Pink Petro Staff

Obama's Win-Win: Support US Oil Exports In Exchange For A Ban On Flaring Of Natural Gas

Blog Post created by Pink Petro Staff on Nov 2, 2015

By Jim Crane; Forbes

The debate over US crude oil exports provides a long-overdue chance to throw off the shackles of political gridlock.

The Republican-dominated House voted last month to lift the 40-year-old ban on oil exports. President Obama vowed to veto the bill if it reaches him.

However, the Obama administration and Congressional Democrats are showing signs of disillusionment with the increasingly indefensible ban, which rewards US refiners at the expense of oil producers and the motoring public.

Still, a favor to the oil industry won’t be possible without a concession, probably one that recognizes the environmental harm from enabling more US oil production.

Some Democrats would back an export bill if it contained support for renewable power generation, such as the renewal of expiring federal tax incentives that would promote continued build-out of wind and solar power.

As I (and many others) have argued elsewhere, a carbon tax would better encourage low-carbon generation. Since the political radioactivity of the word “tax” rules this out, we are left to pick winners, and wind and solar are the best of these.

However, renewable electricity generation has no connection to oil production or export. Oil is a transportation fuel. Barring an exponential increase in the size of the US electric vehicle fleet, boosting wind or solar capacity won’t reduce demand for oil, or the associated carbon emissions.

A better bill would directly target carbon emissions from US oil production. Fortunately, this is easy. Congress should allow US producers to export crude oil – as long as they capture and market the associated natural gas they produce, rather than waste it.

In other words: Let’s replace the ban on crude exports with a ban on natural gas flaring.

The flaring, or burning off of natural gas at the wellhead, has become an increasing problem since 2009; a side effect of the shale oil boom.

Flaring methane is better than the now-banned practice of venting it, since methane is flammable and, in the short run, 84 times more powerful a greenhouse gas than carbon dioxide. Still, flaring in North Dakota spewsthe yearly carbon equivalent of a million additional cars.

But unlike carbon emissions from driving, flaring is flat-out waste – about $1 billion a year in US natural gas that could have generated electricity, heated homes, or kept chili simmering on the nation’s stovetops.

largest US source

Much of the flaring in the United States – about 45% of it – is concentrated in North Dakota’s Bakken shale basin, where 28% of gas produced in 2014 was burned at the wellhead.

That is a far bigger proportion than in states like Texas, where flaring and venting has increased by 400% in four years but remains at around 1% of production; and in New Mexico, Wyoming and the US portion of the Gulf of Mexico, where it is under 2%.

For North Dakota, 28% is an improvement on years when it flared a third or more of its gas. At those levels, the Peace Garden State is in dubious company: tied withRussia, which also flares a third; and ahead of chaoticNigeria, which flared a quarter of gas production in 2012. In volume terms, those countries flare far more gas. Still, North Dakota’s waste, captured memorably insatellite imagery, amounts to about 4% of the global total.

Bakken flaring

(Flaring in the Bakken, PennEnergy)

Why is North Dakota so profligate? Mostly because investors in the Bakken are seeking oil, not gas. Since the state doesn’t force them to capture associated gas, they can avoid the cost of gathering and transporting it, which may outweigh revenues from selling it. Major gas markets lie far away from North Dakota, a state that generates almost all of its electricity from coal.

north dakota electricity

There are other reasons for North Dakota’s flares, including the fast decline in flow rates typical of shale wells, which can incentivize building of more initial gas takeaway capacity than is ultimately needed for a group of wells. Other factors include bad weather, private or tribal ownership of land, and an influential coal industry and power sector built around poor quality lignite. With so much coal, there is little room for natural gas in North Dakota.

But North Dakota’s lax regulations are the enabling factor. Producers are allowed to flare off an unlimited amount of natural gas for a full year after completion. Afterward companies which can demonstrate “economic infeasibility” are granted extensions.

As my colleague Ken Medlock writes, flaring is a “source of demand directly associated with oil production, but it serves no purpose other than allowing firms to avoid the cost of installing gathering infrastructure.”

A ban on flaring would add about $180,000 to the cost of the average well, according to the American Petroleum Institute, which opposes such restrictions. A flaring ban would also provide producers with an increase in revenue from marketed gas that could offset some or all of the expense. Using the API estimate, Medlock found that a typical producer’s cost of a flaring ban over two years would average less than 4 cents per thousand cubic feet (mcf) of gas that was captured and sold rather than flared. At the time of writing, gas was available to North Dakota utilities for $2.87 per mcf, which is slightly higher than the value of gas at the wellhead.

 

Last year, North Dakota approved a plan to reduce flaring to 5% of production by 2020. But in light of recent drop in oil prices, the plan has been delayed. Even at 5% of production, North Dakota would still be flaring at rates more than double those of other oil and gas states.

Alaska, which produces mainly conventional oil, managed to reduce flaring to 0.2% of production – despite harsh weather and low population density – byrestricting flaring to one hour, emergency-only periods. Wyoming and Colorado already require flare-less green completions. In Pennsylvania’s Marcellus formation, where gas is the main event, very little is flared off.

Texas allows flaring for 10 days after completion, butgrants extensions. In practice, Texas’ anti-regulation bent has regulators looking the other way when producers flare without permission or go beyond their allowances. Texas’ leniency has exacerbated air pollution and potentially cost mineral rights holders thousands of dollars per day in lost royalties.

FLARING DAY 1 KMH 6

Flaring in the Eagle Ford (San Antonio Express-News)

Banning flaring could actually assist oil exports. As the Congressional Research Service has shown, different grades of crude oil have different carbon intensities. This is the crux of the opposition to the Keystone XL pipeline, which would enable imports of very high-carbon crude oil from Canada to the Gulf coast. Eliminating US flaring would make US crudes morecompetitive on a carbon intensity basis.

A simple way of enacting a flaring ban would be to extend the US Environmental Protection Agency’s green completions rules to prohibit flaring by a given date after completion of an oil well, other than in an emergency. As in Alaska, any flaring or venting should be accompanied by a written report.

Of course, the US oil industry would probably oppose tightening a rule that raises oil production costs in a low-price environment. However, the firms urging Congress to overturn the ban on crude oil exports recognize that ending the ban would raise the value of US shale oil. Numerous academic, think-tank and government studies have reached similar conclusions.

If US producers want to export their crude and capture higher world prices, why not make sure that some of the increased revenue is invested in capturing the natural gas now being squandered? Otherwise, allowing US crude exports would encourage increased oil production, along with more pollution and resource waste.

Furthermore, shale oil producers which are already gathering and marketing their associated gas rather than flaring, would be rewarded with higher prices for their crude. Their practices already incorporate gas capture costs without the environmental damage associated with flaring.

By predicating a lifting of the export ban on an end to flaring, the Obama administration would be in the enviable position of having it both ways: creating an immediate environmental benefit while supporting economic activity in the US oil sector.

Jim Krane is the Wallace S. Wilson Fellow for Energy Studies at Rice University’s Baker Institute for Public Policy.

Follow him on Twitter on @jimkrane

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