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Bad News for Texas Oil & Gas Industry: New Regulations for Onshore Fracing

The US Department of Interior’s Bureau of Land Management proposed new regulation for drilling on federal or Indian land. The BLM actually already amended the proposed regulation once, after there was serious criticism of their impact. To evaluate the amended proposal, the Independent Petroleum Association of America and Western Energy Alliance commissioned a study on the topic by John Dunham and Associates, an economic consulting firm based in New York City.

Under the original proposal of last year, oil and gas producers would have to pay an additional $1.284 billion in costs. Changes were made to that proposed regulation after producers, manufacturers, state regulators, and others adversely impacted by the regulation change lobbied the BLM to fix the problems. The major changes included: elimination of the requirement that all well simulations undergo the full requirements; elimination of the requirement that all oil and gas well development must be applied for through the BLM before completing a well; modification of the requirement for cement logs on all wells; and substantial changes to administrative reporting and permitting. The comment on the amended regulation closed in August 2013.

14098172-oil-well-pump.jpg Under the amended proposal, according to JDA, oil and gas producers would still have to pay $345 million more per year. JDA noted in the study that the costs of the regulations clearly exceed $100 million, at which point an economic assessment is required by law, and this has never been done. JDA calls the $345 million a “best case scenario” number, that is, in the event that BLM approves 100 percent of applications and capital costs are only 7%. Per well, JDA expects the cost of the revised proposed regulation to be $96,913. These numbers are certainly not nominal or inconsequential to the industry, and independent producers will be the hardest hit.

The unintended consequences of the proposed regulation is enormous. It adds another layer of regulation to the already detailed regulation of the oil and gas industry by states and Indian tribes. The proposed regulation will probably divert investment away from the oil and gas industry and thus hamper both job creation and economic growth. Finally, as the study suggests, increase costs of producing oil and gas will reduce royalty revenue to individual royalty owners and will reduce tax revenue to local governments.

IPPA’s Daniel T. Naatz, a vice president of federal resources and political affairs, said that even with the amended regulation, the impact on the industry is still “significant” and called BLM’s moving forward with these regulations at all a “misguided effort”. For example, the amended regulation still includes no mechanism for when a state or Indian tribe want stricter rules than these federally mandated ones, which makes little sense.

The study was addressed to Kathleen Sgamma, who is vice president of government and public affairs for Western Energy Alliance. She commented that: “(w)hile there are improvements in the second version of the rule, it still remains fundamentally flawed from an engineering perspective, as well as bad regulatory policy. [BLM] still has not justified the rule from an economic or scientific point of view, and continues to lack the budget, staff, or expertise to implement it.”

Those in the oil and gas industry, including tribal and state officials of energy producing states, still hope for a better result that is less burdensome to the industry. Mr. Naatz told reporters, “IPAA will continue to work with the Western Energy Alliance and others to stop the BLM from implementing this ill-conceived regulatory plan.”

There is no question that this craziness by BLM is politically motivated. I commend you to the excellent article concerning this regulation by David Blackmon in Forbes that you can read here. He calls this regulation “a solution desperately in search of a problem, a problem which (BLM) has found itself painfully unable to quantify or really to even identify. In its overwhelming institutional need ‘to do something’, the BLM proposes to impose a rule that has, by its own admission, no quantifiable benefit and that will only serve to impose new costs on producers and consumers of oil and natural gas from federal lands.” That just about sums it up!

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