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Growth in Permian Basin flaring puts oil and gas industry leaders at odds

Oil and gas industry executives expect flaring events — the controversial practice of burning off associated natural gas to enable oil production growth — to increase with Permian Basin oil production, and some industry leaders worry the practice could grow at an unsustainable pace given the lack of economic or regulatory incentives curbing the practice.

Speaking at a Sept. 12 event at the Center for Strategic and International Studies in Washington, D.C., Pioneer Natural Resources Co. President and CEO Scott Sheffield, who expects Permian oil production to eventually double, pegged the Permian's gas-to-oil ratio at approximately 3,000 cubic feet of natural gas per barrel of oil production, and predicted that ratio would increase to 4,000 cubic feet per barrel over time, accelerating the rate of natural gas production growth. "I would expect the Permian Basin … could easily get to 35 Bcf/d," he said.

Against that backdrop, Chevron Corp. subsidiary Chevron North America Exploration and Production Co. President Stephen Green said poor economics mean investments in natural gas pipeline infrastructure are not keeping up with the region's associated natural gas production.

"U.S. natural gas prices are pretty low right now, and demand is not growing at the same rate as production growth," Green said. "You just simply cannot afford to buy long-term transmission capacity … if you're not getting a return on it from the market."

Rusty Braziel, president and CEO of RBN Energy, a firm that provides consulting and advisory services to the energy industry, said pipeline bottlenecks have led to negative natural gas prices, where producers are effectively paying the market to dispose of an oil production byproduct. But the situation that has so far not curbed oil and gas production. Braziel explained that at an oil price of $45 per barrel, producers will still break even when natural gas prices are negative $2 per MMBtu. At $55/bbl the natural gas break-even is negative $4/MMBtu, and at $65/bbl, the natural gas break-even is negative $8/MMBtu. Braziel said the industry flares between 400 MMcf/d and 500 MMcf/d of natural gas as oil price driven natural gas production growth overwhelms Permian infrastructure.

Both Green and Sheffield have advocated for the industry to bring an end to flaring, with Green noting that Chevron has had a "no flaring policy" since 2008, though he said the company has to flare occasionally for safety.

Sheffield said an Aug. 6 decision by the Texas Railroad Commission denying a first-ever challenge to a natural gas flaring permit means that state regulators want "the producers and the pipeline companies to figure it out amongst themselves," adding his company would begin disclosing its practices that limit flaring to investors, such as not starting production until wells are tied in, in order to pressure the rest of the industry to improve practices.

But not all operators may be in a position to eliminate flaring.

"The challenge depends on where you are on the economic spectrum as an operator," Green said. "How many tools can you afford to deploy to deal with the movement of oil or gas? How broadly you participate in the market is also another determinant. … Part of the calculus of our development strategy is: What are we going to produce? What is the gas-oil ratio? How are we going to move the oil molecules? How are we going to move the gas molecules? … Routine ongoing long-term flaring is not going to be sustainable."

Former Schlumberger Ltd. CEO Andrew Gould said "flaring has not changed one iota" since governments started working to limit it in the 1980s. "It's just moved from place to place," he said. "It's very linked to acceleration of new production. ... You can't just produce without taking care of the gas, but some people can't afford to wait to take care of the gas before they start to produce. A regulator who would put a limit on flaring every month in the Permian ... would have a very dramatic effect on the economics of independents."

"The financial returns of the industry in general have been under scrutiny," Schlumberger global director of ESG and stewardship Lees Rodionov said. "Figuring out what the solution is with that lens is a challenge. You have the option to penalize or tax or do incentives and credits. Credits are going to be an easier way to incentivize a behavior in the financial climate that we're talking about."

Vice President of sustainability programs for the Cynthia and George Mitchell Foundation Marilu Hastings argued regulators should be more assertive: "If Boeing can't afford to build a safe airplane, they shouldn't put airplanes into the sky," she said. "The producers that can economically and responsibly produce their product should dominate the market. Perhaps there should be some consolidation of the … wildcatters that cannot produce responsibly in an economic way."

"From a service company perspective there are a lot of customers globally that are asking questions about what we're doing on sustainability in general, and can we measure it in particular on the environmental side." Rodionov said. "But it's not factoring into the commercial decision yet, even [for] operators that have been quite vocal about it."