VAIL, Colo. --George Shultz, former Secretary of State under President Ronald Reagan, came to the third annual Vail Global Energy Forum in early March with a clear message for the stakeholders in attendance. Global warming is a reality, he said, “so we need to take out an insurance policy.” Shultz challenged individuals to undertake what they could “do, and do now.”
That message was a rallying point at the forum held on March 1 and 2. Speakers discussed the potential impacts of soaring domestic oil and natural gas production and U.S. energy independence; the role of natural gas as a bridge fuel and its place in world energy markets; China’s influence and position in global climate change; the outlook for solar, wind and other renewables; and the public’s attitudes toward energy.
Speakers heralded the February approval of new rules made by the Colorado Air Quality Control Commission to reduce air pollution from oil and gas drilling -- including regulations to reduce methane emissions -- as a model for other states. A panel made up of Fred Krupp, the 20-year head of the Environmental Defense Fund (EDF), Colorado Gov. John Hickenlooper, and oil and gas executives Chuck Davidson, chairman and CEO of Noble Energy Inc. (NYSE: NBL), Brad Holly, vice president of Rockies operations for Anadarko Petroleum Corp. (NYSE: APC), and Doug Suttles, president and chief executive of Encana Corp. (NYSE: ECA), celebrated and provided insight into the groundbreaking, collaborative process in which they took part.
The rules are the most stringent for any state in prescribing reductions in “fugitive” methane emissions. Operators have to perform frequent checks for leaks, using infrared cameras and other technologies, and move quickly to repair them. The rules also address methane leaks from storage tanks and other equipment.
Methane has become a significant factor in the debate about natural gas’ role in energy supply. The EDF says that while natural gas produces half the carbon dioxide (CO2) of coal when combusted and offers advantages for local and regional air quality compared to coal, this benefit can be undermined by methane leaks throughout the gas supply chain, including during production. “Methane is at least 28 times more powerful than CO2 as a greenhouse gas over the longer term and at least 84 times more potent in the near term,” the EDF says. “Likewise, oil and gas operations are the largest source of man-made volatile organic compound (VOC) emissions in Colorado, contributing to smog formation.”
Just a day after the forum concluded, an independent analysis by ICF International reported that the onshore segment of the U.S. oil and gas sector could significantly reduce emissions of methane using currently available technologies and at a low annualized cost. “By adopting proven emissions-control technologies, industry could cut methane emissions by 40% below projected 2018 levels at a cost of less than one cent per thousand cubic feet (Mcf) of produced natural gas,” the ICF said. Some measures would pay for themselves through the sale of captured natural gas, according to its findings. The EDF commissioned the report.
The Colorado governor began laying the groundwork for collaboration a year and a half before the rulemaking by emphasizing that the rules would be more robust if the many stakeholders collaborated. Encana’s Suttles recalled being “encouraged” by the governor’s proactive stance, noting that “it was a real dialogue. The issues need a smart solution … otherwise, there was the risk of driving oil and gas out of Colorado” -- along with lost tax revenues, jobs and more. Industry leaders sat down with regulators and environmental groups with the premise that the expectations of all involved could be met.
The coalition’s proposed rules, largely unchanged in the final form, were approved 8 to 1 by the commission. The end result: the removal of about 90,000 tons of smog-forming VOCs and 100,000 tons of methane, overall, from Colorado air annually, according to EDF estimates. Colorado was a strong prospect to lead methane emission control efforts not only because of overall concerns about global warming but also because its “brown cloud” of pollution hovering over the Front Range of the Rockies has been a significant issue for decades.
Noble’s Davidson admitted that when he heard the collaborative process being contemplated would involve national environmental groups, he wondered, “Am I hearing this right?” He quickly recognized it was a “fabulous” opportunity to do things differently, however.
For the EDF’s Krupp, there was a tightrope to walk between natural gas’ benefits as a bridge fuel and the environmental community’s increasingly negative stance on natural gas because of its methane emissions. But given the vast resource base coming from recent years’ shale discoveries, Krupp sought to preserve natural gas’ viability by seeking protections for citizens and the atmosphere. “By reducing methane leaks you make it a clear win for the atmosphere—otherwise, you undermine it,” he said.
Noble’s Davidson said there was no use in members of the oil and gas industry lauding natural gas as cleaner burning unless everyone was convinced the entire lifecycle of the fuel was clean. “We had to address methane emissions,” he said.
In discussing cost benefits of emissions control, Davidson said there is a different standard to apply for the environment and for safety. “What would I pay to make sure everyone goes home safe?” he asked. “What would you pay to have people around operations feel their air is cleaner? You can’t calculate that. There’s no massive spread sheet with a rate of return.”
Encana brought to the table its experience in controlling emissions in Wyoming’s Pinedale-Jonah Field. Suttles admitted there was an “uncomfortable” aspect to “stepping away from the industry” in working on solutions with environmental and other groups. “But we needed answers,” he said. “We needed to find solutions now. And the whole industry isn’t going to get to that.”
Having deployed technology and processes to control emissions in Wyoming, Suttles knew such measures would have a price tag, but “we can make it work,” he said.
“The reality for Encana is that natural gas is a rough business right now,” he said. “The price of the fuel has dropped from about $12 to $13 per Mcf or so in 2008 to about $4 today. We’re discussing reducing our workforce by about 20%.” The efficiency piece for natural gas companies like Encana is “crucial,” he said. The company’s experience in Wyoming showed that the cost of emissions control measures could drop over time.
Holly said that Anadarko’s commitment to the process aligned with its corporate principles. The company is a leading operator in and near the Front Range’s urban environment, where Niobrara and Codell shale horizontal drilling in the DJ Basin has drawn billions of dollars in investment annually from major players. Anadarko needed to increase its social license to operate, he said.
As for the next challenges post-rulemaking, Holly said Anadarko is “filled with scientists and engineers” who thrive on developing solutions for downhole and surface issues. Operators’ abilities to remain cost effective while being environmentally compliant will be driven in large part by these innovations, the operators agreed. Encana’s Suttles said success will also depend on sharing expertise. “The rules allow room for technology and innovation,” he said. “It’s more about goal setting -- how can we achieve the same objectives in a more efficient way.”
After all the debate throughout the rulemaking process, the operators prefer the new rules’ predictability, which gives them comfort that the state is “open for business,” Suttles said.
“Businesses like certainty,” Davidson added. “Colorado has put certainty into its air rules.”
The cost to control methane emissions is estimated at about $22 per month, per well, making it affordable even for smaller operators. For larger companies, Krupp estimated the cost could be several million dollars annually for all of a company’s wells combined.
The Vail forum is organized by the Stanford University-based Precourt Institute for Energy, which researches how to supply energy that is environmentally responsible, economic, secure and deliverable on a large scale.
Shultz is currently advisory council chair of the Precourt Energy Efficiency Center, which is part of the Precourt Institute for Energy. He is also chair of the Hoover Institution energy task force, which is also based at Stanford.