As NRDC and our partners have shown, the oil and gas industry has the technical and financial resources to meet the proposed EPA standards to clean up natural gas production, very likely at a profit. Nevertheless, industry groups have leveled unfounded claims that new EPA standards will stifle gas production. We believe that the standards will provide just the impetus and certainty needed to ensure that the oil and gas industry makes the necessary investments to protect human health and the environment, while yielding profits for themselves (see also David Doniger’s recent blog). Here’s why:
The industry has ample capital
The oil and gas industry is extremely large and very capital intensive, and makes investments that tally up to many billions and trillions of dollars. Here are some examples of the scale of money the industry routinely invests:
- The U.S. oil and gas industry spent over $2 trillion dollars on capital investments in the last decade. In 2011 alone, investments were nearly $300 billion.
- Narrowing in on the midstream section of the natural gas industry (which includes gathering pipelines, processing, transmission, terminals and storage), about 100 large companies had about $350 billion in relevant operating assets, spent $35 billion in the most recent year on those assets, and planned to spend $50 billion in the coming fiscal year.
- The top five natural gas producers in the U.S., ExxonMobil, Chesapeake Energy, Anadarko, Devon Energy, Encana, each had an estimated $3 billion or more in annual capital expenditures in natural gas operating assets alone in recent years.
Let’s take a look at one of EPA’s main requirements. Reduced Emissions Completion, also known as REC or “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. The industry claims that it will need 1,300 additional sets of green completion equipment to meet EPA regulations. This is likely an overestimate, as the industry claims fewer green completions per control equipment set over the course of a year than what EPA has documented evidence of, and therefore more equipment sets needed to carry out the projected number of green completions. But even assuming 1,300 sets as an upper limit, this amount of equipment would cost $650 - $700 million industry-wide. Each green completion set can have an annual return on investment of 100 – 200 percent and is a relatively risk-free investment (because this technology is tried and tested). And these green completion sets can be used for at least five years. So, as a percentage of industry-wide capital investments typically made over five years ($1 trillion), investment needed is less than one-tenth of one percent (0.065 percent). If green completion operations are contracted out, no capital investment is needed and the return on “investment” ranges from 6 percent to 50 percent per completion.
The other emission control technologies required by the EPA proposed safeguards would require about an additional $30 million industry-wide. These technologies also have high annual returns on investments, typically 50 percent to 300 percent, and sometimes larger than 1,000 percent.
The technologies proposed by the EPA are not rocket science
The proposed EPA regulations require the following (see here for simple explanations of these and other technologies): RECs for well completions and re-completions; reduced leakage pneumatic controllers; leakage controls for reciprocating and centrifugal compressors; dehydrators with leakage controls; gas capture devices for storage vessels; and regular leak monitoring and repair. All these technologies have been tried and tested for many years by the natural gas industry. Many of the more progressive oil and gas companies have also adopted some of these measures voluntarily, under the Natural Gas STAR program. All the EPA is doing is bringing the oil and gas industry into the 21st century, not science fiction.
In particular, green completion equipment is not inherently complex: essentially, it consists of tanks and traps which use gravity (not moving parts) to separate natural gas from flowback water and solids, and direct the gas to a pipeline for sale. Even without the EPA regulations, producers need to handle flowback water for safety reasons. The extra equipment needed to handle the gas so it can be sold is minimal, and is relatively simple for the oil and gas industry to construct and operate.
API’s calculations and analyses are skewed and unrealistic
API submitted comments to EPA in November 2011 claiming that green completion costs were very high, and more recently that EPA’s regulations would stifle natural gas production. In our assessment, API’s estimates are way overblown and its conclusions are therefore unrealistic. Here are the main reasons why:
- In November, API estimated that leasing REC equipment would cost $180,000 per well based on $5,000 per day for a purported minimum lease period of 30 days, plus $30,000 for transporting equipment from one well to the next. This is incorrect because multiple wells can be completed during a 30-day lease period, because the well-fluids associated with green completions flow to the surface for usually less than 10 days. Similarly, equipment transportation cost could apply to several nearby wells or multiple wells drilled from a single pad. Moreover, companies can and do lease equipment for shorter periods.
- Interestingly, in a more recent report prepared for API, the consulting firm Advanced Resources International Inc. re-estimated the costs of leasing REC equipment to be about $60,000 per well, assuming $4,000 per day times 15 days per completion. While this number is closer to actual reported costs, even this calculation lacks credibility. As 25 completions can be completed per year, this implicitly assumes that green completion equipment would be leased out for every one of the 375 days in such an extended year, with literally no time for equipment transportation and set-up. The EPA estimates a more reasonable 7 – 9 days per green completion, which implies a cost of $33,000 per well, and allows sufficient time for moving equipment from one well to the next.
- The capital cost of green completion equipment 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 $150,000 per month to lease equipment, when they could very well buy or build their own and operate it for five years for just three times as much. There have been no reports of firms actually paying green completion costs approaching $180,000, or even $60,000. Most reports are closer to or under EPA’s $33,000 per green completion.
Costs of environmental protections are often overestimated, while their benefits are overlooked
Concerns about the future impacts of regulations are often wrong. Over the past several decades the benefits of regulations have consistently and significantly exceeded their costs (and in the last decade by over seven times). Further, cost estimates used by government agencies tend to be too high. Studies of environmental regulation in particular have consistently failed to find negative employment effects; in fact, environmental regulation to curb industry pollution actually has a small net positive employment effect. Alarmist studies tend to neglect the job-producing effects of compliance. As NRDC’s chief economist puts it, environmental protection and cleanup is labor-intensive work; selling pollution control equipment, and transporting, installing, and maintaining it, translates into a lot of income, GDP, and jobs.
For example, studies of the 1990 amendments to the Clean Air Act, by government and private sector analysts, have generally agreed that the Act actually produced quick improvements in air quality at low cost. Both the EPA and industry overestimated costs associated with various programs required under the amendments.
Where there’s a will there’s a way. This could not be more true than for the oil and gas industry, which has rampedâup its gas production very rapidly in the past few years, building out vast production, processing, and transmission infrastructure in Texas, Pennsylvania, Louisiana, Arkansas, North Dakota, etc. But because the industry has not used its talents to simultaneously expand the methods and equipment needed to protect human health and the environment, strong new rules are needed to ensure this happens, along with profits for the companies themselves.