New ICF Study: Cost of Methane Regulations Much Higher Than What EDF Study Projected

EID pointed out a few months ago that the 2014 ICF International study used to justify the Environmental Protection Agency’s (EPA) new methane regulations on the oil and natural gas industry is misleading due to unreasonable assumptions such as $4/Mcf natural gas and projected increases in methane emissions.

Now, ICF has updated its figures from that Environmental Defense Fund (EDF)-commissioned study with more realistic estimates in a new study, released last week. Not surprisingly, the new study finds the cost of EPA’s regulations would be nearly five times greater than what the EDF sponsored analysis indicated.

Commissioned by the Our Nation’s Energy Future (ONE Future) coalition – a group of natural gas companies committed to reducing methane emissions  – the new study actually uses the same marginal abatement cost (MAC) curve model developed for the EDF study, but substitutes more realistic inputs based on recent information on emission and equipment costs.

As result of its use of updated data and direct input of ONE Future member companies (you know, because it’s these companies who actually have field data because their employees are in the field every day working to identify and remediate leaks), the new study finds the cost to reduce methane emissions from natural gas systems is $3.35/Mcf of methane reduced, whereas the EDF study projected a cost of $0.66/Mcf per methane reduced.

This new study finds that industry can reduce a total of 88.3 billion cubic feet of methane emissions at an annual cost of $296 million, contrasting drastically with EDF’s ICF study, which claimed 163 Bcf could be reduced at an annual cost of $108 million.

Here are a few reasons why this new ICF study is a bit more realistic:

#1: It uses natural gas prices that are much closer to today’s prices.

As EID pointed out in March, the EDF study’s rosy projections of ultimate savings from emission reductions were driven largely by the unrealistic assumption of $4/Mcf natural gas and the notion that recovered gas could be sold at that price.

Natural gas prices haven’t reached the $4 Mcf level since November 2014 and have remained well below $3/Mcf over the past 15 months. Furthermore, the Energy Information Administration’s (EIA) analysis of EPA’s Clean Power Plan, released in 2015, projects natural gas prices may not reach $4/Mcf until after 2030, based upon a high oil and natural gas resource base assumption.

The ONE Future-commissioned ICF study assumes natural gas prices are $3.00/Mcf and ultimately reduces that price to $2.25/Mcf after deducting royalties and fees –something the EDF study failed to do. From the report:

“The gas price was assumed to be $3/Mcf, reduced by 25% to account for royalties and fees, for a net value of $2.25/Mcf.”

Of course, with today’s natural gas prices at about $2.44, and considering that royalty and fee payments would still have to be taken out, the price is actually even lower than what is projected in the ONE Future study.

Even so, how much difference does this more realistic natural gas price make in terms of potential value of recoverable gas? EDF’s projected 163 Mcf would be valued at $652 million based on its unrealistic assumption of $4 natural gas prices while ONE Future’s 88.3 Mcf of recovered gas would be valued at $198 million based on its $2.25 price assumption.

#2. It acknowledges recoverable gas can only be monetized in the production sector.

The EDF study was based on the incorrect assumption that recovered gas could be monetized in the midstream segment of the natural gas industry, which resulted in over-estimations of recoverable gas and the value of that gas.

As the result of feedback from ONE Future member companies, the new study much more realistically takes into account the fact that methane emissions can only be recovered and monetized in the production sector. From the report:

“The contractual provisions for gathering, processing, and storage are variable but the ONE Future members reported that these companies typically do not take ownership of the gas but rather are paid a fee for their service. Reduced losses could result in increased throughput and increased recovery of the fee (which is much less than the value of the gas itself) but only if the metering point is downstream of the potential gas recovery.

“The members also reported that the metering for most of these facilities is at the entry point of the facility, thus preventing the operator from capturing the value of recovered gas. Based on this information, the value of recovered gas was included only for the production sector in this study.”

Combined with EDF’s inflated assumption of natural gas prices and the new ICF report’s higher costs – which are based off ONE Future member’s actual costs – for leak detection and repair (LDAR), EDF’s assumption that the midstream segment can monetize mitigated emissions was a primary driver in its miscalculation of the value of recovered gas.

#3. It does not use inflated projected emissions estimates for 2018 as the EDF study did.

Another reason the EDF study projects so much more recoverable gas potential than the ONE Future study is the fact that EDF chose to use projected emissions for 2018 (404 Bcf) as its baseline, while the new study uses the 2012 EPA Greenhouse Gas Inventory (353 Bcf) as its baseline. EDF just so happened to project a 4.5 percent increase in emissions from 2011 levels by 2018, basing the rationale for increased emissions on International Energy Agency projections. But the latest data does not support this forecast.

EPA data shows methane emissions from natural gas systems have actually decreased since 2005 at the same time production has increased 42 percent, and considering EDF’s estimate took likely emissions reductions from EPA’s proposed methane regulations on new and modified oil and gas infrastructure into account, it is difficult to understand why emissions would be projected to rise 4.5 percent by 2018.

These inflated projections led to the EDF report forecasting higher recovered gas totals – and, subsequently, higher gas credits – than what is likely to occur.

#4. Takes into account industry input, which leads to more accurate costs.

The EDF study relied exclusively on assumptions of the cost of deploying abatement technologies. In contrast, the new ICF study features an actual list of available methane mitigating technologies and relies on real-world industry input to calculate the cost of implementation, as report author Joel Bluestein told E&E News:

“We had the benefit of the members’ direct experience with some of these technologies, and in particular the cost of inspecting and repairing leaks. Based on the company experience, the cost of that process in this study was significantly higher than in the EDF study.”

For example, real-world input on the costs of replacing high bleed devices with low bleed devices led to the new ICF study determining the cost would be $6.17 per Mcf of methane reduced. This is a huge difference from the EDF study, which found replacement of high bleed devices with low bleed devices could actually be done at a savings of $2.65 per Mcf of methane reduced – a miscalculation of $8.82 per Mcf of methane reduced.

Conclusion

The fact that the new ICF report finds the cost of the Obama administration’s methane regulations on the oil and gas industry could be five times more costly than the widely-cited EDF study claimed adds to a mounting body of evidence that the rules will be far more expensive than advertised.

National Economic Research Associates (NERA) – which has also conducted economic analyses for the U.S. Department of Energy – recently evaluated  EPA’s Regulatory Impact Analysis that was based largely on EDF’s report and found the alleged cost recovery to be “highly uncertain and very likely overstated.” NERA also determined that the cost of the new methane regulations would be about three times larger than EPA’s projected benefits from its RIA.

NERA went on to note that the agency’s figures “lack the appropriate peer review that is necessary for use in supporting regulatory policy.”
Even though actual gas prices are much lower than $3.00/Mcf, the ONE Future study’s data are much closer to reality.  It adds to the body of literature showing just how off EPA and EDF have been in their estimates.

 

 

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