Economics Don’t Justify Optimism About New Methane Regulations

Methane cloud from a small midstream facility in the Texas Permian Basin.

After years of working to raise the alarm about dangerous methane emissions from the oil and gas industry, I’m happy to see that the media is now reporting on many aspects of the ongoing methane emergency. Among the stories the media recently reported were ones noting the record levels of atmospheric methane, how U.S. oil and gas methane emissions are likely three times higher than previously reported, and new efforts to address these emissions such as the recently launched methane tracking satellite, MethaneSAT. I welcome the increased media coverage and the potential for better quantification of the problem with new tools like MethaneSAT, but unfortunately we can not rely on these developments alone to force the industry to change its dangerous behavior.

The current tools available to track large sources of methane emissions from oil and gas production already indicate that the Permian oil region of Texas and New Mexico is a leading source of greenhouse gas emissions but usually can’t identify individual sources of emissions, which is necessary to hold the companies releasing the methane to account. The work I do visiting oil production sites in person and viewing the methane and volatile organic compound (VOC) emissions with a Teledyne FLIR G620 optical imaging camera does identify emissions down to an equipment specific level but requires in person visits with these advanced cameras, which is an effort that isn’t possible to scale up for all the sites in the Permian.

However, after years of doing this work I know that despite the huge advances in our ability to track and identify methane emission sources, it hasn’t stopped the industry practice of dumping methane in the atmosphere of the Permian and there are strong economic incentives for the industry to continue this process.

On my visit to the Permian in mid-March, natural gas prices for the Permian were negative, which is a unique aspect of America’s largest oil field that also produces a significant amount of natural gas with that oil (known as associated gas). On the simplest level this is a supply and demand issue. There is more gas being produced in the Permian than there are people willing to buy it. However, a big reason for that is that the oil producers never invested in the proper equipment to capture and control methane emissions or the pipelines required to gather the gas and get it to the main market for gas in Waha. I viewed several events of large emissions at oil and gas production facilities while visiting — emissions of methane that had negative economic value at the time.

This is a serious and perhaps fatal flaw in efforts to reduce and stop methane emissions and flaring in the Permian. Various groups, including the IEA’s Global Methane Tracker 2024 report that found the U.S. oil and gas industry led the world in methane emissions, have concluded that up to 40% of methane emissions can be captured if the industry invests in new equipment and that the money from the sale of that captured methane would pay for those investments. Except, for the past several months in the Permian that wasn’t true due to the negative pricing for natural gas. And while the gas prices in the Permian are not typically negative, they reliably trade at a large discount to national prices, as they continue to do now. In April, energy analyst Seb Kennedy of Energy Flux noted that future pricing in the commodities markets supports the expectations that Permian natural gas prices should remain near zero through 2030. There is little or no economic incentive for the oil producing industry in the Permian to spend money to capture the methane.

There are other economic factors working against the reduction of methane emissions in the Permian. Many analysts now believe that the Permian is likely to peak in oil production in 2024 while at the same time, Citigroup analysts forecast global oil prices could fall below $60 a barrel in 2025. If the industry didn’t invest in the necessary methane capture and handling equipment when it was booming, it is unlikely to invest if the Permian is peaking and global oil prices are dropping. And now at the same time the Permian is peaking for oil production, the Permian oil wells are getting gassier so there is even more methane gas to address with less oil revenue to pay for it. This is all happening as the global oil industry may hit peak oil demand this decade. Lower oil demand means lower prices which is another reason the industry will have less incentive to invest in lowering future emissions. Earlier this month CNN published an op-ed by investor Tom Steyer that argued that from an investors standpoint, it doesn’t makes sense to invest in oil and gas anymore. Earlier this year the Institute for Energy Economics and Financial Analysis made the case that investing in oil and gas companies has resulted in poor returns and that the long-term outlook for investing in the industry is “negative.”

The truth is that in order to reach the aggressive methane emissions reduction goals for U.S. oil and gas production, we are once again going to have to trust the oil and gas industry to do the right thing. However, in Texas the state is suing to fight new regulations designed to reduce methane emissions. And the American Petroleum Institute leads a group of industry lobbyists calling on Congress to repeal the new fees for large methane emissions. And in New Mexico, the methane emissions have increased significantly since the state implemented new methane regulations. Relying on the oil industry to do the right thing is a plan for failure.

The industry has proven it will conduct business as usual when it comes to methane emissions. On my last visit to the Permian what I saw was worse than business as usual. I’m concerned our current plans and policies to deal with this problem are set up to fail, which is an unacceptable outcome. We need strong and courageous intervention from our government.

Justin Mikulka and Sharon Wilson

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  1. Margaret Neith on June 17, 2024 at 8:11 pm

    The dysfunctions and ironies built in the capitalist system are hereby exposed. Production and profit reign supreme and just leave the waste products and ill effects for someone else to deal with. Or not, if governments and regulators are also beholden to the fossil fuel industry. Is profit really more important than the future of the very air we breathe? And the climate we need to grow the food we eat? It would appear so.

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