April 7, 2016

Oil industry downplays revenue lost to natural gas waste

Photo Credit: blake.thornberry cc

Chris Saeger is the director of the Western Values Project.

In a recent Farmington Daily Times story, Wally Drangmeister of the New Mexico Oil and Gas Association tried to downplay how many millions of dollars in tax revenue his members were costing the State of New Mexico by inferring it’s slightly fewer millions of dollars.

Photo Credit: blake.thornberry cc

Photo Credit: blake.thornberry cc

According to our 2014 Western Values Project Up in Flames report, American taxpayers will lose upwards of $800 million in oil and gas royalty revenue due to wasted natural gas from venting and flaring alone on public lands. Our report is likely conservative because we did not include leaky equipment and pipelines – another major source of natural gas waste. Our projections were based on a cost of $4.24 per Mcf (thousand cubic feet) of natural gas because that was the cost estimate the U.S. Energy Information Administration was using for its forecasting at the time.

Drangmeister argues that our report overestimates the amount of lost revenue since current natural gas prices are hovering just below $2 per Mcf.

Here’s the thing. Oil and gas prices are highly volatile and change all the time. Looking at prices in a particular month or even a particular year isn’t all that helpful in making long term projections.

Let’s look at what we do know.

The Henry Hub Natural Gas Spot Price monthly average for the past ten years from March 2006 to March 2016 is north of $4.50 per Mcf.  During that time period, natural gas prices fluctuated from just under $2 per Mcf to over $12.50 per Mcf. That’s a big difference and underscores how ridiculous it would be to project oil and gas royalty revenue by looking at any individual snapshot in time.

And natural gas prices are already on the rise. The Energy Information Administration has predicted that natural gas prices will likely hit $3.40 per Mcf by the end of 2017 according to their March 8th, 2016 “Short-Term Energy Outlook.”

US Natural Gas Prices

Moreover, the trend for natural gas prices over the next ten years is likely to be up, not down, especially since the U.S. has now started to export natural gas through Liquefied Natural Gas terminals that will increase long-term demand.

Drangmeister can debate all he wants as to whether the wasteful practices of his members are costing New Mexico $4 million a year or $10 million per year. Either way, it is outrageous that his members would be allowed to deliberately waste millions of dollars in taxpayer revenue when New Mexico continues to face severe budget challenges.

Western Values Project applauds the U.S. Bureau of Land Management for issuing a strong draft rule to cut natural gas waste on public lands. Given that their regulations are more than three decades old, it’s time to modernize and ensure that current regulations reflect current technologies.

The simple truth is that we can no longer afford to allow oil and gas companies to waste our public resources, regardless of whether it’s millions of dollars or millions and millions of dollars.