January 2017 Vol. 72 No. 1

Washington Watch

Controversial BLM Rule Could Stimulate Gathering Line Construction

It is not often that a federal regulatory dictate is good for one section of the oil and gas industry but bad for another. But the Bureau of Land Management (BLM), which is part of the Department of Interior, manages to create that divergence with its November final rule which affects nearly 100,000 federal onshore oil and gas wells accounting for 11 percent of the nation’s natural gas supply and five percent of its oil.

Producers will have to connect many, but not all, of their wells to pipeline gathering systems to collect the new gas rather than flaring. Much of that gathering infrastructure is not in place and would cost producers millions of dollars to build. Dan Naatz, senior vice president of government relations and political affairs at the Independent Petroleum Association of America (IPAA), says “Currently, a lack of infrastructure and gathering lines to collect gas at the wellhead make it difficult for producers to safely transport our product to market.”

In its January 2016 Regulatory Impact Analysis, the BLM does not include any amounts related to pipeline construction. Nor has the agency estimated the miles of pipeline that are likely to be needed to meet the connection requirements in the rule. A BLM spokeswoman did not respond to a query about whether the BLM considered the cost of potential pipeline needs. However, there is a concern that producers in areas such as North Dakota and New Mexico, where the heaviest exploration on federal lands is being done, may opt to close smaller well sites rather than spend what it costs to connect them to either existing or prospective gathering systems.

“The new rule has a potential of closing in natural gas development on federal lands which is not good for producers nor for GPA Midstream members,” states Matthew Hite, vice president of government affairs, GPA Midstream Association. “I don’t think this rule will lead to an increase in gathering line construction. In the cases where venting or flaring happens, the reasons are usually because lengthy permitting delays or cost prohibitive economics that have prohibited the installation of gathering lines.”

The cost of new infrastructure plus arguments about regulatory overreach and new royalty payments have driven the Western Energy Alliance and the IPAA to file a lawsuit against the BLM, calling the final rule a broad new air quality regime that goes beyond authority granted by Congress.

“The BLM’s rush to regulate something already being regulated at the state and federal level is an example of poor government policy and a left hand not knowing what the right hand is doing,” says American Petroleum Institute Director of Upstream and Industry Operations Erik Milito. ” BLM’s new regulations are unnecessary, redundant, technically flawed and could stifle the innovations that have led to our nation’s environmental successes.”

The BLM rejects that argument. It argues it has very carefully considered and minimized potential overlaps with other federal, state or tribal regulations. The rule includes a provision that authorizes the BLM to grant variances from particular BLM requirements. But the agency declares, “It is critical to note, however, that neither EPA nor state and tribal requirements obviate the need for this rule.”

Republicans in Congress will make every attempt to eliminate the new rule. “This purely political move by the Obama administration is a last-ditch effort to save the president’s crumbling climate legacy,” states U.S. Sen. Jim Inhofe (R-OK), chairman of the Senate Environment and Public Works Committee. “BLM’s rule on methane and the oil and gas industry is unnecessary and duplicative. Congress has many tools with which to rescind this rule and I look forward to working with the incoming Trump Administration to ensure economic expansion prevails over misguided bureaucratic interference.”

The new BLM regulations replace those instituted in 1979. The updates are based on recommendations from the Office of the Inspector General of the Department of the Interior (OIG) and the Government Accountability Office (GAO). The rule is called “Waste Prevention, Production Subject to Royalties and Resource Conservation” and is scheduled to take effect Jan. 17, 2017.

The Final Rule requires operators to evaluate opportunities for gas capture and prepare a waste minimization plan prior to drilling of a development oil well. The plan must be submitted with an Application for Permit to Drill (APD) and must be shared with midstream gas capture companies to facilitate timely pipeline development.

The final rule made five significant modifications from the proposed rule in an attempt to mollify industry critics. The final rule uses specified capture targets, rather than requiring that operators capture 100 percent of their associated gas above fixed volumetric limits as initially proposed, in response to comments indicating that, in some states (notably North Dakota and New Mexico), gas volumes are so high and the availability of capture infrastructure so variable that it is extremely difficult to identify a fixed volumetric limit on flaring that would both be achievable and also provide meaningful reductions in all states.

The ability to profit from captured gas – the BLM argues companies can sell the gas and make a net profit – depends on the availability of pipeline gathering capacity. The agency’s cost/benefit analysis found that the benefits would be $209-$403 million per year based on gas sold and methane taken out of the environment, which is to say its “environmental, non-monetary” benefit. The costs would range between $110-$279 million per year in each of the next 10 years.

But shortcomings in the pipeline infrastructure may make it hard to achieve the new sales cranked into the benefit numbers. Numerous companies pointed out the impediments to getting approval of new pipelines built in rights of ways (ROWs). The BLM admitted in the final rule that processing time for ROW applications “can sometimes be an issue, particularly in a handful of offices where staff retention has been difficult over the past few years.” But it went on to argue that processing time is not the primary cause of the large volume of current flaring. BLM data indicates that many applications to flare gas come from wells that are already connected to pipeline infrastructure, or for which operators are not seeking ROWs to build new pipelines.

While there may be some difference of opinion on whether ROW applications are being processed quickly enough, there is no doubt that the cost to build new gathering systems is substantial. Scott Kidwell, vice president of government and public affairs, for Concho Resources, which does substantial federal oil and gas exploration and production in the Permian Basin of New Mexico, says, “If Concho were to construct and install one mile of a four-inch gas line, it would cost Concho approximately $220,000, plus the cost associated with procuring and maintaining the right-of-way. An operator of a low volume oil well that is required to capture the associated gas by constructing and installing a gas line would likely be forced to shut-in or plug the well due to the prohibitive costs associated with procuring, constructing, installing and maintaining the gas line and associated right-of-way.”

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