Costly Methane Reduction Once Again Targets Only Oil & Gas – David Yager – Yager Management

 

 

 

 

 

David Yager – Yager Management Ltd.

Oilfield Service Management Consulting – Oil & Gas Writer – Energy Policy Analyst

June 15, 2017

The old saying goes, “The road to hell is paved with good intentions”. And so it goes for the myriad of new regulations, taxes and restrictions forced upon the oil industry to attempt to make it something it is not, which is a zero-carbon and environmentally benign source of hydrocarbon fuel. Carbon taxes. Corporate taxes. Emission caps. The premise is the upstream oil and gas industry is so shamelessly profitable that governments and regulators can pile on more rules and costs that somehow this industry can accommodate, absorb and survive. And still provide fuel, taxes and jobs.

The newest elephant in the room the industry has not yet had to deal with is the commitment made by the governments of Canada, Alberta and U.S. to reduce methane emissions by 40 to 45% by 2025 with the major culprit being the usual suspect; the oil and gas industry. The new science of climate change has determined that methane – CH4 or one carbon atom combined with four hydrogen atoms – is a greenhouse warming contributor that over a hundred-year period is 25 times worse than carbon dioxide.

If you don’t know what that means it’s okay because neither does your writer.

Methane is more commonly known as natural gas. You know, the stuff that powers your furnace all winter, the hot water heater in the basement, and perhaps your stove top and oven. Natural gas is what built Alberta’s oil and gas industry. First discovered in commercial quantities at Langevin near Medicine Hat in 1883 (as Rudyard Kipling opined “all hell for a basement”), natural gas has been a massive contributor to the improvement of life in this large cold country. Methane was first plumbed into Calgary from Bow Island in 1912. It really helped because if all the trees for firewood had not yet been cut down for they would be shortly.

And Alberta’s modern oil and gas industry was born. It gets better. In the mid-1950s serial entrepreneur Frank McMahon (think McMahon Stadium and the Calgary Stampeder’s home field) of Pacific Petroleums pushed through the Westcoast Transmission “big inch” pipeline that carried natural gas from northeast B.C. to the lower mainland and then further south to the northwest U.S. and California. One of the benefits of bringing this deadly methane into Vancouver was a massive improvement in air quality as coal and wood were replaced with clean-burning natural gas. The record states air quality improved materially.

There were major political debates to get western Canada’s natural gas into obvious Canadian markets. It was a more difficult struggle every step of the way than it should have been.

With an astonishingly short memory, Vancouver recently passed a new law making it illegal for new buildings to use natural gas. That methane which was a major contributor to B.C.’s lower mainland having clean air is long forgotten. We are bombarded with the life-threatening implications of hydrocarbon fuel. It would be helpful if somebody acknowledged even occasionally a few of the historic improvements oil and gas have provided.

Then there’s U.S. coal and the shale-gas revolution. The greatest progress in reducing U.S. carbon emissions in its history has been shale gas fracking resulting in cheap methane and a low-cost replacement of coal with natural gas for power generation. Washington’s Energy Information Administration (EIA) reported that in 2015 (the last full year for which data is available) U.S. coal production dropped 10.3% from the prior year to the lowest level since 1986.

Methane. Think methane.

It is against this historical backdrop of methane/natural gas being an amazing exploitation of resources that we visit the joint determination of multiple governments to clamp down on methane emissions. There are many sources of methane, including the existence of mammals.

The target of the methane reduction plan has been, as usual, the oil and gas industry. The primary sources are leakage caused by fugitive emissions, equipment leakage, and flaring. But what is interesting, from the chart below, is that according to independent sources two-thirds of methane emissions come from other sources than the industry that produces this fuel directly for money and the advancement of mankind.

Source: Bousquet, P. et al. (2006). Contribution of anthropogenic and natural sources to atmospheric methane variability.

According to the foregoing, the second largest source of methane is apparently livestock farming, more commonly called “cow farts”. Homo sapiens also fall into this category but apparently climate scientists don’t think the fact that all of us pass wind from time to time – and emit CO2 as we breath – is material to the future of the world. Another major contributor, which adds up to 24% of the total, is biomass (wood etc.), growing rice and other sources of non-animal food, and biofuels, allegedly a solution to the global carbon problem.

What is notable is that to protect the environment none of the advocates of oilpatch methane reduction have suggested mankind quit eating meat or rice. If you think this is, once again, biased against the oilpatch, you are absolutely right.

So last year a major reduction of methane emissions by the oil and gas industry was determined to be important and the details began to emerge. As written above, this meant that non-combusted (not burned to create water and CO2) methane emissions must be reduced by 40 to 45% by 2025.

The problem is this business is all methane. It is the primary product when producing natural gas and is a major by-product in the production of oil and natural gas liquids. It leaks out of the ground all on its own through existing wellbores, a phenomenon more commonly called surface casing vent flows. Methane found its way to surface at Turner Valley decades ago. It has been the marker for oil and gas all over the world for decades. This is how early oil early explorers found commercial quantities of oil and gas.

In a presentation last year, CAPP figured the new rules as presented by governments would cost $4.1 billion over the next eight years, a period running to 2024. According to ARC Energy Research Institute macro-economic update for June 5, this is 10% of all the available upstream cash flow from the entire industry in 2017.

And CAPP also states the obvious. What the heck is this about for an industry on its knees? CAPP figured last fall that is this were done on a more strategic level with operators exploiting all the micro-opportunities, the cost could be reduced to $1.3 billion. It is not that the producers are trying to neglect their social and financial obligations. But what can an industry selling its product under half of its value three years ago – combined with the other increased levies – be expected to accomplish without shutting down?

The Petroleum Services Association of Canada – the folks with the guys on the ground with the valves, wrenches and infrared methane leak detection technologies – was very forthright.  CEO Mark Salkeld noted that while there is no question this would create more work for the oilfield services industry, his main concern is that any policy changes that negatively affect upstream cash flow are ultimately not positive for the oilfield services industry.

So here we go again. There are an enormous number of sources of methane, one of which is the oil and gas industry. This is an industry that powers much of the world through the production and marketing of natural gas. But government and climate policy has once again focused in on the oilpatch.

All we can hope is that when it sorts itself out we can remain in business. Because when we live in a large cold country like Canada, the continued production and consumption of this methane is essential to life as we know it.

About David Yager – Yager Management Ltd.

Based in Calgary, Alberta, David Yager is a former oilfield services executive and the principal of Yager Management Ltd. Yager Management provides management consultancy services to the oilfield services industry in a number of areas including M&A, Strategic Planning, Restructuring and Marketing. He has been writing about the upstream oil and gas industry and energy policy and issues since 1979.

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David Yager can be reached at Ph: 403.850.6088 Email: yager@telus.net

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