To fix flaring, Railroad Commission must tackle the incentive problem

Previously published in Shale Magazine

By Colin Leyden and Scott Anderson

A remarkable thing happened at the Texas Railroad Commission these past few weeks. Throughout the contentious debate over proration, a growing chorus of voices on both sides was calling on the commissioners to address flaring — an incredibly wasteful, environmentally damaging practice that has been giving producers a black eye for years.

During the epic 10-hour proration hearing on April 14, it wasn’t just environmental and health groups banging the drum on flaring. Large and small producers (both for and against proration), mineral rights groups and investors all called for action on flaring. So while proration may be off the agenda for now, the need and desire to address flaring lives on.

This won’t be easy or come without tough decisions, but there is ample support in all the right places. And we think that support will grow.

“We need to lower our own emissions now, including methane, flaring and a whole range of other things,” said Bobby Tudor, an oil and gas investment banker and chairman of the influential Greater Houston Partnership earlier this year. “And I think there’s a role for policymakers to kind of tighten the screws in a big way.”

Likewise, commission chair Wayne Christian said that flaring is “not something that is going to go away when the industry recovers, unless we do something about it now.”

The heart of the problem is an upside-down incentive structure. The economics of the Permian are built around the liquids, with dry gas often treated as a waste product. Over the years, many solutions for flaring have been offered, including more gas utilization on site, in-field gas storage, enhanced oil recovery — and of course, more pipelines and processing capacity to take gas to market. But sensible as any of these solutions may be, investments are hard to justify in capital constrained markets when it costs virtually nothing to simply burn the gas in a flare stack.

It’s no wonder then that since 2013 operators in Texas have burned off roughly a trillion cubic feet of natural gas — enough to meet the yearly needs of every Texas home three times over. In 2019 alone, Permian operators sent 280 billion cubic feet of gas worth about $420 million up in flames.

What’s more, EDF’s recent helicopter survey found that more than one in every 10 flares at oil and gas sites across the Permian Basin was either unlit — venting uncombusted methane straight to the atmosphere — or only partially burning the gas they were releasing. That means flaring could also be among the region’s largest sources of fugitive methane, a highly potent greenhouse gas, and a significant source of volatile organic compounds and other health-damaging emissions.

Until state regulators stop allowing natural gas to be treated as a waste product, this won’t change.

While flaring under current rules might pencil out for individual operators, it shortchanges a lot of other Texans. Royalty and mineral owners — including 600,000 individual Texas households — get hurt because many don’t get paid for gas that’s flared instead of sold. So it was no surprise during the proration debate that the Texas Land and Minerals Owners Association, whose members hold over 3.5 million acres of oil and gas properties, urged the commission to “avoid results that give flaring wells an unfair benefit.”

The state also doesn’t collect tax on flared gas, which means revenue for the rainy day fund, schools and roads is lost. Likewise, University Lands, which manages oil and gas leases on 2.1 million acres in West Texas to fund higher education, called on commissioners to address Permian flaring under their proration authority, saying that it “could help in reducing oil supply, reducing the waste of natural gas, and demonstrating to an observing public the industry’s commitment to continued environmental stewardship.”

The problem isn’t that Texas doesn’t have rules to limit flaring. It does. And while those rules certainly need to be strengthened to reflect leading industry practice, the bigger problem is that the Railroad Commission has fallen into the practice of handing out flaring permits and exemptions to any and all who ask. In fact, the commission has not denied any of the over 27,000 permit applications they’ve received in the last seven years.

Commissioner Christian has asked a group of oil and gas trade associations to develop a set of recommendations to reduce oilfield flaring in time for the next commission meeting. But any plan that doesn’t address the fundamental economics behind the flaring problem — including the costs to royalty owners and taxpayers — isn’t going to solve the problem.

The Railroad Commission was created to guard the state’s natural resources against waste and mismanagement, and to protect mineral owners. Achieving that mission in the face of today’s challenges requires a longer view of the future than many producers are willing to take. The commission is going to have to once again bring the interests of land and mineral owners and the general taxpaying public back into the equation.

Solutions are most effective when they are working toward a concrete goal — a North Star to guide and focus attention. At their next meeting, commissioners should formally adopt the goal of ending routine flaring in Texas by 2025 and direct staff to develop recommendations for how to achieve it.

This would instantly let industry and the broader market know where things are headed, while giving companies time to innovate and deliver the best, most efficient alternatives to burning off all that gas. It would also allow for a process where not just industry — but also research institutes, other experts and affected stakeholders — could be brought into the process to help develop workable solutions.

Ambitious? Perhaps. But it is in line with the growing industry and investor consensus that the oil and gas industry needs to move quickly toward a near-zero upstream emission profile.

Some may argue that moving to curtail flaring is bad for an industry already facing a massive crisis and that flaring is already decreasing as fewer wells are being drilled and production is shut in. But in fact, that’s actually a good reason to put standards in place now.

Changing how Texas operators produce and deliver oil and gas will be less disruptive during the slowdown, allowing them to shift operational and investment practices as needed so that, when commodity prices recover and production accelerates, we don’t see flaring snap back. Over the long run, eliminating routine flaring will create greater efficiency and reduce a highly visible source of unnecessary waste and pollution that now dogs an industry that is under increasing scrutiny.

Strong standards to reduce flaring is not a case of the government intervening in markets. It’s about correcting market failures and recognizing the costs to society from treating natural gas as a waste product. These changes would reward stewardship and responsibility, for both the state’s resources and the environment, on which all economic activity ultimately depends. Together, these are the building blocks of lasting prosperity.