The Texas Railroad Commission last month surprised many: it said it would tighten the rules for gas flaring at oil fields later this year. Texas is certainly not the state with the best environmental policies record for obvious reasons, such as the fact it is the largest single producer of oil in the U.S. But gas flaring literally wastes billions of dollars. Perhaps the time has come to stop the waste.
Every year, the oil and gas industry flares some 150 billion cubic meters of natural gas. The reasons vary: at oil fields, gas is flared when there are no pipelines to transport it to a collection or storage hub; at refineries, some gases need to be flared to avoid explosions.
And there is more. Many oil producers have no idea how much gas they are wasting through flaring because they have no monitoring systems, Mark Davis, CEO of Capterio – a company that provides flaring elimination services. They also don’t see the gas they flare as a potential revenue stream, mostly because in order to start capturing it, they need to make an additional investment, which is often deemed uneconomical. And finally, Davis says, there are capex constraints. A lot of oil producers, especially in the U.S. simply cannot afford to stop flaring, at least on their own.
Yet these billions of cubic meters of unwanted gas costs money, even if the global gas market is currently oversaturated. Therefore, flaring gas means losing money. It also means higher emissions of both methane—which is what most of the flared gas is made up of—and carbon dioxide.
Methane is drawing more and more attention from climate change activists and other organisations because of its powerful greenhouse properties. As a result, the energy industry has come under stricter scrutiny, with many companies voluntarily announcing plans to keep a closer eye on how much methane they produce in the process of oil and gas extraction. Exxon, Chevron, and BP were among the first to announce methane monitoring systems.
“When you look at the future, the Achilles heel of the gas industry is the methane emissions,” the head of the International Energy Agency, Fatih Birol, said last year. “And the good news is for the industry, this can be fixed by existing technology, only using the best practices. And I can tell you that many companies are taking this seriously.”
They have no other choice but to take it seriously really, in an environment fraught with mistrust of the industry and accusations of driving climate change with their business. Shareholder pressure alone has proven to be a major driving force behind change, for the public players in the field. And now, the pressure to end flaring may increase, after it became clear what a powerful effect on flaring-related emissions oil production cuts had.
In the U.S., in the Permian alone, carbon dioxide emissions from gas flaring are set to drop by half during the second half of this year thanks to the well shut-ins producers were forced to implement in response to the oil demand—and price—crash from earlier this year, according to Rystad Energy. In addition to the shut-ins, there will be fewer new wells put on stream in the second half of the year, which would also contribute to the decline in flare-related emissions.
This would be a decline following a plateau of flaring-related emissions, by the way. After last year gas flaring in the Permian hit an all-time high of 661 million cu ft of gas, it declined slightly to 500 million cu ft towards the end of the year and stayed there until the oil price crash. Now, if the Texas Railroad Commission does tighten rules for flaring, the decline would likely accelerate as E&Ps look for other ways to deal with the waste gas, which, by the way, in 2018 alone cost Texas oil and gas producers almost $750 million.
“The oil and gas industry has been undergoing fundamental change over the past several years, transforming from a cash-inundated juggernaut to an unstable, declining player that the State of Texas depends upon for its financial health,” said the authors of the report that calculated how much Texas had lost from flaring. “In this context, the RRC’s duty to address waste in oil and gas production is not only a legal requirement but also a practical imperative that is becoming more and more critical for the financial future of Texas,” the Institute for Energy Economics and Financial Analysis said.
It’s not just money that is wasted, either. The World Bank, which has launched a “Zero Routine Flaring by 2030” initiative, has calculated that the amount of gas flared annually could generate as much as 750 billion kWh of electricity. This is more than Africa’s total consumption. While the WB notes that not all flared gas can be used for electricity generation, there are other things one can do with it, such as reinject it into oil wells to stimulate production.
There are also purely practical considerations regarding flaring. Flaring in the U.S., counterintuitive as it may seem, has relatively low intensity, Capterio’s Davis told Oilprice.com. Flaring in some large OPEC producers, on the other hand, is very high. And in addition to wasting all this money and opportunities, it can literally damage equipment if the company flaring does not pay enough attention. Add this to the reasons why ending flaring is good for the industry.
But times right now are challenging and an increase in oil well yields, for example, is hardly a good reason to capture associated gas instead of flaring it. Capex constraints have increased significantly as shale producers struggle to survive. Yet pressure is increasing from both environmental groups and government agencies, and, importantly, from energy investors.
“We cannot continue to waste this much natural gas and allow the practice of flaring to tarnish the reputation of our state’s thriving energy sector to the general public and investors on Wall Street,” the chairman of the Texas RRC said after the announcement of the planned flaring caps.
Investors have always had the swing vote in oil and gas. This time, their vote may well mark the first step towards ending a decades-old practice of wasting energy and money in a win-win situation.
By Irina Slav for Oilprice.com
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