API: EPA's proposed emission rules would slow unconventional drilling

New Source Performance Standards proposed by the US Environmental Protection Agency would slow drilling, resulting in less oil and natural gas production, lower royalties to the federal government, and lower tax payments to state governments, according to an American Petroleum Institute study.

API commissioned the study, done by Advanced Resources International Inc. (ARI), based upon gas drilling levels from 6 months ago. Since then, some companies have reduced their levels of dry gas drilling.

“EPA needs to fix these rules in a way that they’ll reduce emissions but not impede oil and natural gas development,” Howard Feldman, API director of scientific and regulatory affairs, told reporters during a Mar. 15 conference call.

API representatives plan to make recommendations from the study to President Barack Obama, adding they already submitted many comments on the EPA proposals, which are expected to be finalized during the first week of April.

Feldman asked EPA to avoid a “one-size-fits-all” approach for emissions completions, to allow more time to implement the requirements, and to streamline compliance and recordkeeping requirements.

“Natural gas prices are half what they were 3 years ago because of the shale boom, and this is benefiting consumers and businesses,” Feldman said. “Applying overly burdensome regulations would be bad public policy and could place an even bigger burden on Americans in the form of higher energy costs.”

API hopes EPA will modify its proposals before finalization, Feldman said.

ARI used two scenarios

On July 28, 2011, EPA proposed rules designed to reduce air emissions from drilling and production. The standards involve several processes previously not subject to federal regulations, including fracing.

Under the proposed standards, emissions of volatile organic compounds (VOCs) would be minimized through the use of reduced emissions completions (RECs), which simultaneously reduce both VOCs and methane emissions.

The proposed rule imposes REC requirements on most unconventional gas wells, and it requests comment on concerns that limited availability of REC equipment could adversely impact drilling and US gas supplies. The specific list of REC equipment as identified in the proposed rule are sand traps, surge vessels, separators, and tanks.

EPA estimates a maximum 4,000/year wells use RECS out of the 25,000/year of new and existing gas wells involving fracing and refracing.

ARI developed two scenarios addressing the use rate of REC equipment and the rate at which REC equipment could be expanded:

• A high scenario assumed 140 REC equipment sets and crews available in 2012 with 200 REC sets/year to be added to 2015. Each REC set can service 25 wells/year.

• A low scenario assumed 292 REC sets and crews available in 2012 with 200 new REC sets/year to be added. Each REC set can service 12 wells/year.

Depending on the scenario assumed, ARI forecast the following effects from base case levels through 2015 after the requirements go into effect.

Overall drilling for unconventional gas wells during 2012-15 would be reduced by 12,700-21,400 wells from the number that would have been drilled without EPA’s standards. ARI said this means 1-1.8 billion bbl of otherwise economic unconventional liquids would not be developed and produced by 2015.

Federal royalties of $7-8.5 billion that otherwise would be collected would not be paid, and state revenues from severance taxes amounting to $1.9-2.3 billion would be delayed beyond the first 4 years after the requirements go into effect.

Howard said either scenario results in fewer unconventional reserve additions, less production, lower royalties, and lower severance tax payments. The ARI analysis did not attempt to estimate lost jobs associated with reduced drilling and oil and gas services.

Michael Godec, ARI vice-president, said the model used in the study assumed a certain level of technological progress although that would not be significant by 2015. Improvements in horizontal drilling and fracing continue to reduce well costs and improve recovery rates in unconventional plays.

Contact Paula Dittrick at paulad@ogjonline.com.

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