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Costs to Oil/NatGas Industry From EPA's Methane Emissions 'Manageable,' Analysts Say

The natural gas industry would be hit with as much as $420 million in costs in 2025 if proposals issued Tuesday by the Environmental Protection Agency (EPA) to cut methane emissions are adopted, but it would be "manageable," and U.S. production levels aren't likely to be impacted by the EPA rules, according to analysts.

Finding and repairing leaks, capturing natural gas from the completion of hydraulically fractured oil wells, and limiting emissions from new and modified pneumatic pumps and equipment used at transmission compressor stations would cut methane emissions by as much as 400,000 short tons by 2025, EPA said in its proposal (see Daily GPIAug. 18). The "commonsense measures" would reduce up to 180,000 tons of ozone-forming volatile organic compounds in 2025, along with 1,900 to 2,500 tons of air toxics, the agency said. The proposed rules would yield estimated net climate benefits of $120-150 million in 2025.

But there would be costs to the industry, too -- as much as $420 million in 2025, assuming 16-19 Bcf is recovered from implementation of the standards, according to Barclays analysts Nicholas Potter and Michael Cohen.

"We see these new standards as manageable from a cost perspective and unlikely to materially affect natural gas production levels in the U.S," the analysts wrote in a note Wednesday. "A number of technologies are currently in use that have the ability to limit methane emissions. Most of these have relatively reasonable upfront costs and, depending on natural gas price levels, payback periods below three years. New regulations will increase compliance costs for companies, but we do not see these as being large enough to take certain production volumes from the market."

Other analysts are forecasting trouble for smaller drilling companies already hamstrung by low commodity prices.

"In a low oil and gas price environment, every penny counts," said Oppenheimer & Co. analyst Fadel Gheit. Small companies could be swamped by costs associated with EPA's proposed rules, Gheit added.

In Colorado, where the industry and environmental groups have worked together to address some energy issues (see Daily GPIAug. 7, 2014), Gov. John Hickenlooper said EPA's proposal isn't likely to interfere with steps the state has taken to strike a balance between the need for a healthy oil and gas industry and concerns about health, safety and the environment.

"Colorado is a model demonstrating the success that can come from collaboration and hard work," Hickenlooper said. "As a result of tough discussions between industry leaders, the environmental community, and other relevant stakeholders, we became the first state in the country over a year ago to directly regulate methane emissions." Major producers in the state "have been generally supportive of the implementation" of the regulation, according to Potter and Cohen.

Industry groups have said the regulations are unnecessary and could add to natural gas costs. "The oil and gas industry is leading the charge in reducing methane," said Jack Gerard, president of the American Petroleum Institute. "The last thing we need is more duplicative and costly regulation that could increase the cost of energy for Americans."

Tuesday's proposals are among a number of actions that will help the nation reach the Obama administration's goal of reducing the oil and gas sector's methane emissions 40-45% by 2025. The Obama administration first released a strategy to reduce methane emissions last year, giving oversight to the EPA and Department of Energy (see Daily GPI, March 28, 2014).

EPA will take comment on methane proposals for 60 days after they are published in the Federal Register. The Pipeline and Hazardous Materials Safety Administration is scheduled to propose natural gas pipeline safety standards by October, and the Bureau of Land Management is due to update standards on venting, flaring and leaks by the end of 2015.

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