The BLM methane rule – the math behind the myth

George Sharpe
Merrion Oil & Gas investment manager

There have been several recent opinions in the paper supporting the BLM’s pending methane regulations. “How can one argue,” they ask, “with capturing millions of dollars’ worth of methane that is currently escaping from wells in the San Juan Basin and elsewhere?”  But although environmental extremists don’t seem to care about math, there are always two sides of the equation.  Here is the math behind the Industry’s opposition to the rules.

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  1. The new regulations will have NO measurable effect on improving the environment. Even if 100 percent of methane is captured, the amount being lost is virtually immeasurable compared to the total man-made greenhouse gas emissions, not to mention the natural emissions.  One reason the Four Corners shows up as a methane hotspot is NOT because of leaks at oil and gas well sites (there are thousands of wells in other basins that don’t show as hot spots), but is primarily a result of natural seepage along the Fruitland Coal outcrop in Colorado.  For those interested, this topic will be addressed by Durango Geologist Ashley Ager at the upcoming Four Corners Oil & Gas Conference May 11 and 12.
  2. Air quality aside, the BLM (which has no jurisdiction over air quality) is claiming the rule is all about saving an estimated $180 million per year in lost royalty payments.  Sounds like a lot, but numbers by themselves have little meaning until they are put into perspective.  In 2014, the Feds collected $3.1 billion in royalties. So this punitive regulation is all to increase royalties by approximately one-half of 1 percent?
  3. The expense of retrofitting wells with vapor recovery units and non-pneumatic controls will cost as much as $50,000 per well.  Emissions per well site are estimated at 0.7 MCF (thousand cubic feet) per day per well.  At the current $2.00/MCF gas price, that is $511 per year, of which the Feds gets 12.5 percent, or $64 per year.  Asking industry to invest up to $50,000 with a 100 year payout, all to make the feds $64 per year is one ridiculous cost-to-benefit ratio.
  4. How many wells will be plugged and abandoned?  There are about 30,000 active wells (or completions) in the San Juan Basin producing about 2.8 BCF per day (billion cubic feet, or 1 million MCF).  However, 0.76 BCF per day of that production comes from 21,000 wells making less than 90 MCFD, a production rate the Feds consider marginal.  Most of those wells are barely (or barely not) economic, and this will be the stake in the heart.     
  5. Because the rules will cause thousands of wells to be abandoned, the new rules will result in a drastic REDUCTION in royalty payments to the tax payers, not an increase.  Based on the above ratios, two-thirds of the wells producing 25 percent of the revenue on federal lands are in jeopardy. That is a potential loss of $775 million in royalties compared to $180 million in purported “savings!” 
  6. Let’s bring this conversation closer to home.  With absolutely no drilling going on, if there is anything sustaining local jobs, it is the manpower it takes to operate 30,000 wells.  Shut in many of those 21,000 marginal wells and Farmington can go back to farming as its primary employer.      

An analogy to this situation would be like the government requiring industry to make large capital investments to save on energy costs.  The savings would increase profits, which increase the taxes to the feds.  However, the revenue saved by industry doesn’t come close to paying for the capital investment.  As a result, all the small businesses throw up their hands and close the doors. The small businesses, added together, represent a loss of way more base tax income than the new tax that is finally collected from the survivors.   The Feds lose, the businesses lose, and certainly all the people that used to work for the businesses lose.

Of course, this is not about cost-to-benefit ratios because that would require someone to, uhh ... calculate a ratio.  But ignoring the facts doesn’t change the facts.  And the fact is, the BLM’s rule is another example of ill thought out regulations that will have negligible benefit at an exorbitant cost — particularly locally, where we can least afford it.

If you would like to do what you can for the cause, please go to and add your signature to the letter going to the BLM.  Alas, it may not help, but it is all we can do.