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This Summer, the EPA will propose rules to more widely require REC technologies to reduce methane emissions from oil and gas wells 40-45 percent by 2025.

EPA Regulations Could Add Costs to Constrained Industry

On January 14, 2015, the Environmental Protection Agency (EPA) outlined measures to reduce methane emissions and volatile organic compounds (VOCs) in the oil and natural gas (O&G) industry, with a new goal to reduce methane emissions by 40-45 percent by 2025 from 2012 levels, despite methane reductions in major basins from 2013-2011 driven by market incentives.

The regulations will aim to reduce methane emissions from new sources, reduce ozone-forming pollutants from existing sources in areas that do not meet federal ozone standards, and complement ongoing state and industry efforts. Specifically, new rules will address emissions from the completion of the high-volume hydraulic fracturing (HVHF) practice at the well-head. HVHF utilizes a high-pressure mixture of water, sand, and various chemicals to stimulate underground rock formations to release oil and gas, with varying amounts of the mixture returning to the surface as “flowback,” along with oil and gas. The EPA will require the capture of the flowback mixture gases – which often contain methane – from this operation. The HVHF practice has led to significant O&G industry growth since the early 2000s due to increased use of HVHF, with a somewhat recent shift toward unconventional (shale) oil production due to attractive revenue opportunities (Figure 1).

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However, the recent oil price decline from $100+ per barrel (bbl) to approximately $50/bbl could threaten this growth trend in unconventional extraction. As the shorter well lifespans in shale plays require more wells to generate revenues in excess of variable costs, the significance of using new and low-cost technologies like HVHF will increase. If low oil prices continue through 2016 and EPA methane regulations are significantly more stringent than state regulations and incentive-driven capture operations, methane emission compliance costs would put increased financial strain on exploration and production companies.

EPA Regulations Would Focus on Reduced Emission Completion Technologies
The EPA rules would likely expand the required use of reduced emission completion (REC) or “green completion” technologies and include flaring as a last resort. While REC technologies are already in use in some shale regions, primarily in the Bakken and Eagle Ford basins due to high pressure and quantity of salable gas during the well completion process, industry says the mandate would result in increased costs. The Western Energy Alliance, which represents 400-plus members, including top producers ExxonMobil, Chesapeake Energy Corporation, Devon Energy, and Conoco Philips; as well as the Natural Gas Supply Association, strongly oppose the regulations, saying they would be costly, choke out a source of economic growth, and are unneeded given that industry already has an economic incentive to capture and utilize methane as byproduct feedstock. The O&G lobby has connected with powerful Republicans ready to scrutinize EPA rules, such as Senate Environment and Public Works Chairman Jim Imhofe (R-OK), who said the methane regulations are “designed to stifle our domestic energy industries despite the successful voluntary steps made by U.S. oil and gas companies to reduce methane emissions,” and that the EPA mandate would “increase the cost to do business in America.”

Flaring is the current method most commonly used by industry to prevent methane emissions as the most cost-effective and efficient technology. In part, this is because facilitating extensive REC use, which captures salable gas, requires infrastructure development to catch up with well development rates. Currently, the Bakken (ND, MT) and Eagle Ford (TX) regions are in most-need of extended pipeline infrastructure for REC utilization. Due to these constraints, flaring (combustion) is the most widely-used technology. Flaring is less expensive than RECs and has a similarly high (95+ percent) methane emissions reduction effectiveness, but combusted gas from flaring represents a missed revenue opportunity. RECs also depend on the amount and pressure of salable gas expelled during the process, as low pressure and volume levels do not allow for economical use of the practice.

However, despite increased cost concerns due to currently – and potentially multi-year – low oil prices and from the potentially stringent regulations, an April 2014 XTO Energy peer-review of an EPA whitepaper noted that cost and equipment necessary will vary by well and by region, and concluded that the cost of an REC would not substantially change well economics. They state: “There should be no substantive difference in cost than those for hydraulically fractured gas wells. Equipment requirements will essentially be the same.” Notably, XTO Energy is a subsidiary of ExxonMobil and is the largest holder of domestic natural gas reserves. EPA estimates the use of REC technology costs between $700 and $6,500 per day; this generally amounts to costs under $50,000 per well, depending on equipment costs and completion process duration. REC costs exceed flaring equipment costs, which average near $10,000, but can increase to an average near $20,000 with labor, operations, maintenance, and other costs, on an annualized basis.

EPA Proposed Regulations will Leverage Existing Technologies to Further Industry’s Current Methane Reduction Efforts
Even without the regulations, industry has already curbed methane emissions over the last two years, even as production has increased. In its rulemaking, the EPA aims to further these advances, using regulatory and voluntary approaches to reach a specific goal of up to 180 billion cubic feet (Bcf) of natural gas saved by 2025, while providing continued support for cost-effective technologies to identify, quantify, and reduce methane emissions. The EPA also noted that its methane reduction strategy captures fuel that is otherwise wasted while reducing pollutants, augmenting economic and health benefits.

According to EPA data from its greenhouse gas reporting program (GHGRP), nearly all U.S. oil and gas-producing basins show decreased methane emissions except for the Williston Basin (Bakken shale region) (Figure 2). These reductions have occurred even as natural gas production has increased. EIA data shows that natural gas production has climbed across major plays during the same time period (2011-2013), with a current February 2015 projected output at 45,440 million cubic feet per day (MMcf/day), up from 44, 827 MMcf/day in January.
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Existing State REC Requirements have not Deterred Exploration and Production; Provide a Model for Federal Regulations
The EPA’s methane reduction strategy involves cooperative engagement with states, tribes, and industry, including the role of the Federal Energy Regulatory Commission (FERC), state utility commissions, and environmental agencies. In particular, EPA intends to develop a process to engage directly with states to ensure effective standards; the Clean Air Act authorizes states to regulate emissions within their boundaries, provided their standards are not weaker than federal regulations. To date, Colorado and Wyoming are leading states for REC requirements, however their rules do allow for flexibility. These requirements have not deterred exploration and production.

For example, in Colorado, Colorado Rule 805 b. (3) was implemented in 2008 and outlines the measures to be used in the REC practice, including but not limited to general equipment, handling of flowback fluids, and salable gas. These regulations are considered some of the most stringent in the nation, however leniency is still included, as operators can request variance from the rule when RECs are not feasible due to well conditions or safety reasons. In addition, Colorado Rule 912 states that unnecessary or excessive venting or flaring of natural gas is prohibited, except during certain well maintenance, stimulation, and testing procedures, and only after receiving approval from the Director on a Sundry Notice, Form 4.

Wyoming has similar venting and flaring under its Oil & Gas Conservation Commission laws, Chapter 3 – Operational Rules, Drilling Rules – Section 39. This rule has been in effect since 2004 for certain regions, and was expanded in 2010 to the southwest portion of the state. The state also requires REC utilization to reduce well completion emissions and capture gas for sale rather than venting or flaring, when feasible.

Wide-scale exploration and production has not declined due to stringent state well completion regulations. Despite declines in natural gas production from many of the top producers over the previous two years, likely caused by an increased focus on oil production, top natural gas producing companies each continue to explore and produce across nearly all domestic O&G basins (Figure 3).
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Methane Regulation will build on Controversial Clean Air Act Rules Opposed by Republican Congress
The EPA expects to issue a proposed rule in summer 2015 and a final rule in 2016, building on a portfolio of regulatory measures to address air standards under the Clean Air Act that has been opposed by Republican lawmakers and industry (Figure 4). The methane standards will rely on in-use technologies, current industry practices, emerging innovations, incentives for equipment modernization and early achievements, and flexible regulatory approaches – similar to its 2012 New Source Performance Standards for the oil and natural gas industry. The 2012 standards are expected to reduce 190,000 to 290,000 tons of VOCs and methane emissions equivalent to 33 million tons of carbon dioxide per year. Moving forward, Republican committee chairs in the 114th Congress have stated agendas to focus much of their efforts in 2015 on oversight of the EPA, BLM, and DOI, and much of 2015 will be a battle between finalizing the Obama Administration’s environmental policies and Republican efforts to pass legislation designed to curb the impact of stringent standards.
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Originally published by EnerKnol.

EnerKnol provides U.S. energy policy research and data services to support investment decisions across all sectors of the energy industry. Headquartered in New York City, EnerKnol is proud to be a NYC ACRE company.