Will the oil crash help clean up the Permian Basin?

Most analysts predict that the crash in oil prices that has led to heavy losses, thousands of layoffs and a growing number of bankruptcies will force the Permian Basin’s energy industry to consolidate as the strongest companies take over. of the weakest.

Basin-wide consolidation could also improve the region’s environment.

Industry analysts and environmental groups say the companies that survive the unprecedented collapse in energy demand will be the biggest and best-funded operators, with the money, the technology and expertise to tackle the two environmental problems that plague the region: high levels of burning natural gas in a process known as flaring and unintended releases of methane, a potent greenhouse gas, in the air.

Andrew Logan, director of oil and gas programs at nonprofit and eco-friendly investor group Ceres, said consolidation of Permian oil and gas companies could lead to an overall reduction in flaring in the region.

“It’s generally true that larger companies do a better job, certainly when it comes to managing flaring,” he said. “So if there is a major consolidation of these small private companies, it seems to me that would improve the situation in terms of the amount of gas flared and also make it less likely to happen later.

Additionally, the companies most likely to consolidate are large publicly traded companies such as Chevron and Exxon Mobil, which are under pressure from shareholders concerned about the potential impact of environmental practices on the planet and on bottom lines. companies.

In recent months, shareholders have seen some success in their efforts to get big oil companies to change their ways when it comes to climate change and environmental issues. Last month, for example, Chevron shareholders approved a resolution urging the company to publish an annual report revealing how its lobbying spending aligns with the goals of the 2015 Paris climate accord, an agreement international effort to reduce greenhouse gas emissions to slow the rate of climate change.

BlackRock, the world’s largest investment firm, backed Chevron’s resolution. The New York investment firm, also a major shareholder of Exxon Mobil, is pressuring Exxon to do more to adapt its business to climate change, recently backing an unsuccessful shareholder resolution to split the CEO positions and president.

“There’s no doubt that publicly traded companies are listening to large investor groups,” said Colin Leyden, director of regulatory and legislative affairs for the Environmental Defense Fund. “This is an additional pressure point for these companies. Let’s face it, money talks.

Hundreds of players

The Permian Basin, which stretches from western Texas to eastern New Mexico, is home to hundreds of players, encompassing the smallest mom and pop producers to some of the biggest oil companies in the world. Over the past decade, it has been at the center of one of the world’s great oil booms and the country’s re-emergence as the world’s top producer.

The boom, however, has not come without environmental costs. Production quickly overtook pipelines and transmission systems to bring the vast amounts of natural gas produced with oil to market, leading companies to flare excess gas in record volumes.

Additionally, improper flaring operations combined with leaks in pipelines and other oilfield equipment have allowed the release of methane, the main component of natural gas, directly into the atmosphere.

The largest operators in the Permian tend to have the best flaring records, according to Gaffney Cline, an oil and gas consultancy. Irving’s Pioneer Natural Resources had the lowest flaring rate, burning only 0.8% of the gas it produced. Other producers with low flaring rates include EOG Resources of Houston, 0.9%; Herringbone, 1%; Occidental Petroleum of Houston, 1%; and Parsley Energy of Austin, 2.6%.

Gas flaring fell to its lowest level in two years as drilling activity plunged, according to Rystad Energy, a Norwegian consultancy. Since March, when coronavirus-related shutdowns sent energy demand and prices plummeting, the number of rigs in operation in the Permian has fallen by two-thirds, from 418 to 147, according to the utility company. Houston Oilers, Baker Hughes.

The drop in the number of rigs reflects the precarious economic situation facing oil and gas producers. Some, especially those heavily indebted, will be forced into bankruptcy, said Charles Beckham Jr., a partner at law firm Haynes & Boone. So far this year, at least 18 North American oil and gas companies have filed for bankruptcy.

Many of those filings will emerge from bankruptcy as reorganized companies, but others will be taken over by larger companies, Beckham said. Still others will simply dissolve, selling assets to pay their creditors.

The consolidation process in the Permian Basin, where around 400 companies operate wells, has already begun, with a positive impact on the environment. In January, Parsley Energy, an Austin-based company with one of the best flaring records, completed an approximately $2.3 billion acquisition of Denver-based Jagged Peak Energy, which the Environmental Defense Fund had listed it as a “bad actor” regarding flaring.

Stephanie Reed, senior vice president of Parsley, recently told the Texas Railroad Commission that Jagged Peak burned up to 20% of associated natural gas from oil drilling. Since the acquisition, the parsley burns less than 3%.

“It didn’t happen by accident,” she said.

View of New Mexico

On the New Mexico side of the Permian Basin, Thomas Singer, senior policy adviser for the Western Environmental Law Center, an advocacy group, said it’s impossible to predict what impact market forces will ultimately have on the environment. of the basin.

“Who knows where the demand is going? Who knows when production will increase and whether companies will be better or worse at environmental compliance? ” he said. “We can only hope for the best.”

Comments are closed.