The Bureau of Land Management recently proposed new rules to limit the practice of venting and flaring natural gas from oil and gas wells on federal lands.[1] In response to the proposed rule, oil and gas proponents claim that the BLM’s proposal exceeds its authority to prevent waste and secure royalties on production of natural gas. In reality, the BLM has unqualified authority to define or refine the principles of “waste,” “avoidable,” and “unavoidable” loss along with the accompanying royalty assessment.[2]  And if BLM does not work to end the waste of natural gas in federal leasing operations taxpayers will continue to lose billions of dollars in lost royalty revenues.

The Mineral Leasing Act (“MLA”) charges the BLM with the responsibility and accompanying authority to “do any and all things necessary” to fulfill the law’s objectives, which include preventing the waste of oil or gas.[3] Some in the oil and gas industry are claiming that the BLM’s proposed update to the 30 year old rules does not comply with Congress’s intent when enacting the MLA in 1920.[4] Obviously, the technology and processes for oil and gas development today bear little, if any, resemblance to oil and gas development when the MLA was enacted almost 100 years ago. Therefore, it is imperative that the BLM update its rules, as it did in 1979, to prevent the waste of federal gas. As part of the update, such terms as “avoidably” and “unavoidably” lost gas should also be updated to reflect the realities of modern oil and gas development.

The current rules governing lost gas, the 1979 Notice to Lessees and Operators of Onshore Federal and Indian Oil and Gas Leases, Royalty or Compensation for Oil and Gas Lost (“NTL-4A”) has failed to effectively limit waste on oil and gas production. From 2009 through 2013, the amount of “unavoidably” lost gas from federal oil leases has been substantially higher in some states than increases in oil production.[5] In other words, the ratio of gas that is “unavoidably” lost to barrels of oil produced from federal leases is increasing. The consequences of that trend are compounded by rapid increases in oil production in some states, due largely to new drilling technologies like hydraulic fracturing and horizontal drilling. In 2010, we should point out, the Government Accountability Office (“GAO”) reported that “around 40 percent of natural gas estimated to be vented and flared on onshore federal leases could be economically captured with currently available control technologies.”[6] In the subsequent years, the proportion of lost gas deemed “unavoidable” continued to increase in relation to oil production in some states. That increase, in spite of the GAO’s findings that much of the gas should be captured, demonstrates the ineffectiveness of the current rules (NTL-4A).

One principle reason current rules (NTL-4A) have failed is because they are limited to judgments made by a BLM Supervisor or Authorized Officer about what is “prudent and proper” or “reasonable,” to determine what is “unavoidably” or “avoidably” lost gas.[7] Not surprisingly, there has been “substantial variation in how the BLM has interpreted and applied the standard” for approval of flaring (i.e. determining what is “unavoidably” lost gas) in this case-by-case evaluation.[8] Over the last 36 years, experience has demonstrated that administering a “waste” standard on a subjective, case-by-case basis, as the status quo and critics of the updated rule would suggest, is unrealistic and unworkable for the oil and gas resource owners, and federal taxpayers. The inconsistent application of “waste’’ standards is one of the principal failures of NTL-4A that the proposed update to the NTLA-4A is meant to fix.

Defining “waste” as only the loss of gas when the value of the lost gas exceeds the cost of capturing it (i.e. it is profitable) means the industry is in the driver’s seat, not the BLM. Only the individual lessee can determine whether the gas it is venting or flaring would be profitable to capture. Congress did not intend the oil and gas companies to be responsible for determining what gas is “wasted” (“unavoidably” lost) and therefore charged a royalty. Such reasoning is not included in the standards established by the MLA or NTL-4A, and it only shortchanges federal taxpayers. It may not be profitable for industry to fix their leaking pipes, which wastes the resource and creates long-term pollution liabilities for taxpayers, but the oil and gas industry must still pay the royalty on that gas.

The BLM clearly has the authority to require operators to do specific things, such as maintaining safety rules that are not in and of themselves profitable. The BLM’s proposed rule, and regulations regarding waste, in general, are designed to ensure that all of the federal gas is recovered, subject to royalty assessment, and available for use in the economy. The standards are not designed to ensure that each cubic foot of gas is recovered at a profit to the industry.

There are further problems with basing the definition of “waste” on the profitability argument.  As the GAO noted, an individual operator may determine gas capture technology is not economically justified because investing in additional oil well development is even more profitable.[9] In other words, the economic test envisioned by the oil and gas industry might assess not just whether gas capture technology is profitable, but whether investing in gas capture is profitable when compared to the potential return on other investments. The GAO also found that some operators determine that gas capture is uneconomic without even really assessing the technology’s cost, or are otherwise unaware of the potential cost savings.[10] A subjective test of “waste” under a profitability standard, as suggested by some industry proponents, depends on individual operators’ economic analyses of varying accuracy and completeness would be an unreliable foundation for the implementation of any rule designed to prevent the loss of federal gas.

Finally, claims that the proposed rule would make current leases uneconomic borders on hyperbole. The total amount of “unavoidably” lost gas accounts for a relatively small amount of gas compared to the total value of resources extracted from each lease. Certainly such an outcome would occur only in an extraordinary case in which conditions would make a particular lease an unwise choice for recovery of federal resources.

TCS is pleased to see the BLM taking steps to reform oil and gas development practices to better protect taxpayers. The outdated rules that govern current development are costing taxpayers billions of dollars in lost revenue.