Reducing Negative Externalities of Natural Gas Production: Exploring Regulatory Alternatives

Jessica Blackband, MPP, Staff Writer, Brief Policy Perspectives

OLYMPUS DIGITAL CAMERA

Well head after fracking equipment is taken off.

A recent Pew study found that Americans perceive climate change as one of the top global security threats, second only to ISIS. Ancipicating significant long-term costs to human and natural communities, regulatory agencies wrestle with how to best manage climate risks. While advances like hydraulic fracturing are thought to contribute to an overall reduction in U.S. carbon emissions by allowing natural gas to displace more carbon-intensive forms of energy such as coal, natural gas operations sometimes vent (release) and flare (burn) methane in the extraction process. The venting of methane is deeply concerning from a climate perspective, because methane is a potent greenhouse gas. In fact, it is 25 times more effective at trapping heat than carbon dioxide. Lessees of federal land self-reported that approximately 462 billion cubic feet of natural gas was wasted between 2009 and 2015.

The Bureau of Land Management (BLM), which leases land to energy companies for natural gas extraction, finalized the Methane Waste Prevention Rule in 2016. This rule regulated natural gas venting and flaring on federal lands in order to reduce climate impacts and reduce the amount of energy wasted in the U.S. each year.  In 2017, President Trump’s Executive Order 13783 mandated that the BLM review the 2016 Methane Waste Prevention Rule to ensure that it did not impose unreasonable restrictions on energy development and economic progress in its effort to ensure that energy assets develop. This review resulted in proposed revisions to the rule. These revisions missed a valuable opportunity to explore incentive-based programs aimed at reducing methane waste.

Incentive-Based Alternatives to Waste Prevention

1) Adjusting Royalty Rates

The BLM could adjust royalty rates to incentivize waste minimization behavior. Surprisingly, royalty rates on federal lands have not changed from 12.5% for nearly 100 years, but competitors leasing state and private lands for energy extraction have increased their rates over time, meaning that companies leasing private lands can retain a larger portion of their profits from extracting and selling natural gas than companies leasing public lands. Prior to 2016, the BLM considered whether to levy royalties on vented and flared gas on a “case-by-case basis.” Regulators would determine whether or not royalties would be levied based on how economically necessary it was determined to be. The 2016 rule intended to drastically reduce case-by-case revision of venting and flaring proposals by implementing general rules regarding when venting and flaring is permitted.

The 2016 rule correctly diagnosed that royalty rate policies for venting and flaring gas are too complex and that streamlining this process is key for minimizing waste. However, in the 2016 proposed rule, the BLM missed an opportunity to consider using royalty rates as price mechanisms that could be used to encourage waste reduction behavior. The BLM could offer royalty reductions for producers who can demonstrate that they are recovering natural gas that would otherwise go to waste. However, the 1920 Mineral Leasing Act mandates that the BLM’s royalty rates are set at “not less than” 12.5%, so decreasing these rates would require more extensive statutory changes. Instead, rates could be raised overall but kept lower for those who can prove that they are minimizing waste.

Critics of this approach object that increased royalty rates could prompt energy companies to lease elsewhere, but there is little evidence to support this. A 2017 GAO Report reviewed studies that looked at the potential impact of royalty increases on energy production on federal lands. None of these studies found a projected decrease in natural gas production on federal lands of more than three percent, even in cases that projected  doubled royalties.

2) Public-Private Partnerships

Raising royalty rates may take a while to implement, and as a result, regulators may want to explore other ways to incentivize waste-minimization behavior. The BLM should also consider other economic incentives to reduce waste.

The 2018 proposed rule notes that some natural gas producers are reducing methane waste independently of government mandates. For example, the American Petroleum Institute’s alliance of 26 producers  have publicly committed to reducing methane waste using equipment changes that the 2016 rule attempted to mandate, such as replacing inefficient pneumatic controllers and better detecting leaks for rapid repair. The BLM could partner with these and other professional societies to offer royalty reductions for lessees who can prove such waste reduction successes. Natural Gas STAR, a voluntary, public-private partnership between the Environmental Protection Agency and the oil and gas sector that aims to reduce methane waste, is an example of this kind of program. Since 2000, industry participants have prevented approximately 1.39 trillion cubic feet of methane emissions using a suite of over 100 approaches.

Conclusion

Even if the agency ultimately decided not to pursue either of these approaches, they are certainly worthy of consideration in the Regulatory Impact Analysis accompanying the proposed rule. These voluntary approaches would allow the agency to encourage waste minimizing behavior while minimizing impacts to small businesses and the economy.

 

 

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