Obama Issues New Methane Rules, Adds To O&G Headwinds

Jeff Reed

On Friday, the Obama administration proposed a new rule aimed at reducing emissions of methane from O&G drilling on federal land. The measure would mandate that O&G companies use equipment to capture leaked gas and would increase the costs they pay for extracting hydrocarbons on public property.

“The proposed rule on venting, flaring and leaking will help curb waste of our nation’s natural gas supplies, reduce harmful methane emissions and provide a fair return on public resources for federal taxpayers, Tribes, and States,” Interior Secretary Sally Jewell said in a Friday statement.

New Rule Comes At A Terrible Time For O&G

Friday’s measure comes after the Interior Department’s decision last week to delay new leases for coal mining on federal lands, and to reform the government’s program for leasing public lands to coal firms with the aim of increasing their costs.

Friday’s new rule (which is open to public comment before being finalized) is seen as a step that could lead to rules that could be imposed on O&G wells on private lands.

The new rule would be phased in over several years. It would require O&G firms to plug unintentional leaks of natural gas and curb the practice of flaring as they extract crude oil.

The rule would require O&G producers to adopt currently available technologies, processes and equipment that would limit the rate of flaring at oil wells on public and tribal lands, and would require operators to periodically inspect their operations for leaks, and to replace outdated equipment that vents large quantities of gas into the air.

Operators would also be required to limit venting from storage tanks and use best practices to limit gas losses when removing liquids from wells. The new measures would also clarify when operators owe royalties on flared gas, and ensure that BLM’s regulations provide congressionally authorized flexibility to set royalty rates at or above 12.5% of the value of production.

Part Of Obama’s Bigger Climate Agenda

Jewell characterized the proposal as a needed measure to reduce the waste of natural gas extracted from federal and tribal land. “Most people would agree that we should be using our nation’s natural gas to power our economy — not wasting it by venting and flaring it into the atmosphere,” she said in a statement.

Friday’s measure complements the Obama administration’s pledge to curb the O&G sector’s methane emissions about 40 to 45% by 2025 from 2012 levels as part of the climate deal reached in Paris last month.

How (& Where) The Rule Will Impact O&G

The Bureau of Land Management estimates it will cost the O&G industry $125 million to $161 million to enact the new rule. And, as noted above, the measure also paves the way for the US government to charge O&G companies higher royalty rates for the hydrocarbons they extract on public land. This would be yet another blow to the industry amid the oil price collapse.

Around 5% of the US’s oil supply and about 11% of its natural gas supply is extracted from approximately 100,000 federal onshore oil and gas wells, the New York Times reports. Those wells generated around $3 billion in royalties to the United States Treasury in 2014, the paper said.

Bloomberg reported that these new ethane mandates could render it too expensive for producers to continue draining oil from some marginal, low-flow wells, as well as discourage O&G production on public lands.

O&G companies say the new rules are duplicative of current state and federal regulations, and voluntary moves by firms to capture and sell natural gas.

The new measure could affect tens of thousands of producing O&G wells on public lands. However, but it will mostly impact producers active in the West. Bloomberg notes that O&G companies with substantial federal leases, including Encana, WPX Energy, Anadarko, Encana Corp., BP and Newfield Exploration, will be more affected by the rules than their peers- such as Pioneer Natural Resources and Whiting Petroleum that operate mostly on private land.