EPA's regulations would not be a burden on the natural gas industry, says Bloomberg Government

Green Completion Equip.PNG

Bloomberg Government (BGov) recently released a report [subscription required for full report] that assesses the business implications of the EPA’s regulations to control air pollution from the natural gas industry. While NRDC does not agree with some of the report’s specific cost estimates, NRDC does echo some of the key findings of the report: that the regulations will not be a burden on natural gas producers; that the price of natural gas drives production levels, while regulatory compliance costs have a minimal to imperceptible impact on production; and that the regulations will be lucrative and create jobs for many well service providers and equipment manufacturers, especially small and medium sized ones, which will be vital in this economy.

According to the report, the EPA estimated that the regulations would necessitate upfront industry-wide investments of $170 million, which would be more than compensated for from the sale of captured methane and natural gas liquids, thus generating a net profit of approximately $15 million. Unsurprisingly, in November 2011, the American Petroleum Institute (API) claimed sky-high annual costs of compliance, with an estimate of more than $2.5 billion (yup, with a ‘b’).  In comparison, the BGov report estimates a net cost between $300 and $500 million.

Green completion equipment
[courtesy:Colorado Oil & Gas Conservation Commission]

At the outset, NRDC takes issue with BGov’s cost estimates for green completions, a process that captures vented, leaked or otherwise wasted natural gas from wells as they are being fracked and readied for natural gas extraction. BGov assumed 15 days for completing a well, at a cost of $4,500 per day. In addition, the report assumes $15,000 for set-up and transportation costs. That’s a total of $82,500. We think that number is too high for a few reasons:

  • Both EPA and BGov assume about 24 completions per year (per equipment). However, using BGov’s estimate of 15 days for completing a well plus extra time for set-up and transportation, would push the year well beyond 365 days. More reasonably, EPA estimated the average duration for completing a well to be seven to nine days (this is the period over which fracking and other fluids flows back out of the fracked well), plus (sufficient) time for set-up and transportation, to allow for 24 completions in a year.
  • BGov states the cost of set up and transportation is $15,000, about midway between EPA’s and API’s estimates. However, in a more recent report prepared in February 2012 for API by Advanced Resources International (ARI), the set up and transportation cost was assumed to equal EPA’s estimate. (This ARI report also assumed 15 days for completing a well at a similar per day cost.)
  • More generally, it is not clear why BGov’s assumptions appear to interpolate between EPA’s and API’s numbers from the November 2011 report, without stronger basis. (My previous blog discusses in more detail our disagreement with the API report.) For instance, the February 2012 ARI report estimated green completion costs at around $60,000 – it is unclear if and how BGov considered  the ARI report’s findings.
  • Southwestern Energy, the eighth largest natural gas producer in the US, can perform green completions at an additional cost of precisely $0. That’s right, with their deep experience and honed business practices, they need to spend no more on undertaking green completions than just venting the gas into the atmosphere. Of course, they reap all the additional revenue from the captured methane. In an informal setting, a Southwestern representative remarked that if a company cannot make money off green completions, it is not doing it right. Southwestern’s Mark Boling has been quoted as saying, “API’s experience has not been our experience”.
  • Taking a step back: The capital cost of green completion equipment set is about $500,000 (API estimates it to be about $467,000), and the equipment lasts at least 5 years. It strains credulity to think that a level-headed market participant would pay as much as $80,000 every 15 days to lease equipment, when it could very well buy or build its own equipment for just six times as much and operate it for five years.  The difference between the former and the latter could add up to several million dollars wasted on leasing equipment.  Moreover, there have been no reports of firms actually paying green completion costs approaching $80,000. Most reports are closer to or under EPA’s $33,000 per green completion. And if Southwestern’s experiences are anything to go by, even these reported costs may go down over time.

Accordingly, we think that the cost of green completions would be closer to EPA’s estimates than those provided by BGov. As such, we continue to believe that compliance with EPA regulations will be cost-effective and likely profitable.

Notwithstanding this discord, NRDC does strongly agree with some of the overarching conclusions of the BGov report.

The BGov report acknowledges that the estimated net compliance costs would not be a burden on industry. While it could affect natural gas drilling, the report is quick to point out that the net compliance costs would be about 0.5 – 0.7 percent of total industry revenue. Our recent publication titled “Leaking Profits”, actually provided numerous examples of how some of the measures required in the EPA regulations could be profitable, not a net cost. Regardless, NRDC agrees that, at the very least, the regulations would not be a burden on industry.

The report further acknowledges that the price of natural gas and natural gas liquids is the dominant driver affecting production. As such, the report recognizes that it is difficult to parse out the impact of any potential small increase in compliance costs on natural gas production. In fact, the report notes that in Colorado and Wyoming drilling permits increased even after green completions were made mandatory in 2009 and 2010.

The report also identifies an important market opportunity in the natural gas industry, which is of immense significance in our stagnant economy. Increased spending on pollution control services would especially be a boon for smaller regional service companies that offer green completions, such as privately held Hughes Specialty Services, a 90-employee company that serves western Oklahoma and eastern Texas, and privately held Cimarron Energy, of Norman, Oklahoma, which serves areas in Pennsylvania, Texas, Colorado and North Dakota. Increased expenditure on green completion (and other) equipment would also drive business for equipment manufacturers, such as privately-owned Process Equipment and Service Co. Inc., of Farmington, New Mexico.

Putting aside all this talk of business implications for a moment, let’s not forget the main purpose behind EPA’s regulations – to start to clean up the operations of the natural gas industry. Actually, we really need to be focusing on renewable energy and energy efficiency as central pillars of a sustainable energy economy. However, natural gas can be a transitory step towards a truly sustainable energy mix. If produced in an environmentally-responsible manner, natural gas can be cleaner than other fossil fuels due to the fact that it burns cleaner than these other fuels.  It may also offer some advantages in this stagnant economy, such as an inexpensive fuel and an avenue for job-creation. But at the very least we need to get it right – there’s no justification for sacrificing our environment and harming our health in our quest for natural gas. The EPA’s regulations begin to ensure protection for these priceless assets. Nonetheless, natural gas is a fossil fuel, and we, as a community, really need to be looking much further towards truly clean energy resources such as renewables and energy efficiency.