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The Impact of U.S. Regulatory Bottlenecks on Domestic Production

The Impact of U.S. Regulatory Bottlenecks on Domestic Production

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Abstract

Policy changes and regulation on domestic oil and gas activities have been enacted to ensure the oil and gas industry responsibly produces hydrocarbons while protecting both individual and environmental health and safety. Unfortunately, many recent changes to national or state level policies have hampered the advancement of the industry under the guise of public and environmental health and safety without foundational justification. In order to ensure the survival of a key pillar that supports the domestic economy as a whole, the true purpose of these policies must go hand in hand with the advancement of the industry without unjust hindrance. 


Introduction

The United States domestic oil and gas sector operates in a free market subject to government health, safety, and environmental regulations. While domestic production is encouraged to supply domestic and global energy needs, there are no specific government policies promoting further developments of such production. There are on the other hand, policies that attempt to hinder their development. The blockades arise at the local level as domestic onshore oil and gas development is regulated by individual states where the activity takes place. Intervention at a state level can be beneficial as each state can make the decision on how to operate, but at times the statewide decisions can lead to exploration and production bottlenecks. 

Regulation for various aspects of an entire industry is similar to the laws placed on individuals in society. Without rules and guidelines, the individual may stray and make poor choices that result in safety hazards or take advantage of others. Therefore intervention can lead to further development and best practices. But, much like governments imposing unnecessary laws on individuals, too much intervention in the business world can lead to economic barriers of entry that suffocate development and hinder growth. The latter is what the domestic oil and gas industry has been experiencing over the past few years. Government regulation has created bottlenecks for additional development and production in the U.S. oil and gas industry resulting in hindered growth. This article investigates four different regulations/policy changes implemented, three at a state level and one at a national level, to further understand the implications, benefits, consequences, and potential outcomes of the legislation.  

Regulations & Policy Changes 

Recent policy changes made at the national and state levels have been enacted to regulate and further support public and environmental health and safety. In September 2019, the House passed two bills blocking oil and gas drilling off the Pacific, Atlantic and Florida Gulf coasts citing environmental concerns including threats to marine recreation and fishing. Lawmakers who oppose the legislation argue that banning offshore drilling would harm the country’s energy production and place the U.S. behind global competitors resulting in a national security risk [5]. Furthermore, oil and gas interest groups say the bans only increase domestic dependence of foreign oil. These two bills directly oppose President Donald Trump’s executive order signed in 2017 to start a five-year development plan for offshore drilling in the Gulf of Mexico and East Coast [5]. A federal judge later ruled that Trump’s order was unlawful because it exceeded the president’s authority. 

Figure 1: Proposed Keystone XL Pipeline Location [15]. 

In North Dakota, the nation’s second largest oil producer, the debate on the Keystone and Keystone XL Pipeline rages on. Keystone XL is a key project for Canadian oil-sands producers that have been hamstrung for years by a lack of pipeline capacity. The stretch of the existing Keystone pipeline transported nearly 40% of North Dakota’s oil in the first part of 2020, and the closure of this infrastructure would have a huge impact on companies in the area like Energy Transfer, Phillips 66, Marathon, and Hess [14]. The new line would help carry 830,000 barrels per day of crude along a 1,200-mile route from the Alberta oil hub in Hardisty to Steele City, Nebraska [3]. From there the oil would travel to the U.S. Gulf Coast refineries that are geared to process the heavy oil-sands crude. The project has been on TC Energy’s drawing board for more than a decade after being repeatedly stalled by opposition from landowners and environmentalists who say it will contribute to catastrophic climate change. President Barack Obama rejected the pipeline’s border-crossing permit in 2015, a decision that Trump reversed shortly after taking office [3]. In recent years, climate change activists have encouraged states and tribes to exercise their power under section 401 of the Clean Water Act giving local authorities the right to review new projects to verify they don’t harm local water [1]. Despite support from the White House, the Supreme Court refused to let construction start on TC Energy Corp.’s Keystone XL oil-sands pipeline. They rejected a bid by President Donald Trump’s administration to jump-start the long delayed project as a result of the Clean Water Act [3]. The act essentially gives states veto power over federal decisions and has hindered the development of this project for years. Furthermore, on August 4th, 2020 a panel of federal judges reversed the court order to shut down and empty the existing Keystone pipeline of crude while the U.S. Army Corps of Engineers completes an environmental impact statement expected to take 13 months [14]. 

Figure 2: California Injection Well Diagram [16]. 

In California, the state regulatory body implemented revisions to the underground injection control (UIC) for cyclic steam injection wells at the beginning of 2020. Several major changes to the existing regulations required producing wells to meet the same mechanical integrity and monitoring requirements as injection wells and restricted projects known to cause surface expressions like injection into a diatomaceous formation. Operators now have until April 2021 to implement continuous pressure monitoring on existing cyclic steam wells and new wells must have monitoring added prior to first production [12]. These wells also must have periodic casing pressure testing performed by April 2024 with additional mechanical integrity tests and radioactive tracer surveys to detect fluid migration every five years [12]. In order for the producing wells to be approved for a UIC permit, an engineering study, geologic study, and injection plan for each well must be approved within the well’s area of review (AOR). The area of review must include wellbore diagrams, formation details, maps and cross sections of the project, calculations for fracture pressure, liquid analysis, and be approved by a professional engineer and professional geologist prior to submission to the regulatory body [12]. Once approved for injection, the dates, time, and volume of each injection cycle must be recorded and kept as long as the project is approved for injection [12]. This is a major step-change for cyclic steam wells to meet the new requirements in a short time period especially since they were not required to record and maintain this level of data in the past. 

Figure 3: Natural Gas Flaring in Texas [17].  

Lastly, down in Texas, the largest oil producing state in the United States, recent policy changes have been enacted to reduce flaring volumes. When newly completed horizontal shale wells with huge initial production volumes are brought online, a lot of associated natural gas comes to the surface as well. Due to pipeline capacity or lack of infrastructure in the area, much of the excess natural gas is burned near the wellhead. New regulations state that flaring can only occur during drilling and may not exceed 10 producing days after initial completion, recompletion in another field, or workover in the same field [6]. Gas that must be unloaded from a well may be vented up to 24 hours in one continuous event or up to 72 cumulative hours in one month. Additionally, gas may be released for up to 24 hours in the event of a pipeline or gas plant upset [6]. Any sort of gas release from a production facility, gathering system, or plant must be reported to the Texas Railroad Commission (TRRC) as soon as possible once it occurs, and a request to flare longer than 24-hours must be submitted within one business day for approval [6]. Such limits on flaring volumes have been put in place to enhance air quality, responsibly produce mineral reserves, and maintain safe operating procedures. 

Implications, Outcomes, Consequences, and Benefits 

The purpose of these regulatory and policy changes is to ensure the oil and gas industry responsibly produces hydrocarbons while protecting both individual and environmental health and safety. With these goals there are oftentimes unintended outcomes as a result of these actions. While banning offshore drilling may ensure clean beaches and prolonged marine recreation and fishing, it limits domestic energy independence and job opportunities in the area. A U.S. ban on new offshore drilling in the Gulf of Mexico, which presidential hopeful Joe Biden promised to enact if elected, would lead to hundreds of thousands of job losses and billions in lost government revenue over 20 years [4]. Additionally, if Biden wins the 2020 election he has promised to ban new offshore drilling, which will discontinue all proposed leasing and future development for the areas in Figure 4. While these leases are not guaranteed to produce activity or generate additional jobs currently, the opportunity for economic development still exists under administrations that support oil and gas. If no new permits are issued in the Gulf of Mexico alone, the offshore industry would have 179,000 jobs in 2040, less than half the 370,000 jobs it would be projected to support under current policies, according to the National Ocean Industries Association [4]. Government revenues from the industry, meanwhile, would be $2.7 billion a year instead of $7 billion [4]. Last year, drilling in the Gulf of Mexico’s Outer Continental Shelf supported 345,000 U.S. jobs and contributed $28.7 billion to the economy [4]. By blocking exploration and production off the Pacific, Atlantic and Florida Gulf coasts the result subsequently eliminates thousands of jobs and billions of dollars in taxable revenue. These waters will be free from new environmental concerns related to the oil and gas industry, but will not reap the economic benefits the industry brings along with it. 

Figure 4: Map of All Proposed Domestic Oil and Gas Offshore Leases Through 2022 [20]. 

The delays to the Keystone XL Pipeline are truly unfortunate. Why? Pipelines are by far the safest way to transport oil and gas from one place to another. The path for this controversial oil pipeline has never been smooth. Issues have existed from the time it was proposed in 2008, through seven years of dogged citizen protests and various conflicting legislative orders by the federal government. Opponents have warned that the pipelines could endanger many animals and their habitats in the U.S. and Canada through the infrastructure’s construction, maintenance, and possible failures that could lead to an oil spill [13]. Alternatively, the State Department has estimated as of January 2014, 180,000 barrels of Canadian crude oil per day is being transported by freight trains [13]. If no pipeline is built, that number will rise. Using trains to transport oil to refineries in the U.S. poses a safety concern because leaks or explosions can occur, killing people and damaging habitats nearby. While the protection of animals and their habitats is incredibly important for the survival of many species, the safety of human life is paramount. Additionally, opponents to the project argue the environmentally harmful process of extracting oil from Canadian tar sands will increase if the pipeline is built. While this may be true, the oil extracted from tar sands will find its way to market regardless of whether or not the Keystone XL pipeline is built. Therefore it makes sense to support the transportation method that is the safest for people and the environment. Finally, the construction of the pipeline would create 42,100 jobs during the pipeline’s construction timeframe of one to two years and 50 permanent jobs [13]. While that isn’t a lot of long-term job creation, it would help keep crude oil refineries in the Gulf Coast up and running. If the pipeline is not built, jobs at those refineries could potentially be endangered. There are many pros and many cons to the proposed pipeline, and it is no surprise the project has been delayed so many times. Luckily, the EPA is returning the Clean Water Act certification process under Section 401 to its original purpose, which is to review the potential impacts discharges from federally permitted projects may have on water resources, not to indefinitely delay or block critically important infrastructure. 

Figure 5: Declining Crude Oil Production in California [18]. 

Oil production in California has been in a steady decline since 1985 and the new injection control requirements will not help that fact. Under the new regulations, at least 55,000 UIC wells are affected [8]. If these wells are not in compliance with the new policies, injection must be halted until they are in compliance. Due to the many steps involved, it takes the state time to review and approve the necessary documents. As a result, receiving a UIC permit can take a long time, meaning production could potentially be down for an extended period of time as well. Since 75% of the state’s crude oil production is from wells affected by the new UIC guidelines, if all wells are not in compliance, state revenues from associated crude oil production will suffer [11]. To add insult to injury, cyclic injection above fracture pressure in diatomite formations is no longer allowed, resulting in a portion of assets with stranded reserves. Not only do these new policy changes have the potential to dramatically reduce production volumes, additional wellwork is required to maintain regulatory compliance. This will increase operating expense (OPEX) costs for fields, cutting into a company’s bottom line. If there is no profit margin, oil and gas companies may choose to abandon operations in the state and shift their focus to areas with less stringent regulations allowing for increased profit margins. While California is the 7th largest producer in the United States, regulatory changes have the potential to move them much further down that list endangering countless jobs and revenue from the oil and gas industry that supports the state economy. 

New flaring regulations in Texas seem to be one of the only recent policy changes to have beneficial outcomes. During the dual black swan events of the coronavirus pandemic and price war, crude prices were sent to historic lows. As a result of sustained low prices, production has been shut in, very few new wells have been completed, and almost all new drilling has halted. The outcome is a reduction in oil production, associated natural gas production, and subsequently, reduced flaring. In fact, since the downturn, the rate of flaring has gone down so much that 99.5% of the gas produced in the month of May was sold and beneficially used to generate electricity, heat homes, cook meals, or make hundreds of consumer products [7]. Now is the opportune time to implement meaningful recommendations for flaring reductions before oil and gas production returns to previous highs. Unfortunately, it will be difficult to keep this progress up as production slowly comes back on line. This is because of limited pipeline capacity and infrastructure in many areas of the Permian Basin. The major driver for selling 99.5% of the gas produced in the month of May instead of flaring significant volumes was additional capacity in pipelines created by the reduction in production volumes. Essentially, shut-ins de-bottlenecked some of the gas pipelines previously at or near capacity. In order to eliminate unnecessary flaring in the future, additional capacity will be needed from lower volumes moving through existing systems or continued expansion of infrastructure. Currently, the pipeline network is not prepared for all the extra gas that will be returned to the system when production climbs back to previous highs. 

Conclusion 

All of these recent regulation and policy changes were instituted for the right reasons: to ensure adequate public and environmental health and safety. Unfortunately, some decisions have the consequence of making it much harder to operate in the United States. When additional regulations lead to incremental costs that hamper the success of businesses, companies may choose to take their business elsewhere. Furthermore, many states have begun to create policies that have started to push the industry out of their state. California, for example, has seen some crazy regulatory and policy changes over the years which have severely limited oil and gas activities in the state. Colorado on the other hand has decided to leave oil and gas ballot initiatives off statewide ballots through 2022 to allow for current initiatives to fully take effect. Since oil and gas regulations are often determined at the state level, it is ultimately up to state residents to decide how to regulate the industry. What many individuals do not realize is their state and municipal budgets are largely supported by the local oil and gas industry. If policies become too extreme, production may become uneconomic and will dry up much needed state revenue. Luckily, in recent weeks, steps have been taken in the right direction to ensure adequate public and environmental health and safety while ensuring the success of domestic oil and gas companies. The Trump Administration has recommended rolling off some Obama-Era EPA standards on methane emissions. The standards are not being eliminated, but the plan is to loosen up crippling emissions standards that have raised OPEX prices immensely since they were introduced five years ago. Some major companies have spoken out against the weakening of methane regulations while smaller, independent oil companies are expected to applaud the rule as a welcome measure of relief when many are struggling to stay afloat [19]. This is one example showing how government entities can review policies to decide if compromises should be made that will support business and revenue without completely repealing environmental oversight. In order to reduce U.S. reliance on foreign fossil fuels and support the domestic economy, new policies must not unnecessarily hamper the advancement of the oil and gas industry under the guise of public and environmental health and safety without foundational justification. 

References

[1] https://www.npr.org/2020/06/01/867224980/trump-administration-limits-states-power-to-stop-oil-and-gas-pipelines

[2] https://grist.org/beacon/new-york-to-williams-pipeline-bye-forever/

[3] https://www.bloomberg.com/news/articles/2020-07-06/keystone-pipeline-stays-blocked-in-u-s-supreme-court-order

[4] https://www.reuters.com/article/us-usa-offshore-drilling-study/u-s-drilling-industry-says-offshore-ban-would-crush-jobs-government-revenues-idUSKBN2320DT

[5] https://www.cnbc.com/2019/09/11/house-to-vote-on-blocking-trump-push-to-drill-off-us-coasts-arctic.html

[6] https://www.rrc.state.tx.us/media/29135/statewide-rule-32-venting-and-flaring.pdf 

[7] https://www.worldoil.com/news/2020/8/5/texas-oil-regulators-update-rules-to-limit-gas-flaring

[8] https://www.ogj.com/drilling-production/production-operations/unconventional-resources/article/17279629/californias-new-underground-injection-rules-go-into-effect-apr-1

[9] https://www.statista.com/statistics/714376/crude-oil-production-by-us-state/

[10] https://www.eia.gov/energyexplained/oil-and-petroleum-products/where-our-oil-comes-from.php

[11] https://www.conservation.ca.gov/index/Documents/Initial%20Statement%20of%20Reasons%20UIC.pdf

[12] https://www.conservation.ca.gov/calgem/general_information/Documents/UIC_regs_workshop/Final%20Text%20of%20the%20UIC%20Regulations%20(Clean).pdf

[13] https://www.nationalgeographic.com/news/2017/01/impact-keystone-dakota-access-pipeline-environment-global-warming-oil-health/#close

[14] https://www.wsj.com/articles/appeals-court-allows-dakota-access-pipeline-to-continue-operating-11596662661

[15] https://www.washingtonpost.com/wp-srv/special/business/keystone-xl-map/

[16] https://www.conservation.ca.gov/calgem/general_information/Pages/UndergroundinjectionControl(UIC).aspx

[17] https://www.dallasnews.com/business/economy/2018/08/27/burn-baby-burn-natural-gas-is-cheap-and-texas-drillers-are-flaring-more-of-it/

[18] https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPCA1&f=A

[19] https://www.nytimes.com/2020/08/10/climate/trump-methane-climate-change.html 

[20] https://www.oregonocean.info/index.php/continental-shelf/101-outer-continental-shelf-oil-and-gas-leasing-program

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