NM meth­ane hotspot: Fact vs. fic­tion

Albuquerque Journal - - OP-ED - BY GE­ORGE SHARPE IN­VEST­MENT MAN­AGER, MER­RION OIL & GAS

The re­cent op-ed by Alexan­dra Mer­lino about the meth­ane hotspot hov­er­ing over the Four Cor­ners con­tained a num­ber of in­ac­cu­rate al­le­ga­tions. Here is the re­al­ity of the sit­u­a­tion.

First, let me con­cede that oil and gas fa­cil­i­ties do have some meth­ane emis­sions, and that meth­ane is in­deed a green­house gas. Ig­nor­ing any cost-ben­e­fit anal­y­sis, it would be ar­guably bet­ter for the en­vi­ron­ment and bet­ter for the bot­tom line if that meth­ane were cap­tured. How­ever, the devil is in the de­tails and the devil’s name is math. In that re­gard, here is the other side of the equa­tion.

1. The meth­ane hotspot is not due to oil and gas op­er­a­tions, but to nat­u­ral emis­sions from the Fruit­land Coal out­crop. The oil and gas equip­ment on older wells in the San Juan Basin is ex­actly the same equip­ment that is on older wells in Ap­palachia or Kansas or Texas or South­ern New Mex­ico, where they have many, many times the num­ber of wells that we have here. If the wells were caus­ing the hotspot, you would have sim­i­lar hotspots over each of th­ese re­gions. The one thing the San Juan Basin has that they don’t have is an ex­posed out­crop of a ma­jor gas-bear­ing coal. To fur­ther un­der­line this point, Mer­lino made the com­ment that Colorado al­ready has strin­gent meth­ane emis­sion rules and that New Mex­ico needs to come to the ta­ble. Why, then, is the hotspot cen­tered over the Colorado/New Mex­ico border where the out­crop comes to the sur­face? If the hotspot was due to emis­sions from older wells in New Mex­ico, it would be lo­cated more to the south over the cen­ter of the basin on the New Mex­ico side.

2. Air qual­ity aside, the BLM — which has no ju­ris­dic­tion over air qual­ity — is claim­ing the rule is all about sav­ing an es­ti­mated $180 mil­lion per year in lost roy­alty pay­ments. Sounds like a lot, but num­bers by them­selves have lit­tle mean­ing un­til they are put into per­spec­tive. In 2012, the feds col­lected $12.2 bil­lion in roy­al­ties. So this puni­tive reg­u­la­tion is all to in­crease roy­al­ties by ap­prox­i­mately 1.5 per­cent?

3. The ex­pense of retrofitting wells with va­por re­cov­ery units and nonpneu­matic con­trols will cost as much as $50,000 per well. Emis­sions per well site are es­ti­mated at 0.7 MCF — thou­sand cu­bic feet — per day per well. At the cur­rent $3.00/MCF gas price, that is $756 per year, of which the feds get 12.5 per­cent, or $95 per year. Ask­ing in­dus­try to in­vest up to $50,000 with a 66-year pay­out, all to make the feds $95 per year is one ridicu­lous cost-to-ben­e­fit ra­tio.

4. How many wells will be plugged and aban­doned? There are plus or mi­nus 30,000 ac­tive wells or com­ple­tions in the San Juan Basin pro­duc­ing plus or mi­nus 2.8 BCF (bil­lion cu­bic feet, or 1 mil­lion MCF) per day. How­ever, 0.76 BCF per day of that pro­duc­tion comes from 21,000 wells mak­ing less than 90 MCF, a pro­duc­tion rate the feds con­sider mar­ginal. Most of those wells are barely, or barely not, eco­nomic, and this will be the stake in the heart.

5. Be­cause the rules will cause thou­sands of wells to be aban­doned, the new rules will re­sult in a dras­tic re­duc­tion in roy­alty pay­ments to the tax­pay­ers, not an in­crease. Based on the above ra­tios, two-thirds of the wells pro­duc­ing 25 per­cent of the rev­enue on fed­eral lands are in jeop­ardy. That is a po­ten­tial loss of $775 mil­lion in roy­al­ties com­pared to $180 mil­lion in pur­ported “sav­ings.”

6. Let’s bring this con­ver­sa­tion closer to home. With only six rigs run­ning, if there is any­thing sus­tain­ing lo­cal jobs, it is the man­power it takes to op­er­ate 30,000 wells. Shut (off) many of those 21,000 mar­ginal wells and Farm­ing­ton can go back to farm­ing as its pri­mary em­ployer.

Of course, this is not about cost-to-ben­e­fit ra­tios be­cause that would re­quire some­one to, uh, cal­cu­late a ra­tio. But ig­nor­ing the facts doesn’t change the facts. And the fact is, the BLM’s rule is an­other ex­am­ple of ill-thought-out reg­u­la­tions that will have neg­li­gi­ble ben­e­fit at an ex­or­bi­tant cost, par­tic­u­larly lo­cally, where we can least af­ford it.

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