Bloomfield company says capturing methane is hard sell
BLOOMFIELD — Branded as polluters by environmentalist groups and under pressure to comply with federal oil and gas regulations aimed at reducing leaked, vented or flared methane, the fossil fuel industry could find some relief in technology that helps operators capture the gas and sell it.
If only more oil and gas companies were buying.
Vapor recovery units, or VRUs, which are more efficient now and can help operators comply with federal rules by capturing most of the leaked or vented methane from oilfield equipment — storage tanks, mostly — represent a remedy for the new regulations producers face. But despite the methane-suctioning equipment's ability to curb pollution and boost revenue, what appears to be a win-win proposition has been a hard sell with San Juan Basin operators.
A major component of natural gas, methane is a greenhouse gas 25 times more powerful than carbon dioxide in trapping heat in the atmosphere over a 100-year period, according to the U.S. Environmental Protection Agency. 2013 EPA emissions data shows a majority of methane emissions — 39 percent — comes from oil and gas production, followed by 30 percent from transmission and storage, 18 percent from distribution and 13 percent from processing.
Twin Stars LTD in Bloomfield sells VRUs, but getting customers to sign on the dotted line has been a challenge, said Roger Armstrong, the company's general manager.
Armstrong said despite the fact that the company engineers, manufactures, repairs and maintains the equipment, it has only been able to sell about 200 units. Twin Stars also maintains another 200 VRUs made by other companies, he said.
Part of the problem also boils down to human behavior, he said.
"The industry has to catch up," Armstrong said. "All your career oil and gas guys have to step up to the new realm of operations. It's much more difficult and sophisticated. It's more work on the operator. He has to understand the technology. The old dogs have got to figure it out and the tech-savvy new kids on the block have got to ... understand the production side of the business. You have this intersection. It's a huge change, and training the industry is almost as difficult as (engineering the equipment)."
One reason the industry has been slow to adopt the new technology is a prolonged stretch of low natural gas and crude oil prices. But Armstrong said that while the downturn presents challenges, his company has kept busy by diversifying its product line and expanding its reach.
After adding the vapor recovery units to its inventory in 2010, Twin Stars opened an office in the southeast corner of the state in Eddy County, in the New Mexico portion of the Permian Basin. Last year, the company expanded into Midland, Tex., after landing a sizable contract to maintain VRUs for a producer there. While its customer base is largest here in the San Juan Basin, Armstrong said the sheer size of the Permian Basin made moving into West Texas and southern New Mexico a sound investment.
"We see a bright future in (vapor recovery)," he said. "That's why we're in it. Diversification and innovation, that's what we're about."
Although vapor recovery has been possible for about 15 years, Armstrong said, recent innovations involving improved engineering aided by computer-controlled technology has helped producers capture as much as 95 percent of otherwise leaked or vented methane, he said.
Founded in 1991 with Armstrong as its first employee, Twin Stars, despite the prolonged bust, maintains about 50 employees. The majority of workers are mechanics working in the oil field maintaining a variety of equipment at clients' well sites, Armstrong said. Twin Stars performs maintenance on about 1,000 VRUs, or more than $100 million worth of equipment, in the San Juan and Permian basins, he said.
Performing maintenance on that many VRUs, many of which are custom built for particular kinds of well sites, has helped diversify the business.
According to the EPA, a storage tank battery can vent anywhere from five to 500 thousand cubic feet, or Mcf, of methane into the atmosphere each day.
Aiming to lower oil and gas-caused methane emissions by 40 to 45 percent from 2012 levels by 2025 has been a major component of President Obama's Climate Action Plan, became a reality last month when the EPA's rule on methane emissions from new and modified sources was finalized. The rule is expected "to reduce 510,000 short tons of methane in 2025, the equivalent of reducing 11 million metric tons of carbon dioxide," according to the EPA.
Methane is primarily leaked or vented through production, processing, transmission and storage of oil at well facilities. According to the U.S. Bureau of Land Management, oil and gas producers on public and Indian lands vented, flared and leaked about 375 billion cubic feet, or Bcf, of natural gas — in these cases, a public or tribal resource — between 2009 and 2014 alone.
A study released in April by Conservation Economics Institute argued that compliance under the BLM's pending methane rule alone would have a financially "net positive impact" on the industry and the state's programs.
Although that's a lot of lost profits, Armstrong said each well facility poses unique challenges for vapor recovery projects. And smaller scale natural gas wells may not deliver enough natural gas for the VRUs to be cost effective.
"It's a lot of engineering and sometimes it can be profitable," Armstrong said. "Not every time, though."
Each facility presents a unique footprint, he said. Many would require modifications made to all parts of a system to make a VRU system work.
The economics of VRUs and rules on atmospheric methane releases were a focus of the Four Corners Oil and Gas Conference at McGee Park last month.
Armstrong said he took in a presentation by Jeff Voorhis of Hy-Bon Engineering Company, Inc., a VRU dealer based in Midland, Tex., who promoted his business' capture technology.
Voorhis told conference participants he would make vapor recovery a "better than free" proposition. Voorhis said his company would install VRUs at well sites for free and take 50 percent of the revenue the captured gas delivers until the equipment is paid off, a pitch Armstrong said Twin Stars also offers.
But, Armstrong said it was the "back-end part" of the deal — the costs of maintaining the equipment — that causes producers to shy away from making the investment.
"We'll (also) do it for free, and we'll split the revenue (until the equipment is paid off). Very rarely do they take that deal," Armstrong said. "It's because it's so difficult to execute vapor recovery. We've made it as easy as we can. The back-end piece is the actual operations of it. Setting the equipment, us doing our in-house engineering. The up-front piece of it, we've got it nailed.The operations is where the work really starts."
VRUs require more attention and workers, he said.
"You're chasing every minute leak on location, trying to keep oxygen out of the system" because it corrodes pipelines, he said. "The biggest thing, you're adding a huge cost to (smaller) operations. In many cases, it's revamping and enhancing a facility. Obviously it takes more time and labor from their folks and us. All of that is just added cost."
Like many local oil and gas officials in the area, Armstrong says oil and gas operators and the industry overall are the "ultimate environmentalists." But complying with laws during a prolonged slump where layoffs and bankruptcies are common, has been challenging, he said.
"I agree with the premise behind the regulations, and, obviously, it's great for us," Armstrong said. "It's a business opportunity for us. We're solving problems for our clients, but it's almost like somebody said, 'Is it possible?' And I said, 'Yeah, it's possible, okay,' but nobody ever said, 'How difficult is it?'"
WPX Energy, Inc., is also one of Twin Stars' customers and one of two operators still drilling in the San Juan Basin.
Armstrong said larger facilities are more likely to install the equipment. The VRUs installed at larger sites can be paid off within a year, but there still might be other costs hiding in plain sight, he said. Complications requiring additional or modified equipment may take a decade or more to pay off.
Kelly Swan, a WPX spokesman, said in an email that over the last three years the company bought 60 VRUs from Twin Stars and incorporated them into new drilling sites in the Gallup oil play.
WPX company officials say the company is spending between $75 and $90 million in the San Juan Basin and $175 to $225 million in the Permian Basin on drilling programs this year.
"(The investment) demonstrates our commitment to environmental stewardship and also provides us with an economic benefit," Swan said. "We can either use the gas for fuel or flow it to (the) sales (line to be sold to and processed)."
The additional volume equals more revenue for the company, Swan said. WPX went with Twin Stars because of the product's quality, but, he said, expense and regulations factored in.
"Cost will always be a consideration," Swan added. "It’s something we have to manage in tandem with compliance."
Swan said the VRUs have not yet paid for themselves. Regulations, he said, were a driving force behind the company's decision to build new drilling facilities with VRUs.
"Time will tell. These are considerable investments," he said. "This is the option we’ve chosen to date to meet a compliance objective."
Armstrong said the perception that the industry doesn't want to clean up operations and sell more gas couldn't be more untrue. A culture change in the industry may be one stumbling block, but the long-term investment during an industry bust cycle represents the ultimate deal-breaker, he said.
"We're in business to sell gas; we are not in business to vent gas," he said. "We want to capture gas and sell it. It's just a matter of, 'Can we afford to do it?'"
James Fenton is the business editor of The Daily Times. He can be reached at 505-564-4621.