API: Proposed EPA Emission Rules Will Reduce Shale Gas Drilling

Proposed regulations by the U.S. Environmental Protection Agency (EPA) to reduce air emissions from hydraulic fracturing operations would drastically reduce shale gas drilling by 31 percent to 52 percent, or 12,700 to 21,400 wells, over the 2012 to 2015 time period, according to a study by the American Petroleum Institute (API).

The API study also found that:

• 5.8 to 7.0 quadrillion Btu (Quads) of otherwise economic unconventional natural gas would not be developed and produced by 2015, a 9 percent to 11 percent reduction
• 1.8 billion barrels of otherwise economic unconventional liquids would not be developed and produced by 2015, a 21 percent to 37 percent reduction
• federal royalties of $7 billion to $8.5 billion that would otherwise be collected would not be paid in the first four years after the requirements go into effect
• state revenues from severance taxes amounting to $1.9 billion to $2.3 billion would be delayed beyond the first four years after the requirements go into effect

The study, conducted for API by Advanced Resources International, examined the potential impact of the requirements for use of reduced emissions completions (REC) equipment on hydraulically fractured wells, including potential revenue from methane, cost impact and delays in unconventional resource development.

Two scenarios were used to address the use-rate of REC equipment for the study – the first estimated it would take three to four years for REC equipment to become available to keep pace with unconventional drilling activity, while the second estimated it would take six to seven years equipment to become available to allow the pace and level of unconventional drilling that would otherwise occur.

Under both scenarios, a significant slowdown in unconventional resource development would occur. The analysis did not estimate lost jobs associated with reduced drilling, oil and gas supply services and indirect employment.

EPA in July 2011 proposed a number of regulatory requirements to reduce air emission from the oil and gas industry. These proposals include reducing emissions of volatile organic compounds (VOCs) through the use of RECs, which simultaneously reduce VOC and methane emissions. When gas cannot be collected during well completion operations, emissions would be reduced through pit flaring, unless it is a safety hazard.

EPA's proposed rule, expected to take effect sometime next month, would impose REC requirements on most unconventional gas wells. The REC requirements would not apply to exploratory wells or delineation wells, which generally are not near a gas sales line. Equipment required to conduct RECs may include tankage, special gas-liquids and separate traps and gas dehydration.

A number of states now require the use of RECs, and a number of companies are already using this process, even where not required by states, according to ARI's report. EPA estimates that 3,000 to 4,000 of the 25,000 new and modified fractured gas wells completed each year currently employ RECs.

According to the ARI report, the cost assumptions used by the EPA are unrealistically low, and the impacts also are underestimated. API on Nov. 30 commented on the proposed rule, saying that equipment required to conduct REC would not be available in time to comply with the current final rule schedule.

"We believe it will take years to manufacture sufficient specialized equipment and adequately train operators how to safely conduct these operations." API also noted that the equipment is fairly specialized, the number of shops licensed to make the equipment is limited, and some components have long lead time.

Howard Feldman, director of regulatory and scientific affairs with API, told reporters in a conference call on Thursday that the organization was seeking to work with EPA to develop standards to reduce air emissions that would be beneficial for both the environment and U.S. consumers.

"We're cautious of what the EPA is doing because we believe it runs counter to the adminstration's commitment to produce gas," said Feldman. "We hope that they will make modifications to the final rule that will allow all of us to produce gas efficiently and safely without affecting the marketplace."

The issue of methane emissions from shale gas wells has been the subject of discussion and studies in the past year by the EPA, Cornell University and America's Natural Gas Alliance, an energy industry association.

IHS-CERA: EPA Methodology for Methane Emissions Overstated

EPA's current methodology for estimating gas field methane emissions is not based on methane emitted during well completions, but instead on a data sample of methane capture during well completions, according to a 2011 IHS CERA report.

The assumptions underlying EPA's methodology do not reflect current industry practices.

"As a result, its estimates of methane emissions are dramatically overstate and it would be unwise to use them as a basis for policymaking," IHS CERA noted in the report, adding that the Cornell study conducted on methane emissions in 2011 also makes similar errors.

If methane emissions were as high as EPA and the Cornell study assume, extremely hazardous conditions would be created at the well site. "Such conditions would not be permitted by industry or regulators," IHS CERA noted.

The regulations proposed by EPA are already standard industry practice and are unlikely to significantly reduce upstream greenhouse gas emissions.

"However, measured emissions could be significantly lower than EPA-inflated estimates," IHS CERA noted, adding that the greatest benefit of the proposed regulations is likely to be better document of actual greenhouse gas emissions from upstream gas development.

Karen Boman has more than 10 years of experience covering the upstream oil and gas sector. Email Karen at kboman@rigzone.com.