Will Regulation of ‘All of the Above’ Energy Cost 20X More on Public Lands?

Federal Lands

More than 96% of the domestic energy production growth from shales has taken place on private lands safely out of the reach of the Federal government bureaucrats and regulators.  That energy production growth is transforming America’s energy future by increasing supply reliability and driving down the price of natural gas from more than $13 per MMBTU to less than $3 per MMBTU in a period of less than five years.

Meanwhile, on public lands production has actually slowed as the Department of Interior and its Bureau of Land Management (BLM) press on with extensive environment studies and new regulations even as the President professes support for an ‘all of the above’ energy strategy.  The Federal government announced proposed rules on fracking on public lands in May 2012 (43 CFR 3160.0-3) and has received more than 2,000 comments on those rules by the September 10, 2012 deadline. Interior Secretary Ken Salazar said in May he hoped to issue a final rule by the end of 2012 likely after the Presidential election.

According to a study by John Dunham and Associates the total cost of the proposed Federal rules will be about $1.5 billion to $1.62 billion a year or about $235,839 per well to satisfy the requirements on chemicals disclosure and certification that the well  is properly isolated to prevent leaks that might contaminate groundwater.  This figure compares to a BLM estimate of $11,833 per well—a difference of more than 20 times.    All that cost for rules that the oil and gas industry and the states of Colorado and Wyoming claim are unnecessary, unreasonable and required E&P firms to take actions that no state currently regulating fracking for oil and natural gas production has required.

The Dunham Study disputes the BLM claim that the proposed regulations are not major changes from existing rules citing the following examples of how the new rules add substantial and costly new requirements for E&P activities on federal and Indian lands:

1. Mandates additional information and meet new requirements than currently required for all well stimulation (completion) activity when applying for a permit to drill (APD).
2. Requires a similar separate application must be filed prior to additional drilling on an existing well.
3. Requires BLM review and verification the additional drilling requirements at each permit stage slowing down the process and driving up the cost of idle equipment and crews.
4. Requires additional cement bond logs be submitted to BLM for review and approval prior to completing the well again idling equipment and crews and driving up costs.
5. Requires reporting specific source of water used in well completion operations.
6. Requires submittal of a detailed engineering design and other information related to well stimulation operations to the BLM for approval.  These detailed studies end up becoming the basis for environmental litigation designed to challenge the review process and thus slow to stop E&P activities.
7. Requires detailed information about how all recovered fluids from well drilling will be captured and disposed consistent with the rules.
8. Requires a successful mechanical integrity test before beginning any well drilling.
9. Requires receipts be supplied to BLM to validate that recovered fluids are disposed of in a proper manner.

Dunham also says that by adding additional requirements for new drilling activities at existing wells many of the current 90,452 wells on Federal leases will find greatly increased costs over time. Dunham calculated its estimates of the cost of these new fracking rules on public lands by examining data from the thirteen state regulatory authorities in the Western states covered by the study.  Dunham found about 12,300 oil wells, and 14,100 gas wells currently in the process of receiving a permit, or permitted but not yet drilled.

As you can imagine, private energy developers are wondering if the shale drilling opportunities on public lands—substantial as they are on the 38 million acres leased by the U.S. Government for energy development —are worth the aggravation.  Now a private study of the implications and costs of the proposed Federal regulations and environmental requirements to gain access to public lands has added up the costs. It is not a good news story.

Gary Hunt is President, TCLABZ, a pure play B2B predictive energy analytics platforms company.