EPA Rule to Have Limited Production, Cost Impact

The U.S. Environmental Protection Agency’s (EPA) proposed rule for cutting methane emissions from U.S. oil and gas operations would have a limited effect on natural gas production and are manageable from a cost perspective, analysts say.

Announced Tuesday, the proposed rule would require producers to adhere to standards on emission levels of methane and volatile organic compounds from new and modified oil and gas production sources and natural gas processing and transportation sources, according to an Aug. 19 Barclays Research report.

From a cost perspective, Barclays' analysts see the new standards as manageable, and unlikely to materially affect U.S. gas production levels. Assuming $4/Mcf gas prices, EPA officials estimate the rule would cost the industry $150 to $170 million in 2020 and $320 to $420 million in 2025. The estimates assume that 8 billion cubic feet (Bcf) in 2020 and 16 to 19 Bcf in 2025 of gas will be recovered from the new standards being implemented, a relatively small amount given that the 2014 U.S. gas market was approximately 73 Bcf/d, Barclays noted.

FBR & Co. analysts noted that the extension of the green completions requirement from only new gas wells to new and modified oil and gas wells would increase costs less than one percent. Overall, the rule is expected to impact an additional 15,000 wells.

“New regulations will increase compliance costs for companies, but we do not see these as being large enough to take certain production volumes from the market,” Barclays noted. Oil and gas producers already are using several technologies that have relatively reasonable upfront costs – and payback period of less than three years, depending on gas prices – that can reduce methane emissions. Colorado, which last year became the first state to regulate the detection and reduction of methane emissions, can be used as a case study for addressing methane emissions.

The EPA has not yet said how or if it plans to regulate existing methane sources. Companies can voluntarily adopt practices to reduce emissions from existing methane sources, but no binding regulations exist today to do so. Environmental groups are pushing the EPA to regulate existing wells, which would be a much more costly regulation for oil and gas producers to meet, Barclays noted.

EPA estimates that the proposed regulations would reduce methane emissions by 20 to 30 percent, short of President Obama’s goal of a 40 to 45 percent reduction from 2012 levels of methane emissions from U.S. oil and gas operations.

“On first read, the proposal is consistent with what we see as the Administration’s middle of the road approach on shale, which seeks to allow for growth while curbing environmental impacts by codifying best practices,” FBR analysts said.

Statutorily, the rulemaking opens the possibility of regulating existing operations and infrastructure, and the Environmental Defense Fund projects 90 percent of methane emissions by 2018 will come from existing sources, FBR noted.

The American Petroleum Institute has stated that declining productivity of existing operations means that retrofits to existing infrastructure are not cost-effective, FBR analysts said in an Aug. 19 research note. But disagreements remain over the magnitude of leaks from the U.S. gas system. “EPA could improve its estimates after the public comment period, which could add to the supply of associated natural gas captured.”

The proposed EPA rule is the first of three proposed rule changes seeking to cut methane emissions from U.S. oil and gas operations. It also represents another step in President Obama’s greenhouse gas reduction strategy, which include the recent Clean Power Plan and vehicle efficiency standards for the transportation sector.

The rule would require semi-annual monitoring surveys and submission of monitoring plans. It also would set methane emissions limits from oil and gas completions, pneumatic pumps, well site leaks, gathering and boosting stations and compressor stations. These areas were not covered when performance standards were last released in 2012, and did not directly regulate methane emissions, Barclays said.

The EPA will accept public comments on the rule for a 60-day period. “Disagreements over the rules are likely to set the stage for battles in Congress, and in court, potentially delaying implementation,” Barclays' analysts noted.

Later this year, the Department of Transportation’s Pipeline and Hazardous Materials Safety Administration will propose natural gas pipeline safety standards. These standards will focus mainly on pipeline safety, but also are expected to lower methane emissions. The Department of the Interior’s Bureau of Land Management also is expected by year-end to update its standards on venting, flaring and natural gas leaking, Barclays said.


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