Permian - Will Flaring Rules Limit Oil Production?

The primary driver of production in the Permian Basin, located in West Texas and southeastern New Mexico, is oil, with the gas produced considered "associated gas," which means it simply comes along with the oil. Commentators have expressed concern that the gas flaring rules in Texas, combined with the lack of pipeline capacity to transport this associated gas to market, may become a constraint on the production of oil from the Permian.

While flaring may increase, perhaps significantly due to pipeline constraints, based on our analysis of current Texas Railroad Commission (RRC) regulations, we believe that, at least for the near term, such a concern may be exaggerated. Our analysis of Permian Basin flaring permits suggests that the RRC, acting in accord with the existing RRC regulations, has historically been very flexible in allowing flaring to occur when there is no available pipeline capacity. We do not anticipate an imminent change in the RRC's regulatory stance, despite a recent report by the Environmental Defense Fund (EDF) urging changes to the RRC flaring regulations to give associated gas stronger regulatory status as a valuable natural resource rather than a byproduct to be produced only if there is an immediately available pipeline.

Why is Flaring a Concern for the Permian Basin?

Flaring is the controlled burning of natural gas that cannot be processed for sale or use due to technical or economic reasons. A typical reason for flaring gas is that there is no commercially available method for transporting the gas from the well that is producing it, i.e., no gathering or interstate pipeline facility exists within a reasonable distance of the well. The EIA's 2018 Energy Outlook through 2050 shows oil production in the Permian growing from about 2.5 million barrels of oil per day to 4 million barrels per day by 2030, and finds that the growth in Lower 48 onshore crude oil production "occurs mainly in the Permian basin in the Southwest region," because it is "one of the lower-cost areas to develop."

In November 2017, the EDF issued a report calling on the RRC to modify its current flaring rule, "Statewide Rule 32." The EDF asserted that the current rule allows for the "wasting" of associated gas as a "necessity" for the economic production of oil. EDF proposed a revision that would allow flaring only when operators could prove that a no-flare policy would cause physical waste or prevent a producer from accessing its fair share of the oil being produced. However, Rule 32 does have substantial procedures in place to limit the flaring of associated gas. The rule allows an operator to flare gas while drilling a well and for up to 10 days after a well's completion. After that, the flaring of associated gas for extended periods is generally allowed in cases where there may be no pipeline connections or because existing pipelines may have no available capacity. RRC staff may issue flare permits for 45 days at a time and for a maximum limit of 180 days. After that, the rule requires the operator to submit a request that must be approved by an order of the Commission itself.

Perhaps underlying EDF's concern, but a comfort to the industry, is that a review of the approximately 300 requests made to the Commission over the last six years in the three RRC regions covering the Permian basin shows that the Commission has approved every request for extended flaring and that the most common length of time granted for such a request has either been for one or two years, as shown below.

In its report, the EDF found that, on average, 3% of the gas produced in the Permian was flared in 2014, while 4% of Permian gas was flared in 2015, but that the percentages varied widely by producers, as seen in the following chart:

Source: Palacios, Virginia and Leyden, Colin. Vast Energy Resources Wasting Away in the Texas Permian Basin. Environmental Defense Fund. 2017. Web. Accessed 05-16-2018.

What the Permian can learn from the Bakken?

While EDF argues that this data supports its call for changes in the RRC's flaring rules, it is helpful to compare the results reported by EDF to the regulations that were issued by the North Dakota Industrial Commission in 2014 to control flaring in the Bakken basin. The North Dakota regulations slowly reduced the percentage of gas that could be flared from 26% in 2014 to the current level of 15%, while ultimately reducing that amount to 9% beginning on November 1, 2020. Based on the EDF report, all of the producers in the Permian are currently compliant with the North Dakota 2020 regulations, and many of them are substantially below that amount. Even the EDF identified Pioneer, Kinder Morgan, Laredo Petroleum, Parsley Energy, Endeavor Energy, and Crownquest Operating as "high performers" who were able to maintain "a lower rate over a prolonged period of high production, from 2014 through 2015," which should be "similar to what can be expected in the coming boom years."

Given the results of this study and how it compares to the regulations in North Dakota, it seems unlikely that the RRC will revise its regulations. Because the RRC has regularly allowed extended periods of flaring for wells that have no ready access to pipeline capacity and because the EDF study does not show that flaring is a major problem as it was in the Bakken, it does not appear that, for the near term, flaring of associated gas in the Permian will be a limiting factor on production. However, if production continues to grow at the rates expected by the EIA, there will undoubtedly be pressure to build additional gas pipeline capacity to keep the flaring percentages under control.