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With Permian flaring on the rise, regulation remains uncertain

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Permian flaring triples as calls increase to limit it

Tightening of regulations likely: Platts Analytics

Federal government could start regulatory push next year

Washington — Pioneer Natural Resources CEO Scott Sheffield has called flaring a "black eye" on the Permian Basin. Jason Bordoff, founding director of Columbia University's Center on Global Energy Policy, wrote this week that flaring must end or US oil producers will lose their social license to operate.

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Flaring, or burning off associated natural gas during oil production, has roughly tripled in two years in the Permian. And, as flaring has skyrocketed, so have the calls to curb it. But there is little agreement on how that should be done.

"We want to reduce flaring ... the question is how we do it," Texas Railroad Commisioner Ryan Sitton recently told reporters.

Sitton, a Republican, lost his re-election campaign in this week's primary election. James Wright, the Republican who defeated him, has yet to outline a plan for flaring. But both Democrats still vying for their party's nomination in November's election have said they plan to make the state's flaring permitting process stricter.

Either Democrat faces long odds of victory in November, but even if one bucks Texas voting trends, it is unclear how much one new member of the three-member commission may be able to do.

"Regardless of a Democrat or a Republican winning a Texas Railroad Commission seat, flaring regulations would not change dramatically in the short-term," said Rene Santos, an analyst with S&P Global Platts Analytics. "The long-term is more difficult to predict, but some tightening of the regulations is likely."

In the fourth quarter of 2019, flaring from Permian wellheads averaged 583,490 Mcf/d, down from a high of 683,410 Mcf/d in the third quarter of 2019, according to Rystad Energy. Permian wellhead flaring averaged 616,590 Mcf/d in 2019, up from 232,080 Mcf/d in 2017, according to Rystad.

In the Bakken Shale, where operators continue to flare more than 500,000 Mcf/d of gas, a lower total, but higher percentage of flared gas than in the Permian, historic oil output may be being held back by flaring regulation. The state requires operators to flare no more than 12% of associated gas production, a metric operators statewide have consistently missed. That limit falls to 9% on November 1, 2020.

Lynn Helms, director of the North Dakota Department of Mineral Resources, has told S&P Global Platts previously that oil output growth will slow significantly as the state steps up its flaring enforcement efforts.

"The public sentiment around flaring is changing and the public perception of it on a state and national level is that it has to decrease," Helms said in an interview.

Flaring intensity

Similar regulation in Texas would force operators to gradually adapt in the Permian, said Artem Abramov, head of shale research at Rystad Energy.

"We will see improved collaboration between E&Ps and midstream players on the project planning and we might see some project/cash flow delays, but nothing extreme in the basin-wide context as long as the flaring targets are reasonable," Abramov said. "In any case, large producers in the Permian are moving towards much stricter internal flaring policies. Some of them are already there."

Abramov said regulators may see no need for regulation due to the ongoing reduction in flaring intensity in the Permian over the past year.

In Q4 2019, Permian flaring intensity, or the percentage of gas flared in the play, fell below 4%, down from about 5% a year ago, according to Rystad. Flaring intensity in the New Mexico portion of the Permian fell from 4.5% in Q4 2018 to a range of 2.8% to 3.2% in the second half of 2019, Rystad said.

But despite the plunge in flaring intensity, federal regulators may decide to address the issue if Texas regulators continue with lenient permitting, analysts said. This would likely only happen if a Democrat takes the White House in November's election and would likely set up a lengthy legal battle with Texas.

According to the Environmental Defense Fund, the US Environmental Protection Agency could seek to limit flaring by using its authority under Section 111 of the Clean Air Act to regulate criteria pollutants and greenhouse gas emissions from stationary sources. It could also use its authority under Section 112 of that act to regulate hazardous air pollutants from stationary sources.

Under the Obama administration, the EPA finalized rules aimed at curbing methane emissions from the oil and gas sector. The rules regulate flaring under the Clean Air Act and were aimed at required gas capture instead of flaring.

The Trump administration has since narrowed these rules, which could complicate future federal regulation of flaring, according to Kevin Book, managing director of ClearView Energy Partners.

"The Trump administration proposed an aggressive reform intended to circumscribe regulatory pathways that could apply to existing sources," Book said. "If it succeeds, a future administration could always try to reverse it, but that might be difficult with a federal judiciary loaded with strict constructionists."