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Rollback of methane rules expected to buoy US marginal wells

Highlights

Obama-era rules would have been prohibitively expensive for smaller operators

Trump administration officials see changes as boost to domestic supply

Marginal wells account for estimated 10% of US oil output

Washington — When WTI spot oil prices crashed below $30/b in early 2016, Columbus Oil sold off every well not within an hour drive of the company's headquarters in Seminole, Oklahoma because long drives were cutting into operating costs.

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The cost of transporting natural gas to pipelines had also risen, so the company sold off its gas wells too. To survive the downturn, the company also got rid of its postage machine, saving an estimated $1,200 a year.

Columbus operates 23 producing wells in Oklahoma which produce a total of about 110 b/d, or an average of about 5 b/d.

These marginal, or so-called stripper wells, make up a relatively sizable, but unspectacular portion of US oil and gas output. These are also the wells which appear to be the biggest beneficiary of the Trump administration's recent efforts to ease methane emissions rules put in place in the final days of the Obama administration.

Marginal wells, characterized as producing no more than 15 boe/d over a 12-month period, are often located outside the shale plays that triggered the ongoing US shale revolution. These wells account for roughly 10% of US oil production and 11% of US gas production, according to the US Energy Information Administration's latest data.

Marginal well operators are also, it seems, perpetually on the edge of profitability or collapse.

"We work on a shoestring to make money," Darlene Wallace, CEO and owner of Oklahoma-based Columbus Oil, told S&P Global Platts in an interview. "We don't have airplanes, we don't have corporate towers. We're a different kind of breed of producer."

WTI prices have climbed about $40/b since Wallace first considered eliminating the postage machine from her company's modest office and 2018 will likely be the first year in five years that Columbus has turned a profit, she said.

Still, Wallace was facing federal regulatory costs she said may have forced her to sell off the remainder of her wells, or least shut in production.

"It was going to be outrageously expensive," she said. "I wouldn't have been able to do it."

But Wallace, and thousands of other operators of US marginal wells got a reprieve this month when the Trump administration took formal steps to weaken Obama-era limits on methane emissions from oil and gas operations.

The changes will "support increased domestic energy production -- a top priority of President Trump," Andrew Wheeler, the US Environmental Protection Agency's acting administrator, said as the agency announced a proposal which would roll back requirements for producers to monitor and repair methane leaks.

The Interior Department last week finalized a rule rolling back some of the requirements for methane emissions from oil and gas operations on federal lands.

Although the potential future supply impact of these changes remains unknown and likely hinges on future oil and gas prices, takeaway capacity and other factors, marginal well producers will clearly be the major beneficiary of the methane rollbacks.

Operators of even productive marginal wells may make only $50/d in revenue after taxes and royalties, making them severely at risk for negative impacts of relatively costly regulation, according to Lee Fuller, an executive vice president with the Independent Petroleum Association of America. Federal methane rules, such as one requiring a $100,000 flare camera and hiring trained operators, likely would have shut-in the majority of these marginal wells.

"The costs were enough to take a productive well from plus money to minus money," Fuller said.

Stripper wells can be "very sensitive" to non-maintenance capital requirements, according to Kevin Book, managing director of ClearView Energy Partners.

"Specific conclusions depend on operators, their portfolios and the prevailing price of oil," Book said. "Some marginal wells can get pretty resilient above $100/b because most production is pretty resilient at that price. At $40/b, it can be a different story."

When the Interior Department last week announced its final rule weakening an Obama-era rule aimed at curbing methane emissions from oil and natural gas operations on federal lands, Katharine MacGregor, Interior Secretary Ryan Zinke's deputy chief of staff for policy, pointed out that the Obama-era rule, if not revised, likely would have shut down much of the US' marginal well production.

"Do you want to pay and install a lot of new equipment on these wells, or is it more economically viable for them -- and a choice they would have to make -- to shut that production in?" she said during a conference call with reporters.

In its final rule, Interior estimated that about 73% of wells on agency-administered leases are marginal wells. Interior said that annual compliance costs for these marginal well operators would have accounted for 24% of an operator's annual revenues from even the highest-producing marginal oil wells and 86% of an operator's annual revenues from the highest-producing marginal gas wells.

Interior estimates that, without the revisions to the methane rule, roughly 18.4 million barrels, or about 5,000 b/d, may have been shut in. But Book said the supply impact could be higher.

"Companies that no longer must commit staff and working capital to wells on federal lands could theoretically divert those resources into operations and productive investments elsewhere in their portfolios that could add to oil production," Book said.

-- Brian Scheid, brian.scheid@spglobal.com

-- Edited by Alisdair Bowles, newsdesk@spglobal.com