The industry said the rule has the potential to create confusion and add hoops that could quash development. Sgamma’s group said a “conservative” estimate regarding the 2013 proposed rule would add $97,000 in expenses per well, which usually cost at least $1.5 million.
—Washington Examiner article, March 20, 2015
The day the Department of Interior released its regulations on oil and gas “fracking” operations on public lands, the $97,000-per-well figure circulated widely in news reports as the cost of the rule.
The tougher regulations have been four years in the making. And as new environmental regulations tend to be received, industry groups believed it would add costs to operators and environmental groups believed the rules didn’t go far enough. Readers asked us to check this $97,000 figure, as it was quoted in almost every news article that day and continues to be cited.
How much will the new regulation cost? Is it really $97,000 per well? Or as little as $11,400, as the government says?
Hydraulic fracturing, or “fracking,” is the practice of injecting sand, water and chemicals into a well at high pressures to fracture shale layers in the Earth, which then releases natural oil and gas.
The Interior Department released its final rules on fracking on March 20, 2015, after four years of heated debate. The regulations imposed stronger standards for companies practicing fracking on federal and tribal lands. This was the first time since the 1980s that the agency moved to standardize fracking regulations on federal land. About 90 percent of wells currently drilled on federal land use fracking. Less than a quarter of the country’s fossil-fuel output comes from federal lands.
The Bureau of Land Management estimates the rule will affect between 2,800 to 3,800 wells per year, based on how active operations are on public lands in a given year. The agency estimates costs of complying with the new rule could be about $11,400 to $11,800 per operation, or $32 million to $45 million a year. This would make up about 0.13 to 0.21 percent of the cost of drilling a well, according to the final rule.
The much higher, $97,000-a-well figure comes from a July 2013 economic analysis commissioned by the Western Energy Alliance (WEA), which studied the cost impacts of the proposed rule. The analysis finds that if the BLM’s then-proposed regulations applied to the 3,566 wells that are under development in the western states, it would cost at least $345.6 million, or $96,913 per well.
At question is whether the rule sets cost-prohibitive standards for cement casings on wells, to protect usable water and minerals. The technical engineering aspects of this debate are very complex, so we’ll refrain from going too deep into the weeds.
The BLM estimates the new casing standards in the rule would cost approximately $4,000 to $5,500. WEA estimates the casing standards would cost about $86,950 per well. Why are the numbers so vastly different?
WEA’s analysts say the rule requires an additional 2,350 feet of casing per well, which they called a conservative estimate. Operators had been following the BLM’s Onshore Oil and Gas Order No. 2, which was written in 1988. The order is written broadly, and allows companies to work with states to comply with construction requirements that are safe and cost-effective, since each basin is geologically unique. Currently, state regulators set the minimum well depth, construction requirements, cement casing at which fracturing is safe and practical, according to a fact sheet on fracking by the Society of Petroleum Engineers. Cement casings are built to last at least 40 years, and operators and states already work closely to isolate usable water and not contaminate natural gas, according to the fact sheet.
The federal rule newly requires companies to “determine and document that there is adequate cement for all casing strings to isolate usable water.” Sgamma said this takes away flexibility and companies will need to add cement to meet federal requirements. Sgamma acknowledged that some wells may not need to add any extra casing, while other wells may need a lot more than 2,350 feet. She said the final cost for operators may be even bigger than $97,000 per well, because figure does not include new changes that were added in the final rule. WEA is studying the impact for the next few months.
“Regulators often don’t have an appreciation for how requirements translate practically on the ground, or how wording can be interpreted in various ways. Certainly the Washington BLM office doesn’t understand how the BLM field offices had worked with states to identify the usable water zones that they actually cared about … and had flexibility on how to protect them, whereas now, this rule is very prescriptive,” Sgamma said.
The BLM costs are so low because they believe the new rule incorporates industry practices, and formalizes what operators already are doing. Officials estimate wells largely are complying with these casing requirements, so they would not have to build large amounts of new casing. So BLM estimates that if there are, in fact, new costs associated with the casing standard, it would be for logging and reporting purposes.
Michael Scialla, an oil and gas analyst at Stifel Financial Corp., who follows oil and gas companies that are drilling and fracking wells and advises investors, said his clients have not expressed major cost concerns. Not all the companies he follows practice fracking on federal land, but those that do have said the impact would be minimal. The companies are concerned that formalized federal regulations would take away flexibility that companies have to work with state regulators, he said. But they are in compliance with “virtually everything” that is required in the new rules, Scialla said.
Indeed, much of the cement casing requirements mirror industry guidelines set by the American Petroleum Institute. A table on p. 16177 of the BLM rule in the Federal Register shows the rule’s requirements are modeled after industry casing requirements.
However, we wonder about the BLM’s estimates, which the government believes is an overestimate. Officials attributed their numbers to the agency’s economists, who wrote the proposed rule’s economic analysis. BLM assumes the industry already is complying with the majority of requirements, but acknowledges it “does not have specific data about the prevalence of voluntary compliance with these requirements irrespective of the rule.” So it could vastly decrease or increase costs for operators, depending on their current practices.
The Pinocchio Test
The exact impact of the rule remains to be seen, and there are pending legal challenges to the BLM rule. While it makes sense that industry groups are bracing for high cost impacts, it is difficult to believe that the BLM’s casing requirements, modeled after industry standards, would be so detrimental to companies. Long-lasting construction projects such as cement casings are built carefully with state regulators, keeping in mind the individual geological characteristics of the basins. One would presume that industry standards and state regulations have been more stringent than federal requirements set in 1988.
Yet the BLM estimates that cement casing requirements would be as little as $4,000 per well is fishy. It assumes that majority of wells already are complying with the new federal rules, yet those requirements have been determined by state regulators so far. We are hindered by the lack of a breakdown of wells that already meet federal requirement, but the BLM’s estimate may end up being too low. The BLM acknowledges it does not have accurate data on companies that are voluntarily complying with the new requirements.
These two figures are so extreme that it is difficult to conclude which one is a more realistic one. Each figure is used by proponents and opponents of the BLM rule as a definitive calculation of its impact. But in reality, it is so much more complicated than that. These numbers obscure the complexities of this debate, and the fact that neither the BLM nor the industry groups really know how many wells will be affected. We award Two Pinocchios to both figures.
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