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Prioritizing oil, Texas Railroad Commission rejects challenge to gas flaring permit

Highlights

Decision prioritizes continued flow of crude oil

Low natural gas prices at Texas hubs cited

The Texas Railroad Commission on Tuesday approved a small producer's application to continue flaring gas from a set of Eagle Ford Shale wells, despite objections from the midstream company that gathers gas in the same field.

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The TRC's reasoning was that the value of the crude oil coming from a producing well outweighs the lower value of the associated gas that must be removed.

Although the TRC has never denied a producer's application to flare gas, the 2-1 vote in the first challenge to a flaring permit sets a precedent. It showed approval for the state's Permian Basin producers who currently flare millions of cubic feet of gas daily, prioritizing allowing crude oil to continue to flow while gas pipeline developers catch up to the Permian's explosive growth.

Citing rock-bottom natural gas prices at Texas hubs -- where prices go negative at times, forcing producers to pay for gas takeaway -- Commissioner Ryan Sitton said shutting in nearly $500,000 per day of oil production coming from Exco Resources' Briscoe Ranch wells to prevent burning off roughly $10,000 per day of associated gas production would be a waste that the commission is charged with preventing.

"I do think we are being consistent," Sitton said.

CHALLENGE BY WILLIAMS

Pipeline giant Williams challenged Exco's request for an extension of its permit to flare gas from some Briscoe Ranch oil and gas wells in the Eagle Ford Shale, saying Exco was connected to Williams' gathering system and simply did not want to pay to remove the gas. It was the first time a midstream company had challenged a producer's application for a permit to flare.

While flaring permits in the Permian are needed to dispose of gas that has no pipeline path out of the basin, Williams' Mockingbird Midstream Gas Services' system was in operation at Briscoe Ranch when Exco bought its wells there, Williams attorney John Hayes told the commissioners in June. Exco just does not want to pay for gas transportation when it can flare, Hayes said.

"Exco bought into the wells knowing what the price was," Hayes said. "Flaring is waste -- if the test is that anytime the gas revenues are less than the [costs], you should be able to flare. There's no need for the flaring regulation."

Exco's position is that Williams' tariff is too high to make any money on the gas. Shutting in the well to prevent gas flaring would limit the amount of oil the wells will produce, and unproduced oil is also waste that the commission is responsible for preventing, Exco attorney David Nelson argued in June.

FOCUS ON REVENUES

Williams said the TRC should take into account oil revenue when balancing the costs and benefits, while Exco noted that the commission historically has never commingled oil and gas revenues when making decisions.

"Clearly we are disappointed with the railroad commission's ruling. However, we do appreciate the agency's attention to the matter," Williams spokesman Christopher Stockton said in an email. "We are committed to continuing to work with our customers in a productive manner to provide the market with effective natural gas gathering solutions."

The Environmental Defense Fund said the commission's decision gives operators a "blank check" to turn down pipeline connections because they can flare. "Preventing waste and pollution will eventually cost operators," Colin Leyden, the environmental group's senior manager for regulatory and legislative affairs, said after sitting through the hearing in Austin without being called as a witness. With no limits to flaring, "operators have all the leverage," Leyden said.

Commission Chairman Wayne Christian, who cast the dissenting vote, did instruct the commission's staff to gather data on how many operators are flaring despite having access to a pipeline system, which Leyden found encouraging.

If he had been called to testify, "I would have urged the commission to look at the data and figure out a process going forward," Leyden said.

-- Bill Holland, S&P Global Market Intelligence, newsdesk@spglobal.com

-- Edited by Bill Montgomery, newsdesk@spglobal.com