When Loyalty and Incentives Collide
The regulators have a hidden weapon in the fight against methane - the industry groups who advise them, to build their businesses
In my search to identify trends to give myself and my clients the lead before they show up in the mainstream it’s necessary to look hard for clues. Our seeming preference for extremism over rational negotiation until something breaks and we try common sense appears to be a feature of our world, not a bug. Coming up with odds for various outcomes involves looking for places where two seeming opposites actually agree, although they’ll never admit it publicly.
Such is the case these days with the new methane emissions regulations that will become final in May. Without diving too far into the rabbit hole, there are actually several sets of regulations for companies to wade through. Just the wading increases administrative costs, and crafting a solution that will work for assets in several states is an exercise in teeth-grinding complexity and fine print. The new EPA regulations currently only apply to assets that are considered “new” - meaning they didn’t exist or were modified after December 2022. For the others, there are rules for assets on land owned by Native American tribes or Federal agencies, rules for assets in states that already have rules, and possibly at some point rules in states that have to come up with a plan for complying with the EPA rules for assets that existed before 2022. A few states are hard at work on these, and others, such as the state with the highest production in th US, Texas, aren’t on board.
If you use a mental model of thinking about these rules as like tax laws, you’ll quickly realize there are groups that benefit from them, even while being part of the industry that is required to follow them. CPA’s who specialize in tax prepartation most likely aren’t thrilled about the time it takes them to file their own returns, but don’t make a big fuss over regulations that make taxes more complex. I also haven’t seen a lot of impassioned editorials in professional journals complaining about the addition of thousands of employees to enforce the rules.
Same with the environmental services industry. As would be expected, a number of companies who specialize in filing regulatory permits, compliance reporting, monitoring, and interpreting regulations are involved in the initial creation of the regulations themselves. The methane regulations contain very detailed requirements for allowable emissions for certain kinds of equipment and for types of monitoring that have to be performed. Manufacturers of new equipment, and suppliers of services, software, and solutions see new sales and lines of business. All these intiatives increase costs for operators. Many would say this is long overdue, that consumers and businesses have benefitted at the expense of the environment, and created a Tragedy of the Commons that is ruining the air.
The interesting thing here is that at least part of the gas industry and so-called “climate activists” like the Environmental Defense Fund both benefit from increased oversight and spending on methane control. The difference is that one of them issues press releases about it. The other one emphasizes its role in assisting the industry in obeying the rules, without mentioning how they influence them.
The bottom line? Companies who base their businesses solely on government mandates may end up caught in the crossfire as industry pushes back on the more unrealistic parts of the law and those who advocated for them. Companies who include compliance as a product line addon to their current businesses can see added work, without as much existential risk if the regs change. These businesses include measurement services, compression companies, and training.
The other bottom line? Regardless of how the regulations are rolled out for older assets, the costs of producing, processing, and transporting natural gas are rising. Currently prices in key producing regions are negative, and the portion of the hydrocarbon stream that’s coming out of the ground as gas is rising. The common assumption by analysts that natural gas in an oilfield is a “by product” doesn’t work well when the by product becomes a cost center instead of an added revenue source. You’re asking the oil stream to carry a lot of additional cost that boosts the breakeven crude price needed to drill more wells.
I’m still standing by my call that US gas production is headed toward its own plateau following the one that’s currently coming into view in oil over the next 5 years. This will have a major impact on gas consuming industries and electricity consumers in th US. Still early, but the signs are that this trend is underway. You still have a little time to research the rumor, but don’t wait until it hits the headlines.