By Rich Heidorn
The Environmental Protection Agency on April 17 issued regulations on natural gas drilling that it says will not only improve air quality but also increase producer profits.
The regulations, which will take full effect in 2015, require producers to capture about 90 percent of the volatile organic compounds and methane that can escape into the air as a result of natural gas production using hydraulic fracturing, or fracking. EPA says the rule will cost producers about $170 million a year, but that cost will be more than offset by the sales of the captured methane and natural gas liquids, resulting in a net gain of about $15 million a year. The industry, on the other hand, projects net annual compliance cost at more than $2.5 billion.
The Bloomberg Government Study, titled “Fracking Emission Rules: EPA, Industry Miss Mark On Costs, Consequences” (subscription required) analyzes available data on the number of wells affected by the rule, compliance costs per well, the volume of fuel captured and the price for which it can be sold. The study finds that the regulation is neither the profit driver EPA claims nor the billion-dollar burden industry has portrayed.
The study finds:
• The regulations will increase producer costs by $316 million to $511 million a year, or less than 1 percent of producer revenues.
• Drillers are already capturing emissions in geological formations where the volume of methane and liquids makes the capture cost effective. For some wells covered by the new rules, the cost of capture may exceed the incremental revenue from captured fuel.
• Producers voluntarily capturing emissions or operating in states that already require capture will face little or no change to their operations aside from reporting requirements. Other producers may reduce drilling for new wells as they divert capital now spent on production to complying with the regulations.
• The regulations may generate annual revenue of about $383 million for well service providers and more than $125 million in sales for equipment manufacturers.
EPA projected that producers would generate profits totaling about $15 million a year from the natural gas drilling regulation, while the American Petroleum Institute estimated net costs of more than $2.5 billion. Bloomberg Government estimates net compliance costs of $316 million to $511 million, based on gas prices of $3 to $4 per thousand cubic feet (mcf).