Small drillers fear new rules will add crushing costs
Concerns about ‘equity’ grow among some Texas oil producers ahead of federal methane rule
WASHINGTON — After drilling oil and gas wells around Abilene for decades, Cactus Schroeder wonders if his career is nearing its end.
The 68-year-old owner of Chisholm Petroleum says newly released regulations aimed at stopping the potent greenhouse gas methane from escaping into the atmosphere will likely be too costly to comply with for a company like his, which relies on production from so-called stripper wells that produce fewer than 10 barrels of crude a day.
Days after the Biden administration released its long-anticipated methane rule at the COP28 climate conference in Dubai, the realities of coming into compliance are driving anxiety across oil and gas fields in Texas and the country.
While larger oil companies like Exxon Mobil and BP are expected to comply with the new regulations relatively easily — they have been in negotiations with EPA over the rule for two years — smaller operators like Schroeder are far less certain of their future once the regulation goes into effect five years from now.
“It’ll be death knell for people in the business that are my size,” he said. “The reality is I’m at the end of my career, and if this happens a lot of my properties that are smaller scale can’t handle the cost of getting up to speed on those rules.”
Under terms of the more than 1,600-page regulation, the vast majority of U.S. oil and gas wells will need to replace out of date, leaky production equipment and inspect their sites multiple times a year for methane leaks, requiring tens of thousands of dollars in up front costs and thousands in annual costs for a small production site. And that’s in addition to methane fees,
which go into effect next year, costing producers up to $1,500 per metric ton of emissions.
Those costs are relatively small for new wells that might produce hundreds of thousands of dollars a day in revenue, but for an older well producing nominal amounts of crude each day, most of which are operated by smaller, privately held companies, it simply might not make sense to keep producing.
Shutdown estimates
While estimates vary on how many oil and gas wells will shut down, tens of thousands of wells, up to 10% of the more than 900,000 wells currently in operation in the United States, are likely to do so, said Ramanan Krishnamoorti, a petroleum engineering professor at the University of Houston.
“The big operators have been working on this for a while and have the technology in place,” he said. “The challenge is going to be for the old legacy wells, the small- and mid-size wells. For those companies, it’s going to hurt.”
A spokesperson for EPA said the agency had adjusted a draft version of the rule released last year to “(minimize) any significant economic impact of the final rule on small business,” pointing to language that allowed small well sites to be inspected without the use of expensive infrared cameras and allowances for natural gas flaring at well sites with methane emissions below 40 tons a year.
Those provisions will likely mean reduced costs for the smallest oil and gas operators, but the vast majority of smalland mid-sized operators are still likely to face steep costs, like having to replace older pneumatic controllers that frequently vent methane into the atmosphere with electricpowered models that require connection to a power grid or solar panels, said Lee Fuller, an officer at the industry group Independent Petroleum Association of America.
“We keep trying to tell EPA if you put in that framework you would incur these huge costs that threaten these wells,” he said. “We’re keeping our legal options open.”
More consolidation
The new regulation is expected to intensify consolidation at a time big players like Exxon Mobil and Chevron are moving to acquire smaller rivals.
Ken Medlock, an energy professor at Rice University, predicted additional costs created by the methane rule will force smaller firms to, “either sell assets or merge with other producers in effort to bring scale economies to work.”
The challenge for smaller oil and gas companies is that their environmental footprint is disproportionate to their size.
A study funded by the Department of Energy in 2022 found that marginal oil and gas wells, of the type typically operated by smaller, familyowned companies, are responsible for about half of the industry’s methane emissions, despite only producing 6% of U.S. oil and natural gas.
And with the United States seeking to reduce greenhouse gas emissions to net zero by mid-century, stopping those emissions will be crucial to avoid the worst consequences of climate change.
“Overall, compliance costs are reasonable and it’s clear that the benefits of these commonsense standards far outweigh the costs,” said Sean Hackett, a senior manger at the Environmental Defense Fund.
But the Biden administration has pledged to protect the economies of fossil fuel-producing regions, which are expected to suffer as new technologies such as solar panels and lithium-ion batteries take up a larger share of energy demand.
And while some oil and gas fields might suffer relatively small levels of disruption from the methane rule, older fields face an increasingly rocky future.
“It’s an equity issue,” said Krishnamoorti, of the University of Houston. “The overall economy is not going to suffer, but the small producers, the people who can afford this the least, they are the ones who are going to suffer.”