Gas Flaring “Running Rampant” In The Permian

Gas flaring in the Permian basin is "running rampant," and may not be fully resolved even after new gas pipelines come online.

Texas is now one of the world's largest sources of gas flaring in the world, according to an investigation from Energy Intelligence.

By now, most industry watchers are aware that gas flaring has been rising quickly in the Permian basin, as aggressive drilling for oil is pulling up huge volumes of associated natural gas. The surge of gas production caught the industry off guard, leading to a localized supply glut and no way to move the surplus. As a result, drillers are flaring off ever-increasing volumes of gas, burning it off into the atmosphere.

But the spike in gas flaring is also the consequence of Texas regulators, determined to keep the oil boom going. "[R]egulators are pushing through permits and companies are prioritizing oil production growth above all other considerations," Deon Daugherty wrote in the Energy Intelligence report. The report also notes that the Texas Railroad Commission (RRC) is made up of three commissioners who are publicly-elected and "whose campaigns are largely funded by the industry."

The RRC is responsible for regulating oil and gas companies, including deciding whether or not to approve permits for flaring. Strikingly, the commission has never denied a permit for flaring, despite the rapid proliferation of the practice, "giving operators free rein to dispose of associated gas," Daugherty wrote for Energy Intelligence. Last year, as gas production continued to surge, some analysts speculated about the possibility that shale companies would have to slow the pace of drilling because they would be unable to flare.

But the Texas RRC has never let them down. Regulators approve permits that allow drillers to flare for months at a time. When the permits near expiration, they are extended. In some cases, companies receive permanent waivers, allowing the practice to continue indefinitely. One commissioner on the Texas RRC even wrote a recent op-ed, extolling the upsides of flaring, stating that it was "an important part of America's rise to global energy dominance." Related: Iran Looks To Reduce Dependence On Oil To Zero

This year, gas flaring in Texas is set to increase by 25 percent over 2018 levels, "countering international government and official industry efforts to rein in flaring in response to global warming," Daugherty wrote for Energy Intelligence. Daugherty said that the Texas RRC approved 4,197 flaring permits in 2018, a 50 percent increase from the year before. The current pace for 2019 is on track to surpass even last year's large total. If Texas were a country, it would be the fourth largest source of gas flaring in the world, sitting only behind Russia, Iraq and Iran, but ahead of Algeria, Nigeria and Venezuela.

Ultimately, the industry finds it more profitable to burn the gas. Recently, in a closely watched case, the Texas RRC approved a flaring permit request from Exco, a small driller in the Eagle Ford. The reason the case saw extra scrutiny was because Exco was not requesting a flaring permit due to a lack of access to pipelines. Exco had access, but didn't want to pay for it, and instead preferred to simply flare the gas. The Texas RRC sided with the driller, saying that the cost of pipeline access might force Exco to shut down the well. Better to let Exco flare, regulators argued.

One need not be an environmentalist or an industry critic to see that this situation is disastrous in many ways, including for the industry. As Energy Intelligence notes, gas flaring at such extremes "raises important risks for the industry's social license to operate." Reckless levels of venting and flaring is bad for local air quality and for the climate, but it also puts the industry's ability to operate at risk. Drillers are prioritizing short-term profit at the expense of the "climate and the oil industry's reputation," Daugherty said in the Energy Intelligence report. Sources told Energy Intelligence that "no company will curb Permian oil production based on flaring concerns."

A surprising conclusion from the Energy Intelligence report was that new pipelines might not fix the issue. The midstream bottleneck is often cited as the reason that flaring has exploded, and drillers and industry backers (including the Texas Railroad Commission) often argue that it is merely a temporary problem that will resolve itself when new pipelines come online. Related: The Two Forces In Oil Markets That Keep Money Managers Awake At Night

But flaring is the result of more than just a lack of pipelines, as the Exco case highlights. Additionally, equipment failures and gas plant shut-ins have also been a big factor. Meanwhile, even when long distance gas pipelines come online, there will still be a lack of other infrastructure, including compressor stations and smaller gathering lines. It's not clear when or if that infrastructure will catch up. Without regulation, the massive rate of flaring could continue. As oil production rises, so does gas output - and flaring. The EIA estimates that natural gas production in the Permian will rise by another 240 million cubic feet per day in September, month-on-month.

Instead, Energy Intelligence says that flaring relief only really comes when oil companies slow the pace of drilling. But without regulatory limits, they only do that when pressured by broader market forces. Low oil prices and poor financial results have heightened investor pressure recently, which is beginning to feed through to the industry's plans. "It may be that Wall Street - not the companies, the government or environmentalists - is the most effective regulator of flaring," Daugherty concluded in the Energy Intelligence investigation.

By Nick Cunningham of Oilprice.com

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