Flaring fight is the hands of Texas oil and gas regulators

Randy Diamond – San Antonio Express-News: A fight between a pipeline operator and an energy company is putting natural gas flaring, a controversial byproduct of the shale oil revolution, into sharp focus.

It’s playing out at the Texas Railroad Commission, regulator of the state’s oil and gas industry, in a case that producers and environmentalists are watching closely.

The commission oversees flaring — the controlled burning of natural gas, sometimes an unwanted commodity flowing out of oil wells — and approves thousands of uncontested permits for the practice a year. But Exco Resources Inc. of Dallas has a dispute on its hands for oil wells on the Briscoe Ranch in Dimmit County where it wants to flare the gas.

Oklahoma-based Williams Cos. opposes Exco’s permit, arguing it has a pipeline gathering system in the Eagle Ford Shale that can take the natural gas from Exco’s wells.

But Exco, which announced on July 1 it had reorganized and emerged from bankruptcy, contends it’s too expensive to transport the natural gas through Williams’ pipeline. In a document filed with the regulator, Exco said it doesn’t have a connection to the gathering system.

The pipeline company disputes that.

“The valve is closed because of the dispute over the price, but it is like saying your kitchen faucet is disconnected because you turned off the faucet,” Williams attorney John Hays Jr. told the Railroad Commission at a hearing last month. “No, the faucet is still there.”

The commission, weighing whether pipeline costs should play a role in determining if oil producers receive permits to flare, could rule on the matter as soon as August.

Flaring has been under attack from environmental and public health organizations as well as the World Bank, which is conducting a global campaign to stop flaring by 2030, contending pollutants from the practice lead to climate change.

But Texas regulators have taken the position since the mid-1990’s that flaring at oil drilling sites is necessary if no pipeline is available to transport the natural gas, said Bret Wells, a law professor at the University of Houston. Before then, he said. the commission took a more evidence-based approach, balancing flaring with the the railroad commission’s charge to preserve natural resources — such as natural gas — and prevent waste.

“In my view, the flaring of natural gas when there is an immediately available pipeline available represents needless waste of the state’s natural resources,” he said. “Companies have a social license to operate in this state, and part of that social license is to operate in a conservation-minded manner that minimizes the waste of the state’s finite natural resources.”

Flaring has been on rise with the Texas oil shale revolution, which has helped propel the U.S. to become one of the top oil exporters in the world.

Rising crude production in Texas increased flaring by as much as 40 percent in the Permian Basin and 15 percent in the Eagle Ford in 2018 from the previous year, according to a World Bank report. Overall, the bank found that flaring increased by 48 percent in in the U.S. and 3 percent globally last year.

Related: Researchers Tally Flares in Eagle Ford Shale Region

Railroad Commission statistics show oil companies applied for 27,000 flaring permits in the last seven years. Commission spokeswoman Ramona Nye said all of them won approval.

“Protection of public safety and our state’s natural resources are the Railroad Commission’s top priorities,” Nye said in a emailed response to questions about the dispute between Exco and Williams. “RRC rules are in place and enforced to ensure safe, responsible production of our state’s natural resources.”

All three members of the Railroad Commission said at the June hearing said they took a free-market approach and were reluctant to force parties into contracts. On the other hand, they questioned whether considerations about expense were a valid reason to allow flaring in cases in which a pipeline was present.

Commissioner Ryan Sitton said if flaring permits were based on oil producers’ economic hardship, there’d be no need to have an approval process. Drillers, he said, would simply flare when it resulted in a better return than using a pipeline.

At the hearing, Exco attorney David Nelson argued Exco might have to shut down the wells if commissioners denied its flaring permit..

Hays, the Williams attorney, told the commissioners Williams spent $1.5 billion building the pipeline system, and that Exco could have built its own system but choose not to do so.

Exco officials did not return phone calls seeking comment on the case. Williams spokesman Keith Isbell said the company could not comment while the case was before the commissioners.

Their decision in the case could be far-reaching, said Simon Lack, managing partner at SL Advisors, a New Jersey firm that invests in energy infrastructure companies.

“If the RRC requires drillers to use available gathering and processing networks, regardless of economics, that would be good for pipeline investors,” he said.

An Exco victory, on the other hand, could give oil producers the upper hand and make pipeline companies reluctant to build new pipelines.

Low prices for natural gas are also playing a role in the dispute. Lack said pricing at the Waha hub in Midland has often been negative this year, meaning gas producers have had to pay to offload their output. For oil companies, that makes flaring a cheaper option than transporting natural gas through a pipeline.

Oil companies operating in the Eagle Ford use pipelines for gas whenever possible, said Christopher Ashcraft, interim president of the South Texas Energy & Economic Roundtable, an industry group.

“Its the responsible thing to do,” he said.

He said STEER had 11 members who are oil producers operating in the Eagle Ford. Exco was not one of them.

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