Important Context on a New Oil and Natural Gas Regulatory Cost Analysis

A new analysis by researchers from environmental think tank Resources for the Future (RFF) finds the benefits of several oil and natural gas regulations – most notably the Obama-era Bureau of Land Management (BLM) venting and flaring rule and Environmental Protection Agency (EPA) methane rule – outweigh their costs by roughly $2 billion and therefore should not be targeted by the Trump administration for repeal or revision.

“[U]sing net benefits as the criterion for whether a rule should be repealed or not, we found that for five out of the six rules analyzed, the benefits forgone outweigh the cost savings, so society would be worse off without those five rules.”

But this conclusion comes with one huge caveat: it is based on RFF weighing calculated global benefits of implementing the rules against the rules’ domestic costs. Only by employing this flawed “global benefits of methane” methodology are the researchers able to conclude that the Obama-era BLM venting and flaring rule and the EPA methane rules would yield net benefits.

If this sounds familiar, it’s probably because the Obama administration used the same standards in its Regulator Impact Analysis for the rules. As E&E News reported Thursday:

“The new calculations, which relied on many of the same assumptions that the Obama administration used when it wrote the rules, highlight how differently the Trump administration approaches the costs of new rules.

“The Obama administration estimated the ‘social cost’ of methane emissions far higher than the Trump administration, according to RFF’s underlying paper on the BLM rule. That’s because the Obama administration calculated the effects worldwide, while the Trump administration calculated the effects just on the U.S.”

To understand why the Trump administration’s approach is more appropriate, some background is in order. Federal law requires a Regulatory Impact Analysis (RIA) be conducted to determine whether the costs of proposed federal regulations would be excessive. If the latter proves to be the case, an alternative is to be sought. Seeing as the costs of implementing these rules “would be private costs borne by the oil and gas industry”– to use RFF’s own language – weighing domestic costs against domestic benefits seems a more rational approach in conducting an RIA, which is exactly what the Trump administration did, ultimately determining that the costs outweighed the benefits.

Just as importantly, projected costs are far more certain than projected benefits. As E&E News recently pointed out, “To be sure, the benefits of regulations are spread across society and are essentially theoretical, while the industry costs are measured in hard dollars.”

All this noted, even the Obama administration acknowledged the costs of its version of the BLM venting and flaring rule would have far outweighed the benefits if not for its use of the highly speculative global “social cost of methane” estimate. As E&E News also recently reported:

“Republicans in Congress and some members of the oil and gas industry fought the Obama rule, on the grounds that its costs outweigh the benefits. That’s true, even according to the previous administration’s own analyses — unless the climate impacts of releasing methane into the atmosphere are taken into consideration.”

The same scenario played out in RFF’s analysis.

When factoring in its own calculation of the global benefits from implementing the Obama BLM methane rule, RFF concludes that implementation of the rule would result in $800 million of net benefits. But when factoring in domestic benefits only, RFF finds the rule would yield millions in net costs. From RFF’s BLM rule analysis released earlier this year:

“The authors find that, when using the global social cost of methane, repealing the rule would result in net costs of $814 million to $1.2 billion over 10 years (in 2012$ and a 3 percent discount rate). When using the Trump administration’s domestic social cost, however, repealing the rule results in net benefits to society of $495 million to $860 million (in 2012$ at a 3 percent discount rate).”

A similar scenario plays out when RFF used its calculated domestic benefits rather than global benefits to crunch the numbers on the EPA methane rule. From RFF’s April analysis of that rule:

“Using the domestic social cost of methane, net benefits to society of repealing the rule are estimated at $285 million to $457 million.”

And with regard to calculating the real-world costs Obama-era BLM rule, it is also worth noting that the RFF analysis does not take into account potential lost royalty payments from marginal wells being shut in as the result of implementation of a stringent and costly rule that would effectively ban flaring. An analysis from economist John Dunham found that 112.4 million barrels of oil would have been effectively shut in as result of the Obama-era rule. That oil would be worth more than $8 billion at current oil prices, which translates to a loss of approximately $900 million in royalties.

All told, it is clear that the economic impact these rules would impose on an industry that generated more than $1.3 trillion in U.S. economic value in 2015 and supported 10.3 million jobs far outweighs RFF’s theoretically and overly broad benefits estimate.

And with regard to the Obama-era BLM rule specifically, calculating the monetary benefits of reducing greenhouse gases in the first place is completely inappropriate. The BLM has no legal authority to regulate air quality. The BLM rule is intended to address waste, not climate change, even though it was promoted by the Obama administration as being a climate change regulation.

Additionally, the more recent EPA data show methane emissions from oil and natural gas systems continue to decline even as production reaches record-shattering levels. The latest EPA data show petroleum and natural gas system methane emissions from large facilities declined eight percent from 2016 to 2017.These reductions came at the same time oil and natural gas production increased six percent (521,000 barrels per day) and three percent (700 million cubic feet per day), respectively, from 2016 levels.

Methane emissions from venting and flaring during petroleum production declined 36 percent between 2015 and 2016, while overall methane emissions from petroleum systems declined by 1.2 million metric tons of CO2 equivalent between 1990 and 2016. Over that same period, U.S. annual crude production increased by over 1.5 million barrels per day.

Collectively, oil and natural gas system methane emissions have declined 14 percent since 1990 at the same time natural gas production has increased 50 percent and oil production is up 21 percent.

This data show that the Obama-era methane rules are unnecessary, while a close look at RFF’s analysis reveals the rules would be very costly as well.

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