BLM Gas Waste Proposal Considers Royalty Changes

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By Alan Kovski

Jan. 27 — A proposed rule to reduce the waste of natural gas from federal and Indian lands opens a couple of doors to increased federal royalties.

The Bureau of Land Management proposal, Waste Prevention, Production Subject to Royalties, and Resource Conservation, would revise the way royalties are applied to wasted natural gas and would advance a step toward increasing royalties for the oil and gas that is produced and sold.

The rule, unveiled Jan. 22, was written primarily to reduce flaring, venting and leaking of gas (RIN 1004-AE14). Flaring typically occurs when an oil well is producing natural gas as a sidestream in a location where no gas pipeline is available to transport the gas to market. The flaring burns the methane and other gases to carbon dioxide. Venting usually is briefer, notably during well completion work.

The regulatory impact analysis accompanying the proposed rule said about 59 percent of the gas flaring from oil wells in 2013 occurred in North Dakota, 21 percent in South Dakota and 11 percent in New Mexico.

The oil-rich Williston Basin, including the Bakken Shale, spreads across much of North Dakota and part of South Dakota and involves much gas flaring because of the region's inadequate pipeline infrastructure. The San Juan Basin in northwestern New Mexico may be the primary source of flaring in that state.

Those areas presumably would see the primary impact of a change in new requirements to limit flaring. A potential change in royalties could affect far more areas and companies.

Sliding Scale for Royalties?

Under the Mineral Leasing Act, the royalty rate is fixed at 12.5 percent for noncompetitive oil and gas leases. For leases won through competitive bidding, the rate can be higher, but under existing regulations it is specified as 12.5 percent.

The proposed rule would rewrite the regulations to treat 12.5 percent as the minimum, opening the way for higher rates. The BLM said it was not proposing higher rates for now, but its discussion of the subject in the preamble of the proposed rule indicated a strong interest in some form of sliding-scale royalties that could reflect changes in commodity markets and could be progressive, keyed to the volume of the commodity.

The BLM said it was drawing its ideas from various sources, including a 2011 study by consulting company IHS CERA for the BLM and another 2011 study, called the Van Meurs Study, done by three consulting companies for industry sponsors. Both studies had favorable views of sliding-scale royalties, as summarized by BLM in the proposed rule.

In 2015, the BLM solicited public comment on possibilities for changes in royalties and various fees for oil and gas development (RIN 1004-AE41). Industry representatives warned that higher royalties and fees could suppress economic activity and reduce royalty revenues. Environmental activists enthusiastically endorsed increases in all of the costs being considered by the BLM (119 ECR, 6/22/15).

Independent oil and gas producers fear that the BLM could be setting the stage for rate hikes in the future, said Dan Naatz, senior vice president of government relations and political affairs for the Independent Petroleum Association of America.

Kathleen Sgamma, vice president of government and public affairs at the Western Energy Alliance, an oil and gas association, said the Obama administration appeared to be looking only for higher royalty rates atop a wave of new regulations. On the idea of a sliding scale for royalties, she said, “I think we'd be more willing to talk about that if we saw some regulatory certainty on federal lands.”

Royalties for Some Flaring Wanted

Under the current applicable regulation, NTL-4A, gas can be flared royalty-free from an oil well if a company convinces the BLM that it would be uneconomical to build a small pipeline connection to the nearest main pipeline. Gas can also be used royalty-free at a well site for such purposes as power generation.

The company must show that requiring the gas to be captured would “lead to the premature abandonment of recoverable oil reserves and ultimately to a greater loss of equivalent energy” than what would be lost from flaring. It is assessed on a case-by-case basis and involves a substantial paperwork burden, according to the BLM.

The proposed rule would change that. There would be a limit on allowable flaring, set at 1,800 thousand cubic feet per month per well, averaged across all of the producing wells of a lease. That limit would apply in the third year of a phase-in period starting with the effective date of the new rule, as Interior Department officials explained when they unveiled the rule (14 ECR, 1/22/16).

All flaring and venting of gas not judged by the BLM to be unavoidable would be subject to royalties. The BLM estimated the new method of applying royalties to flared gas could generate additional royalties of $9 million to $16 million a year. To put that in context, federal royalties from oil and gas in fiscal year 2014 amounted to $3.1 billion, the BLM said.

Flaring would be considered unavoidable if connected to emergencies, leaks, well drilling, well completion, well tests, dewatering of exploratory coalbed methane wells, venting from pneumatic devices in the normal course of operation, evaporation from storage vessels, downhole well maintenance and the unloading of liquids from gas wells. Flaring (or, in limited circumstances, venting) also would be deemed unavoidable at a well that is not connected to a gas pipeline.

Thousands of Wells Involved

The BLM said the proposed rule would reduce the venting, flaring and leaking of emissions of methane and volatile organic compounds from federal and Indian lands by an estimated 50 percent after the three-year phase-in.

The agency estimated the proposed flaring limits would affect 435 to 885 leases in any given year. The regulations to reduce leaks would affect up to 36,700 well sites, the agency said.

The proposal might reduce crude oil production by as much as 3.2 million barrels a year, but it would increase gas production for markets by up to 14.5 billion cubic feet (Bcf) a year and would increase the on-site productive uses of gas by as much as 41 Bcf a year, the BLM said.

While the flaring reductions were expected to have net financial benefits, the leak reductions were estimated to cost up to $70 million a year and have savings of up to $17 million a year.

For the measures on flaring and leaking, the proposed rule and its accompanying regulatory impact analysis also included estimated factoring in the Obama administration's assumptions about the “monetized” benefits of reduced methane emissions and reduced carbon dioxide emissions, calculations that produced much higher financial benefits.

Gas Losses Already Declining

Companies already have been reducing their venting, flaring and leaking of gas and have an economic incentive to continue doing so, as their trade associations are quick to remind the BLM. The agency did not dispute the point in its proposed rule but indicated it wanted to accelerate the trend.

The BLM proposal will require best practices to minimize venting of gases during oil or gas well development. It would push companies to replace older equipment with better equipment and would involve the use of better leak detection technologies such as infrared cameras.

The BLM will hold public meetings on the proposal in February and March and is aiming to complete the rule by the end of 2016.

“Realistically, they don't have time to do it in a deliberative manner,” the Western Energy Alliance's Sgamma said of the rulemaking. Because of that, it will be legally vulnerable, she said.

To contact the reporter on this story: Alan Kovski in Washington at akovski@bna.com

To contact the editor responsible for this story: Larry Pearl at lpearl@bna.com