A Sustainable-ROI Perspective on a Methane Rule

UPDATE—May 10, 2017: On a 51-49 vote, the US Senate today declined to overturn the methane emissions rule, keeping the existing regulations in place.

We’re happy to see that lawmakers took into consideration all the stakeholders involved in this regulation. We are also proud that they took the long view. There is only so much natural gas in the ground and it doesn’t help anyone, today or in the future, when it is simply released into the air unused.

COMMENTARY—March 10, 2017

We’re always on the lookout for applications of the cost-benefit analysis principles of Sustainable Return on Investment (S-ROI), so a recent news item about a vote in the US House of Representatives on venting and flaring of methane at natural gas drilling sites caught our eye.

At issue is a rule issued by the Bureau of Land Management (BLM), which oversees leases for oil and gas extraction on federal and Indian lands. The rule tightens restrictions on methane leaks at gas wells, and phases in new limits on the burn-off of excess methane, a practice called flaring. The House voted against the rule under the Congressional Review Act, and it would be overturned with a corresponding Senate vote and Presidential signature.

The BLM’s rationale for the rule:

Bring gas that would otherwise be wasted into the energy market, where it would increase supply (thereby reducing energy prices) while generating royalties for the US. It would also reduce emissions of methane, a potent greenhouse gas.

The counterargument, from the petroleum industry, is that methane emissions have already been substantially reduced through internal rules and state-level regulation, and that the rule would impede production, cost jobs, and result in lower tax and royalty payments by causing further declines in drilling on federal land.

While they don’t specifically mention S-ROI, the BLM does reference a couple of its key principles. First is stakeholder outreach, which was conducted in the rulemaking process via “public and tribal meetings in 2014,” and a subsequent public comment period followed by another round of meetings. Second is a monetized cost-benefit analysis, which incorporates costs of implementation, ancillary benefits like the sale of gas that would otherwise have been wasted, and numerical values for things like emissions reduction:

• “Using conservative assumptions, the BLM estimates that the rule’s net benefits could range from $115 to $188 million per year. Benefits include revenues for operators from sale of recovered natural gas and environmental benefits of reducing methane emissions and other air pollutants.”
• “Many oil and gas operators are voluntarily taking steps proposed in the rule to reduce wasted gas and improve operations. The BLM estimates that the annual cost to industry of implementing the rule will be $125-161 million. Individual, small business operators may see profit margins reduced by roughly one- tenth of one percent, on average. About 40 percent of natural gas now vented or flared from onshore Federal leases could be economically captured with currently available technologies, according to the 2010 GAO report.”

One key question is job creation or loss. Jobs in the oil and gas sector tend to be relatively high-paying, and so can make a big difference to individuals, families and communities. However, oil and gas production employment levels have been volatile, roughly doubling to a peak of 538,000 in response to increasing domestic production and generally higher energy prices from 2005 to 2014, but giving up about half those gains since then, with many rigs taken out of service in the face of falling energy prices.

In a full S-ROI analysis, inputs would be collected from affected stakeholders or their representatives or proxies, including energy companies, their employees, residents of areas near the affected sites, energy consumers, taxpayers, etc. The effects of future energy market fluctuations would also be modeled, as would the employment effects (pro or con) on local communities.

We can’t say how much of this was done, and it’s beyond the scope of a blog post to dig into all the details or resolve differences of opinion. But, if the BLM’s analysis is anywhere in the ballpark, the S-ROI perspective would be that overturning the rule would lead to a modest short-term gain for a relatively small number of people and entities, and a long-term loss distributed across a much larger group. Indeed, the oil and gas producers themselves might end up better off with the rule in place, as the recaptured methane seems to offer relatively quick payback on the up-front cost, especially if energy prices go back up.

At the end of the day, it’s up to policymakers to judge the relative merits of these types of tradeoffs. As they do so, they and their constituents deserve to have the best possible information and analysis, and we firmly believe that S-ROI provides an excellent framework for this type of assessment.

— Photo by Tim Evanson used under Creative Commons.