When Jim Wright won a seat on Texas’ energy regulator against climate activist challenger Chrysta Castaneda, the anti-fossil fuel movement’s collective hearts sank.
The planet will be ruined! But the Texas Railroad Commission—the Commissioners of which are nearly always Republican and fossil-fuel friendly—bowed under the climate pressure long before the election and is now cracking down on flaring. And if climate activists (and Big Oil, but more on that later) have their way, Texas’ oil industry will suffer.
But rather than point to the climate win and acknowledge the Republican-led regulator’s efforts against flaring, much like Michael Bloomberg-supported failed candidate Chrysta Castaneda’s, the media sucked up internet bandwidth to repeat Big Oil’s objection that these measures just aren’t far enough.
Where’s the total ban on routine flaring? they chide from their cheap seats.
For Texas, however, these regulations could prove far too much.
Between a Shale Rock and an (Even) Harder Place
Many of the oil and gas companies that operate in the Permian (and in U.S. shale patches everywhere) are publicly traded companies. They don’t answer to the American public at large, or to the media. And they don’t answer to Big Oil. They answer to one of two gods: their investors and shareholders, and the industry regulators.
What with all the sanctimonious oil divesting going on, the investors/shareholders that are left are mostly interested in one thing: returns.
That is not to say that they are willfully against climate consciousness. But when it comes down to the nitty-gritty, these investors want to see a return, not see reductions in flaring, which would not only hurt the bottom line, but would send many smaller oil and gas companies go under—utterly and completely.
This is a prime example of how the divestment movement—this melodramatic public spectacle that the media eats up—has created a situation whereby most climate-conscious investors have already bailed on the industry, and therefore have no voting power left that would allow them to effect change. This leaves oil and gas companies beholden to the other man with an entirely different agenda: the regulators.
Enter the Texas Railroad Commission.
With fewer approvals for routine fracking, oil and gas companies now find themselves stuck in an impossible position—and one that they are vilified for instead of acknowledging. The oil companies must satisfy their investors with returns, and reduce their routine flaring--but often this is an impossible ask.
The Texas Railroad Commission, the state’s poorly named industry body tasked with regulating the oil and gas industry--a job that has become much more difficult over just the last few years. The oil industry it regulates contributed $16 billion to the state’s coffers last year--and since 2007, it has contributed $150 billion. The Commission must tread lightly, threading the needle between looking out for the state’s fiscal interests and managing the effects of oil and gas drilling on the climate. And the voting public in Texas spoke loud and clear in this last election cycle when it elected James Wright to a seat on the Commission--an staunch oil advocate--over challenger Chrysta Castaneda--an equally staunch climate advocate who promised to end both flaring and venting at a time when the oil industry already finds itself in dire financial straits.
The Railroad Commission has tightened up some flaring regulations in November by making the process more thorough for oil and gas companies to apply for an exception to flare. Companies must now submit more information to justify why they have a need to flare, and the duration of those exceptions may be shortened in many cases. The new regulations could also provide incentives for operators to use technologies to reduce the amount flared.
But what does this flaring mean?
Flaring is the most economical—and often only—way to vent excess gas while pumping oil.
When you bring oil up out of the ground, a certain amount of gas comes with it. It’s just a necessary by-product of the oil industry. Where you find one, the other almost always follows. And as the well ages, the ratio shifts, and companies end up with less oil and more gas. In today’s climate where nat gas buyers and infrastructure are lacking, this is a tough position to be in.
So what do you do when you don’t have any use for that gas? When there aren’t enough pipelines to bring it to market, or when the market is oversaturated with gas, or when you can’t get a contract to process the gas, what is an oil company to do?
They have three choices:
- a) They can pay to have the gas taken away. This continues to lower the price of gas as the market gets more saturated, exacerbating the problem, and increases the cost of pumping oil. Investors won’t have it.
- b) They can stop pumping oil until the gas glut abates, foolishly hoping that all the other oil and gas companies choose to do the same, again, leaving investors unhappy.
- c) They can vent it into the atmosphere without burning, spewing methane into the atmosphere. Regulations limit the amount that can be vented.
- d) They can light it up and flare it, spewing Co2 into the atmosphere. This, too, is regulated.
The choice becomes that of the lesser evil, and most choose either c or d, and that’s because if they choose a or b, they won’t survive, plain and simple, because not everyone will choose a or b.
When regulators step in and limit the amount that can be flared or vented, there is no question it will hurt the bottom lines of oil and gas companies (and state revenues), sending many of them under, and creating budget shortfalls for the states that rely on oil and gas tax revenue.
Yes, each state could further restrict flaring and venting. And most do to some extent, and in the current climate, we are seeing more of this. Texas just recently announced that it would put stricter limits on routine flaring. This indeed could encourage oil and gas companies to flare less and instead incur additional costs—after all, we’ve established already that companies will choose the lesser evil. All the regulator has to do to get compliance is to enact harsh penalties for violators.
But what if other states, such as North Dakota, don’t follow suit? Will oil and gas companies operating in the Bakken then have a leg up over Texas if they can flare more gas, therefore lowering their operating costs?
This highlights one reason why state regulators may be reluctant to impose more flaring restrictions. What elected official wants to be responsible for killing jobs and killing state revenue, the likes of which are substantial, especially in the midst of a pandemic and oil price rout?
More Than You Know
Truth be told, flaring might be worse than you realize. Natural gas flaring hit new highs in 2019, with Texas accounting for 47% of the total gas flared in the United States. North Dakota was next, flaring 38% of the total, according to the EIA.
In total, the U.S. flared 1.48 billion cubic feet per day in 2019.
Pipelines: The Red-Headed Stepchild
Of course, much of the need for flaring and venting could be avoided with a few more pipelines. But these have fallen out of climate-conscious favor, too, on grounds that new fossil fuel pipelines are a step in the wrong direction.
Big Oil’s Perplexing Take
Some might be surprised to learn that many Big Oil companies are in favor of tighter venting and flaring regulations. But the reality is that the larger, more integrated companies have more capital at their disposal and costs spread over more barrels that would allow them to adhere to stricter regulations.
It’s the smaller companies that will struggle.
Occidental, for one, became the first U.S. company to endorse the World Bank’s Zero Routine Flaring by 2030 initiative earlier this year, signaling that it will be a strong supporter of efforts to reduce carbon dioxide emissions.
And Pioneer Natural Resources consistently flares a smaller percentage of its production than the basin average. The average flaring rate for oil producers in the Permian is 3.7%, according to GaffneyCline, yet Pioneer’s average is just 0.8%. Its CEO Scott Sheffield has called on energy investors to ditch their shares and pull funding from any energy company that has a rate of flaring above 2%. This serves as a prime example of why larger companies are behind tighter flaring regulations: because they can, and others can’t.
Things on this front are moving quickly.
Mid-December, the largest U.S. oil lobby, the API, launched a program that would encourage companies to rein in their flaring. Exxon announced in December plans to eliminate entirely its routine flaring by 2030.
The climate may call for an end to flaring, or at least a substantial reduction. Climate activists think so, a large number of scientists think so, and even Big Oil seems to think so. Pipelines could go a long way toward alleviating the regulatory burden of decreased flaring, but those projects are meeting resistance. Oil companies are left to choose between satisfying climate activists, regulators, and shareholders on their quest to quench the world’s thirst for crude.
By Julianne Geiger for Oilprice.com
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