Methane Fee – More Than a Marginal Impact


Nov 21, 2023

Methane Fee Impact: Stripped Down

Pending finalization (expected August 2024) of the EPA greenhouse gas reporting rules , methane fees based on “empirical emission data” will be imposed after January 1, 2025. This new methane charge is part of the Inflation Reduction Act (IRA), and mandates that methane emissions over a designated threshold will result in per-ton fees for petroleum and natural gas operations.

Assumptions: Set High

The critical issues in measurement and reporting of emissions include acceptable tools, methods, and timelines for reporting as well as appropriate evaluation of volume, duration, and intensity of methane releases. The “super-emitter” program and “other large releases events” requirements may impose significant investigation, evaluation, and data reporting burdens for brief releases and third-party leak reports. The EPA’s duration assumption of six months, potentially based on a momentary leak, is a disincentive to both development of better technologies and to immediate follow-up and repairs.

The potential restrictions on “top-down” satellite monitoring – mandating that it can only be used for large release events and not for supporting annual emissions reporting – are concerning since this may disincentivize innovation, impairing cost-effective satellite monitoring/measurement capabilities and accuracy.

Onsite monitoring tools are available but can be cost-prohibitive (depending on well production levels) when purchase, installation, maintenance, and data capture/management are considered. Optical gas imaging (OGI) is required for all pad sites or sites with storage tanks under the new guidelines: OGI costs are approximately $4,500 per pad, per quarter. Audio, visual, and olfactory (AVO) inspections and gas meter readings at wellheads will also be mandatory.

Operators that exceed EPA-mandated levels of methane emissions (Methane Emissions Reduction Program) will be subject to per metric ton fees: for 2024 emissions, $900; for 2025, $1,200; and $1,500 for 2026 and beyond.

Standards and regulatory guidance (“quad zero” regulations) may soon be finalized by the EPA for low-production wells, to be followed by state compliance regulations.

Low Production = Oversize Impact

The largest impact from the new methane reporting and fees will be felt by operators of marginal wells, also known as “stripper” wells.

Excluding Alaska and offshore, there are approximately 800,000 active US wells: around one-third of these wells (~287,000) are considered extremely marginal, producing 0.5 BOE/day: together they contribute only about 1% of U.S. production. Another ~327,00 wells are considered marginal, producing from 0.5 to 15 BOE/day, contributing nearly 80% of US production.

The costs of compliance with the quad zero rules will force closing of many of these low-volume wells. There is the possibility of staggered timelines to implement enforcement, as a large percentage of these marginal wells may be cost-prohibitive for continuing production due to monitoring costs, and will need to be plugged. States may prioritize closing the maximum number of wells based on cost per well (Texas and West Virgina) while others (Pennsylvania and Ohio) prioritize based on methane emissions, closing the highest emitter first, regardless of costs.

The monitoring cost per BOE will be highest for local producers with low-producing wells: over the next three to five years many will become unprofitable, with operators struggling to fund plugging costs for the hundreds of wells suddenly warranting closure.

Emissions vs. Production

With literally hundreds of thousands of marginal wells at risk of abandonment, companies and governments must balance financial and environmental goals: methane emissions monitoring and fees versus the value of production. The average cost of well plugging is in the $50,000 range, depending on well depth and location.

Too Many Zeroes

For extremely marginal wells (around 287,000 at 0.5 BOE) most at risk to be orphaned, one industry data provider estimates the cost of plugging them all could total between $8,000,000,000 and $10,000,000,000if each well costs ~ $25,000 to 30,000 to plug.

Difficult Conclusions

Realistically, it is not feasible or possible to close hundreds of thousands of wells immediately when the guidelines are finalized. The uncertainty of costs (equipment, data collection, maintenance) and threat of additional methane per ton fees based on potentially inaccurate methane emission levels will push many local companies with marginal wells to walk away from the business, leaving liability with the state and promoting further consolidation of the industry to just a handful of large corporations.

Many operators are taking proactive measures, installing the required monitoring tech and keeping careful records, but will still be subject to methane fees based on emissions levels. Many of these operators will also be pushed into bankruptcy, especially if monitoring and measuring is imperfect and inaccurate.

Accounting for Impact

The impact of these new emissions regulations and fees may mean that over the next several years there will be thousands of U.S. wells suddenly in need of plugging and sealing, as marginal and extremely marginal wells are no longer viable.

It is imperative that regulators fully consider the comprehensive impact of new regulations before hastily developing unrealistic requirements and fees. To avoid a massive influx in orphan wells and further consolidation of an already top-heavy industry, changes to the current proposed regulations must occur.

For operators looking to proactively seal methane leaks to avoid future fees, BioSqueeze® provides the most cost-effective solution to eliminate downhole leaks in the form of sustained casing pressure/vent flow/gas migration. By reducing risk BioSqueeze® ensures leaks are sealed as efficiently as possible to maximize impact while minimizing expenditure.

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