The Methane Rule and the Cost of Continued Environmental Regulation

Categories : Procurement Goals | Set Strategy | Save Money Published on : Jun 22 2016

By: ProcurementIQ Analyst, Agiimaa Kruchkin

According to the Environmental Protection Agency (EPA), the oil and gas industry is the leading source of methane – the primary component of natural gas. Methane gas is emitted during the production, processing, storage, transmission and distribution of natural gas, making it the second most prevalent greenhouse gas emitted in the United States. As a part of its pledge under the Paris Agreement, the Obama administration introduced the first federal regulations to control emissions of methane gas on May 12, 2016. This new regulation, which immediately applies to new and modified wells and entails hefty compliance costs for oil drilling and gas extraction companies, will help the United States slash oil and gas sector methane emissions by 40 to 45 percent below 2012 levels by 2025. The effect of this regulation will also reach north of the border, as the Canadian government is expected to produce a similar set of regulations for its oil and gas extraction industry. The regulation’s main critics are oil and gas leaders, who have insisted that the regulation would be unnecessary and burdensome amid challenges the industry is already facing from low oil and gas prices.

Background

US Methane EmissionsThe October 2015 leak of natural gas at a subterranean storage well facility in the Aliso Canyon was the largest methane leak in US history. This leak made Los Angeles, the location of the field responsible for the leak, the US capital of methane gas emission, according to a new study from the National Oceanic and Atmospheric Administration. Researchers at UC Irvine have estimated that, by the time the 112-day mega-leak was plugged, more than 100,000 tons of methane had been released – the equivalent of the annual greenhouse gas emissions of over half a million cars in terms of environmental impact. In consideration of this environmental catastrophe, the December 2015 Paris Agreement introduced some welcome change. 195 countries at the Paris climate conference adopted the first-ever universal, legally binding global climate deal. During a summit in March 2016, President Obama and the Canadian Prime Minister Justin Trudeau announced joint efforts to curb emissions of methane gas in the wake of agreements made in the Paris climate talks.

Impact

According to the EPA, the new limits on methane gas emissions from oil and gas wells will help combat climate change and reduce air pollution that harms public health. The standards are expected to reduce methane emissions by 510,000 short tons by 2025, albeit at a price tag of an estimated $530 million in additional costs per year. However, the EPA also projects that the rule will save $690 million a year by averting severe storms, floods and other consequences of climate change during the period.

Under the new rule, oil and gas companies will have to upgrade pumps and compressors, and the use of “green completion” technology, which captures the surge of gas from newly fractured wells, is expected to expand accordingly. Moreover, the EPA dropped its proposed waiver for low-producing wells that generate less than 15 barrels per day, thereby expanding the reach of the regulation throughout the oil and gas sector. Also, the frequency of inspections for methane at compressor stations was revised to four times a year instead of two. Although most of the new requirements go into effect immediately, energy companies will have a year to submit leak detection and repair plans.

Oil and gas producers, already burdened by low oil and gas prices, job cuts and dwindling rig counts, have been outraged by the prospect of greater compliance costs going forward. Industry leaders have argued that, because methane can be sold, oil and gas companies have an incentive to stop and prevent leaks – as evidenced by some companies’ aggressive and voluntary move to plug leaks in the past. Still, even oil and gas investors worry that the industry is moving too slowly, thereby risking becoming part of the climate change problem. Compliance with the federal mandate governing methane emissions will provide a long-anticipated platform for natural gas producers to promote their image as a low-carbon source of energy. As a result of higher compliance costs, ProcurementIQ anticipates oil and gas producers to increase prices for many of the services they provide, such as underbalanced drilling services, directional drilling services and hydraulic fracturing services, also challenging their customers.

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