“We’re talking about a product, methane, that these operators sell to offset the cost of the regulations,” Grossman said. “That helps to ease the burden for them.”

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