Big Oil Is Burning Cash In The Permian

Global oil giants are facing ever-increasing public pressure and higher levels of scrutiny over their responsibility to curb harmful greenhouse emissions. Yet, in the sprawling oilfields of Texas, New Mexico and North Dakota, an industry-old practice of burning off unwanted natural gas has refused to die. 

The burning off (flaring), as well as the intentional release (venting) of natural gas, is proving to be a black eye that Permian producers just can’t get rid of.

But investors are paying attention, and ESG (environmental, social and governance) investing isn’t just a passing fad--it’s a mega-trend now. 

Larry Fink, the CEO of BlackRock--one of the world’s largest hedge funds, told CEOs around the world last month that climate change has become a “defining factor in companies’ long-term prospects”. 

That, he said, would lead to a significant reallocation of capital--and it’s going to happen a lot sooner than anyone previously expected. 

“For the first time since WWII we sense a shift in which climate and the environment — not growth — will become the priority of governments and their citizens, as shortages of food, clean water and air become existential questions,” Saxo Bank Chief Economist Steen Jakobsen said in his latest quarterly outlook report.

So what will these huge funds think of the excessive flaring that’s going on in the Permian? Right now, they’re not thinking much of it, but they will--especially once the coronavirus vanishes and focus is once again on the industry’s activities. 

Texas: The Flaring Capital

Texas might be better known as home to the famous Permian Basin, the site of the world’s biggest oil boom. But it’s also quickly earning a dirty reputation as the epicenter of one of the country’s biggest energy wastes and associated air pollution. 

Citing infrastructure limitations and safety issues, producers across some of the country’s largest oilfields are flaring natural gas at record levels, despite emissions commitments.      

According to data from Rystad Energy via Reuters, the Permian basin flared a staggering 293.2 billion cubic feet of natural gas, more than 3x the amount of gas produced by the most prolific gas facility in the Gulf of Mexico and enough to power more than 7 million American homes for a whole year.                                        

Flaring--the deliberate burning of unwanted polluting gas--has become an acute problem in Texas, home to most of the Permian reservoir, a sprawling 86,000 square miles (220,000 km2) oilfield straddling two states. Loose regulations in Texas compared to New Mexico means producers like Exxon, privately held BTA Oil Producers and Matador Resources burn significantly more gas in their Texas oilfields compared to those in New Mexico. Indeed, Rystad calculates that 83.5 percent of the gas flared in the Permian is done on the Texas side.

However, these companies risk flaring their way out of big money as investors latch on to environmentalism and ESG investing gathers momentum.

And then we’ve got the coronavirus and an oil price war between Saudi Arabia and Russia. 

Rystad noted in a February newsletter that “the Permian keeps struggling and insufficient capacity for gas, its low-cost oil supply potential even at WTI of $50 per barrels has been proven across many parts of the basin”. 

But we’re not in a world of even $50 oil right now. $50, in fact, sounds smashing. Now, we’re in $30-$35 territory, and if excessive flaring doesn’t put off ESG-bound capital, there’s going to be even more because it’s the cheapest way to deal with it.

Small Producers Are Even Dirtier

Despite natural gas being a viable fuel commodity, low market prices and limited transport infrastructure means companies often opt to burn it or simply release it into the atmosphere (venting). 

They are, after all, more interested in the crude oil concealed beneath the surface. 

Venting is less common with producers burning 2.6x as much gas as they vent. However, it’s even more deleterious than flaring because it releases unburned, odorless methane which is many times more potent as a greenhouse gas than carbon dioxide.

Still, the amount of natural gas many companies are flaring is simply inexcusable. Related: Why 2030 Isn’t The Magic Year For Electric Vehicles

According to Reuters FactBox, Exxon flared around 6.6 percent of its natural gas production in the Permian last year. However, this is a tale of two states: It burned a lot more of that on the Texas side (17 percent) than it did on the New Mexico side (6.8 percent).

Likewise, Matador Resources went on a flaring binge in Texas (6.8 percent), but toned down its flaring in New Mexico (1.7 percent). And the list goes on in this fashion, with BP highlighted as the most prolific flarer, burning 13.5 percent of its natural gas in the Permian last year. 

Apache Corp. has a practice of not bringing wells online before installing pipeline transportation first. However, “third-party midstream operational issues” have forced the company to increase its flaring rate according to a company spokeswoman. Apache flared less than 1 percent of its gas in three counties; however, it burned a staggering 24 percent of its gas in one Texas county, Reuters notes, based on Rystad data. 

Royal Dutch Shell is probably the ‘cleanest’ when it comes to flaring. The company only works in the Texas Permian where it burned off just 1.5 percent of its gas. Chevron Corp., EOG Resources, ConocoPhillips and Occidental Petroleum are all reported to have low flaring rates.

On average, companies operating in the Permian flared 6.6 percent of their natural gas last year.

Interestingly, smaller producers are actually more guilty of the practice than their bigger brethren. Indeed, a handful of companies that are nowhere near the top producers have an outsized role in the business of flaring.

(Click to enlarge)

Source: Environmental Defense Fund

Steward Energy II, for example, is the 60th largest producer in the Permian. However, the company was the fourth-largest flarer by volume (4.3 Bcf) in 2018. Steward actually flared more natural gas than XTO Energy, despite producing less than a tenth of XTO’s natural gas. Steward flared an incredible 64.5 percent of all the gas it produced, according to the EDF. 

Another small company, Surge Operating LLC, flared 4.4 Bcf of natural gas, good for 22 percent of its total production thus qualifying as the 3rd largest flarer. Meanwhile, Jagged Peak Energy flared more than 3.5Bcf, or 19 percent of all the natural gas it produced. Related: Oil Prices Rise As Trump Declares National Emergency Over Coronavirus Outbreak

The good news is that the biggest producers are actually flaring less. According to the Environmental Defense Fund, some of the largest Permian producers have lowered their flaring rates compared to five years ago. That’s encouraging because it demonstrates that individual companies are, in fact, capable of reducing flaring.

(Click to enlarge)

Source: Environmental Defense Fund

The potential good news, however, is overshadowed by the blatant and excessive wastefulness of many operators that flare exceptionally high amounts of natural gas. In some cases, companies are even flaring all of their produced natural gas volume. 

Loose Regulations

Mounting pressure on the oil industry regarding its climate impact has forced some operators to pledge to reduce their flaring habits. However, recent research by Greenpeace’s investigative unit has unearthed how the practice remains rampant across giant U.S. oilfields, with oil majors BP and ExxonMobil among the worst offenders.

A big part of it can be blamed on lax rules.

Regulation is the big difference between Texas and New Mexico, with Texas having approved every permit for flaring or venting since 2013, Reuters reported. 

In New Mexico, applications for flaring require a clear plan to capture gas and must be renewed every 30 days as opposed to Texas where renewals are good for six months. This has led to wildly different rates of flaring between the two states even by the same companies. 

Perhaps the State of Texas ought to consider applying the existing gas production tax (7.5 percent) to flared gas. Currently, flared gas is exempt from production taxes, leading to unacceptable levels of harmful burning and potentially millions of dollars in tax revenue going up in smoke.

By Alex Kimani for Oilprice.com

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