As New Mexico officials discuss ways to reduce the practice of natural gas venting and flaring from oil producers, an S&P Global Market Intelligence analysis showed that the biggest operators are responsible for three-quarters of the problem.
New Mexico's top 15 oil and gas producers accounted for 78% of the 100.3 MMcf/d of natural gas the state's operators flared in 2018, according to an S&P Global Market Intelligence analysis of data collected by the New Mexico Oil Conservation Division. That year, the industry vented or flared enough gas to exceed the 94.4 MMcf/d consumed by the state's 592,775 residential customers.
Exxon Mobil Corp. subsidiary XTO Energy Inc. vented and flared 2,557 barrels of oil equivalent per day of natural gas, or approximately 14.8 MMcf/d, the most of any operator in the state. That figure represents a nearly threefold increase over the 2017 level and echoes a Feb. 18 Texas Railroad Commission report that identified XTO as Texas' top flarer by volume. Devon Energy Corp., EOG Resources Inc. and Occidental Petroleum Corp. also saw their New Mexico flaring volumes climb in 2018.
As New Mexico officials discuss possible regulatory changes to reduce the practice of natural gas venting and flaring, many of the state's operators are already taking steps to reduce their environmental impact. But it remains uncertain whether those actions will attract investors to a sector already under financial scrutiny.
Part of the issue is an economic one. Recently, the market price of oil in the state relative to that of natural gas has been such that operators can afford to grow oil production, even as pipeline bottlenecks have led to negative natural gas prices, where producers are effectively paying the market to dispose of an oil production byproduct.
At the same time, shareholders are increasingly weighing the long-term environmental sustainability of the businesses in which they invest.
Raymond James analyst Pavel Molchanov said in a Dec. 30, 2019, report that investment professionals rely on some sort of environmental, social and governance criteria to weigh investments in 26%, or nearly $12 trillion worth, of U.S. assets. That dollar amount is up nearly threefold since 2012, and the percentage is even higher for European assets, the analyst added.
"A textbook example of low-hanging fruit is flaring of natural gas," Molchanov wrote. "As a rule of thumb, the highest-weighted component of an [exploration and production] company's ESG score is the carbon intensity of its operations, followed closely by other types of emissions and waste. … Simply put: the less a company flares, the better its score will be. ... Cash outlays for new equipment and workforce training are counterbalanced by the potential to improve the stock's valuation by meaningfully broadening the scope of prospective investors."
Molchanov said that as operators improve their ESG scores, their share prices should increase, but "investing on this specific premise would be rather tenuous" as quantifying the change in ESG scores over time is "very difficult."
Exxon Chairman and CEO Darren Woods said in May 2019 that the company was on track to reduce its U.S. methane emissions by 15% and its flaring volume by 25%; however, the company did not respond to a request for specific steps it was taking to meet that goal. Other operators outlined a combination of better planning, deploying technology to detect and repair leaks, and finding uses for associated gas production, with many placing an emphasis on infrastructure.
"We have made a decision as a company that we're not going to bring any well on production until we have the ability to handle the gas associated with that well," Devon President, CEO and director David Hager said in September 2018, calling it "the right thing to do … even though the bulk of the value comes from the oil side." Hager said the company only flares "when there are upset conditions downstream of us" such as a pipeline compressor station outage.
In 2018, EOG's flaring rate per oil-equivalent production was among the lower end of New Mexico's large operators. EOG Chairman and CEO William Thomas said in May 2019 that the industry's flaring will improve over time as midstream companies build more natural gas infrastructure. "I think some companies got caught with inadequate gas takeaway infrastructure," Thomas said. In its 2018 sustainability report, the company said it conducts infrastructure planning "well ahead of an expected increase in activity." For example, the company said it installs natural gas gathering lines "early in the life of a play" and contracts "sufficient pipeline takeaway capacity to provide flow assurance."
"Large-scale development … forces you to plan further and further ahead with your business because when you turn on eight, 10, 12, 23 wells at the same time, you better have your crude takeaway, your water takeaway and your gas takeaway ready to go," Concho Resources Inc. Executive Vice President and COO William Giraud said in May 2019. "That wasn't always the case back in the days of drilling onesies and twosies all over the place. So I think the obligation to plan further in the future is going to help with the flaring side of that equation." Concho flared at a lower rate than the statewide median rate in 2018 and saw its statewide flaring volumes decline for three consecutive years.
During a Feb. 19 earnings call, Concho executives said the company's total flared volumes averaged 1.6% of gross production in 2019, down from 2.7% of gross production in 2018. "That's the result of a very intentional effort on our part," Concho Chairman and CEO Tim Leach said.
"There does need to be additional pipeline development, and there are, fortunately a couple in the queue. ... We don't anticipate any change to our program in 2020 based on constraints," Concho President Jack Harper added.
An Occidental spokesperson said Feb. 5 that the company "is committed to ending routine flaring events by 2030." In addition to a leak detection and repair program, the company aims to use associated gas production in its operations. One program called "net power" would use associated natural gas production to generate electricity to power the company's operations.
"It will utilize our gas that, if we sold it, wouldn't make nearly as much [money]," Occidental President, CEO and director Vicki Hollub said in August 2019. "Not only will it give us a way to utilize that lower-cost gas, it also … provides a … stream of CO2 off of it for use in enhanced oil recovery, or EOR. … There are other ways to get more value for [our gas] than selling it for 23 cents."
"The cheaper the hydrocarbon gas, the better the economics get for EOR because you're basically replacing oil for gas. So that's another thing we continue to advance so that you don't flare, but you can extract value from it," said Kenneth Dillon, Occidental senior vice president of oil and gas operations.
Companies will have to attack the flaring problem from multiple angles if they are to succeed, Molchanov said.
"The relative economic attributes of all of these options vary on a case-by-case basis. Adding pipeline capacity can be a viable option, provided that the incremental revenue from gas sales is sufficient to recoup the upfront infrastructure investment. ... There are some geographies … where there is virtually no local natural gas demand," Molchanov said.
"A particularly wide spread between oil and gas prices would, all else being equal, improve the economics of processing the gas into CNG or LNG, but the cost of the equipment also needs to be taken into account," Molchanov said. "If it were automatically a 'slam dunk', there would be no need for flaring!"