Natural gas supply need not be adversely affected by EPA's upcoming rule

We disagree with the recent report from the American Petroleum Institute (API) claiming that the upcoming finalization of EPA’s proposed rule will stifle natural gas production, due to equipment supply concerns for Reduced Emissions Completions (RECs). Underlying REC economics are favorable – manufacturers and vendors should have ample impetus to supply the market with REC equipment and services.

REC, also known as green completion, is a process that captures vented, leaked or otherwise wasted natural gas from wells as they are being fracked and readied for natural gas extraction. Hydraulic fracturing (fracking) is used to stimulate gas production from shale wells, through completions (for new wells) and workovers (for older wells). RECs can also be used for non-shale wells. Portable equipment for RECs can be brought on site to separate the gas from the solids and liquids produced after hydraulic fracturing, and then deliver it into the gas sales pipeline. RECs help to reduce many dangerous pollutants, including methane, which is a powerful global warming pollutant, and volatile organics and air toxics that cause asthma, health and environmental harms.

The economics of RECs are very favorable for both the natural gas producer and the vendor of REC services, clearly seen in the table below. This should provide considerable business impetus for vendors and natural gas producers to implement RECs, and manufacturers of REC equipment.

[a] Investment cost of $500,000; equipment lifetime is assumed to be at least 5 years. Source: EPA Natural Gas STAR, based on input from various companies including BP, BRECO, Newfield Exploration and Williams.
[b] Revenue per REC of $43,000 from captured natural gas (sold at 2011 average price of $4 per thousand standard cubic feet of natural gas), plus $7,000 from gas condensates, less about $5,000 in operational and maintenance expenses; times 25 RECs per year. Source: EPA Natural Gas STAR.
[c] Based on 9 days per REC times $3,600 per day of contracted services, plus $600 in set-up costs. Source: EPA Natural Gas STAR.
[d] As in b above, but for a single REC. Source: EPA Natural Gas STAR.
[e] According to API. Source: API Comments to EPA on Docket ID No. EPA-HQ-OAR-2010-0505, November 30, 2011, Pages 94-95. Available at www.regulations.gov.
[f] Assuming that approximately half of the $33,000 that natural gas producers pay vendors goes towards paying back equipment investment;  assuming that only approximately 12 RECs per year are possible in this case (according to API).

In addition to the summary economics above, various companies such as Anadarko, BP, Devon Energy, EnCana and Williams have reported that RECs have been very profitable for them, with payback periods of less than one year to two years.

More than 20,000 RECs per year may be needed due to EPA’s final rule (page 3-21 of this EPA analysis).  Both EPA, in its rulemaking analysis, and API, in its comments to the proposed rule and its recent report, agree that the industry currently has capacity for about 4,000 RECs per year based on equipment availability. API goes on to say that 1,300 additional REC equipment sets will be needed to meet the additional demand of 16,000 RECs per year stemming from the EPA rule, and points out that without EPA rulemaking additional voluntary investment in REC equipment is unlikely. API based its conclusions on a survey of its members, but it’s not clear how many of them are manufacturers of REC equipment, if any. API does not comment on the possibly sizeable financial capacity of natural gas producers to themselves fund REC equipment purchase and manufacture.

We believe that, and as perhaps implied by API, the finalization of the EPA rule will provide just the necessary market certainty for manufacturers, vendors and natural gas producers. This coupled with the underpinning favorable economics of RECs will lead to sufficient equipment supply. We believe that the industry can rise to occasion and adapt drilling in keeping with equipment supply. In the immediate term, should any equipment concerns materialize, EPA can provide flexibility to the industry (for example, by requiring RECs at the highest gas-emitting wells first), so that the industry is able to respond to the rule without compromising natural gas supply.

The implementation of this rule will increase profits for natural gas producers, and create considerable jobs for manufacturers of REC equipment and vendors of REC services. RECs will also reduce global warming pollution and other human-health and environmental harms. Timely implementation of EPA’s rule is a win-win situation for all concerned.