Industry Study Applies Own Numbers to EDF Study, Strengthens Our Case for Regulation

The natural gas industry group Our Nation’s Energy (ONE) Future Coalition released a paper yesterday applying their own set of assumptions to an earlier analysis commissioned by EDF, which had shown that oil and gas methane emissions can be dramatically reduced for about a penny per thousand cubic feet of gas sold. Both analyses were carried out by ICF International.

We always welcome new points of view, but it’s important to note the new calculations change key variables in ways that boost the cost of reducing methane emissions while significantly understating benefits of these reductions. An even bigger problem comes when others in the industry public relations machine start to mischaracterize the study.

Despite these changes, the results still end up making what we think is a strong case for sensible regulatory standards to make sure that best practices become the standard practice industry-wide in order to reduce the oil and gas industry’s nearly 10 million metric tons of yearly methane emissions.

Even Slanted Figures Underscore Need for Rules

Before diving into the numbers, let’s first consider the irony here. Having fully conceded that methane emissions are a real and serious problem, numerous industry groups have spent two years arguing that industry already has enough economic incentive to reduce emissions on a strictly voluntary basis, no rules or regulations required.

But yesterday’s report says the cost of making necessary methane reductions is 70% higher than the value of the gas to be saved, pulling the rug out from under the idea that economic self-interest would drive industry to make significant reductions.

Intentionally or not, this report is “Exhibit A” for why strong regulatory standards are necessary.

According to the numbers presented, if left to its own assessment of economic value, the oil and gas industry simply does not have an incentive to act. Of course, this report is not the only evidence of that fact. Clearly there are reductions to be made that the industry is not currently making.

On the other hand, the good news is that even if you allow for high cost assumptions contained in this report, it remains true that we can achieve a 40% reduction in today’s emissions for less than one penny per thousand cubic feet of gas produced. With the right regulatory framework in place this is a problem that can be solved.

A Walk Through the ONE Future Numbers

The new ICF ONE Future Coalition report makes a number of major assumptions that significantly skew the findings toward higher costs and lower benefits.

Outdated, Inaccurate Emissions Figures.

For starters, the findings are based on 2012 oil and gas sector emissions, as published by EPA in their 2014 inventory. But EPA has since updated the inventory not once but twice. In the inventory published in April 2016, current emissions are about 27% higher than the figures used by One Future.

Higher emissions mean that leak detection and repair, along with other measures, would almost certainly reduce even more emissions, making the economic and environmental benefits of avoiding lost methane greater for every dollar spent.

Even if you keep all the other assumptions in the report, we estimate that using updated inventory figures would result in a roughly 45% reduction in oil and gas sector methane emissions for a cost of approximately $0.01 per thousand cubic feet of gas produced, which is squarely in line with estimates in the original ICF analysis commissioned by EDF.

Inflated Costs Estimates.

In our view, the One Future Report exaggerates the cost of compliance, particularly the expenses involved with the core process of leak detection and repair (LDAR). This includes excessively high capital costs for equipment like high flow samplers and remote methane leak detectors that are not actually required for regulatory compliance, as well as inflated labor costs and survey times.

It’s not surprising that industry estimates would come in on the high side here. They’re entitled to make their case. But the figures in the report run sharply counter to data submitted by service providers and technology companies in public hearings and written comments to EPA and the Bureau of Land Management that demonstrate that costs on the ground are low and declining.

  • In public testimony to the EPA, Texas-based Rebellion Photonics said its leak detection services cost $250 per site, less than half the $600-per-site cost estimated by EPA in its proposed rule limiting methane emissions from new and heavily modified sources in the oil and gas sector.
  • FLIR, which makes optical gas imaging technology, submitted comments to BLM saying “Our surveys of FLIR customers that provide consultant services showed average rates of $250-$350 per visit. Internal OGI programs showed costs that were lower and in the range of $150-170 per site visit.”
  • Based on experience under state-level regulations passed in 2014, Colorado officials estimate the costs per inspection to be less than the $550. In recent interviews, Colorado officials indicated that “we really haven’t heard concerns about the cost or any difficulty associated with implementation.”

In a recent survey in Colorado, seven out of 10 oil and gas producers surveyed recently said the benefits of regularly checking equipment for leaks outweigh the costs. An economic analysis in New Mexico has shown that compliance costs will amount to approximately two cents on the dollar of annual oil and gas revenues in the state.

Moreover, advanced monitoring technologies like those being developed through EDF’s Methane Detectors Challenge and ARPA-E’s MONITOR Program have tremendous potential to further lower costs and enhance environmental benefits.

Understated Benefits.

The ONE Future report also understates benefits to companies reducing emissions in several important respects.

First, it assumes leak surveys would happen only once a year, yielding only a 40% benefit. EPA and BLM rules require semi-annual, and in some cases quarterly monitoring, while Colorado requires tiered inspections as often as monthly at the largest sites. Real world experience with more frequent surveys – as required by states like Colorado and Wyoming – show substantially greater reductions are readily achievable. The ICF report commissioned by EDF, for example, modeled a quarterly LDAR program with a conservatively estimated 60% benefit.

The ONE Future also significantly underestimates the amount of gas (and hence, the amount of money) saved by reducing leaks. It only counts gas savings in the production segment, leaving out midstream sources like those in the gathering, processing, and transmission segments, which have been shown to account for significant losses – and therefore major savings opportunities. While not every company can fully monetize the value of saved gas, avoiding this waste does have important benefits in reducing industry’s net costs that are clearly not reflected in the report.

Bottom Line

When you add up the changes in the math, the ONE Future Coalition analysis makes a compelling case for why regulation is needed to spur the oil and gas industry to make necessary reductions in methane emissions. The report is also reassuring on the point that technologies and practices are readily available to achieve these reductions.

Even with its higher cost assumptions, the One Future Report reaffirms the point that the oil and gas industry can make a significant reduction in annual methane emissions for marginal additional cost. What’s needed now are the right state and federal regulations to drive it to happen.

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