By Bret Wells, George Butler Research Professor of Law, UH Law Center
The oil downturn offers an opportunity to reconsider rules for flaring natural gas.
The Eagle Ford shale has provided an economic boom to South Texas. It is the source rock for the storied East Texas Field and also for the Austin Chalk formation, but it wasn’t until 2008 that the industry discovered the viability of producing directly from the Eagle Ford shale using horizontal drilling and hydraulic fracturing techniques.
However, the state of Texas finds itself at an important transition point. The severe downturn in oil and gas development has given regulators and the industry an opportunity to calmly assess whether current development practices in the Eagle Ford shale are appropriate. One of the most visible and controversial practices has been the flaring of commercially usable and profitable natural gas that could have been efficiently produced but instead was burned off in the rush to bring crude oil to market.
In the oil-rich portions of the Eagle Ford, the formation produces enormous amounts of associated gas along with the liquid-rich crude oil. But pipeline construction was not able to keep pace with the number of wells completed before the downturn. Statewide, the Texas Railroad Commission reported that Texas flared or vented more than 47.7 billion cubic feet (bcf) of associated gas in 2012. According to the commission, this was the largest volume of gas flared in the state since 1972. In 2012, based on the amount of flaring nationwide, the United States had the dubious distinction of being one of the most prodigious countries for flaring in the world.
This downturn, therefore, represents an appropriate time for the Railroad Commission to reassess its existing regulations on flaring. The industry should know the rules of the game before significant new capital is invested.
Under existing Rule 32, the Railroad Commission accepts that flaring commercially profitable associated gas is “a necessity” any time an oil well is capable of producing crude oil in paying quantities and there is no immediately available pipeline or other marketing facility for the natural gas. Rule 32 doesn’t require weighing the relative benefit of producing the crude oil more quickly versus the economic loss caused by the flaring of the natural gas, nor does it require any factual showing that crude oil would ultimately be lost if it were not produced immediately.
Instead, the only evidence needed to flare an oil well for as long as 180 days is proof that a pipeline is not immediately available. An application does not need to contain a statement that correlative rights are at risk or that the operator is in danger of suffering either drainage or the permanent loss of oil. Instead, the operator need only show that crude oil production would be delayed (not lost, but delayed) if the requested flaring exception were not granted.
In the past, flaring exceptions were requested and granted even though gas pipeline connections were within three miles of the new well and connections were expected to be completed within a matter of a few months. Exceptions were also routinely granted for flaring profitable associated gas even when the operator only needed a few months to remove excessive hydrogen sulfide from the gas. What is more, Rule 32 allows the commission to provide a flaring exception after the 180-day period as part of an administrative hearing and via the issuance of a final order signed by the Railroad Commission.
Turning reality upside down
The commission has historically provided numerous exceptions for flaring in the Eagle Ford shale. Routinely issuing permits to avoid any delay in crude oil production highlights the oxymoronic reality of the existing Rule 32 exception practice. Within the construct of Rule 32, flaring commercially profitable associated gas is viewed as “not wasting,” while conserving the natural resource and deferring crude oil production until pipeline connections are made is defined as “waste.” It is ironic to suggest, as Rule 32 currently does, that burning a valuable natural resource directly into the atmosphere is “nonwasteful,” while waiting until the crude oil and natural gas could be efficiently and commercially produced is “wasteful.” Rule 32 currently turns reality upside-down.
There is some hope the Railroad Commission may be rethinking its existing rules. On June 3, 2016, in an interview with the Texas Tribune, Commissioner Ryan Sitton indicated the commission is using this downturn as an opportunity to reconsider rules that are “outdated and need to be updated,” and he specifically referenced rules on flaring as one example. See Texas Tribune Interview of Commissioner Sitton. This is encouraging, as it is time for the Railroad Commission to revise Rule 32 so that it affirmatively states that flaring gas represents “waste” unless an operator can prove a delay in access to pipeline connections would diminish the ultimate recovery of crude oil or result in significant drainage from neighboring tracts. Said differently, the flaring of natural gas should be allowed only after proof is given that a “no-flare” policy would itself result in the loss of the ultimate recovery of crude oil or would represent a potential loss of one’s opportunity to obtain a fair share of the oil and gas in place.
The mere delay in crude oil production should not be considered “wasteful” for purposes of Rule 32. The Railroad Commission did not think flaring associated gas from oil wells in conventional oil formations made sense in 1947 when it issued no-flare orders to stop massive flaring. That logic still holds in today’s unconventional shale formations. Amending Rule 32 in the manner I have described would elevate natural gas produced from an oil well to its rightful status as a valuable natural resource that must be produced in accordance with sound conservation practices, rather than a byproduct that need only be conserved if there is an immediately available gas pipeline connection.
If the commission were to amend Rule 32 and grant fewer flaring exceptions in the Eagle Ford shale, the oil would still be in place. Given the low permeability of the Eagle Ford shale formation, the historic issues of conventional formations — the risk of substantial drainage from neighboring tracts and the risk of not allowing the formation to produce at its maximum efficient recovery rate — would appear to be largely inappropriate for today’s unconventional shale formations. Flaring of associated gas in the context of the Eagle Ford shale, therefore, provides an even easier factual case for the Railroad Commission to issue “no-flare” orders than the situation it confronted in 1947.
And this dramatic downturn means now is the time to act. Operators should use sound conservation-minded operating practices to efficiently produce the state’s natural resources before the next upturn,hopefully next year. Changing the standards now gives the industry time to consider how it will complete future oil wells in the Eagle Ford without wasting a valuable natural resource.
Bret Wells is the George Butler Research Professor of Law at the University of Houston Law Center. He is also an Energy Fellow with UH Energy. For the author’s further scholarly writings on this topic, please see Bret Wells, Please Give Us One More Oil Boom – I Promise Not to Screw It Up This Time: The Broken Promise of Casinghead Gas Flaring in the Eagle Ford Shale, 9 Tex. J. Oil, Gas & Energy Law 319 (2014).
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