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Will New Oil and Gas Infrastructure Be Required for Producers to Meet Their ESG Goals in the Permian?

In the Permian Basin, numerous oil and gas producers have committed to eliminate routine flaring and limit non-routine flaring to a share of total production. These commitments follow sharply reduced drilling activity in 2020 and the start of two new pipelines in 2021 that have significantly reduced flaring volumes in the Permian from 2019 peaks. Today’s Energy Market insight will explore these commitments and discuss the challenges facing producers in the Permian to maintain those commitments into the future.

Nine of the top ten natural gas producers in the Permian have expressed an explicit date by which they aim to end routine flaring.  In addition to stating goals to eliminate routine flaring, producers have begun to announce goals to limit non-routine flaring as well. On December 20, 2021, SM Energy announced a goal to limit non-routine flaring to just 1% of natural gas production.

The table above compares flaring intensity for the top ten natural gas producers between 2019 and 2021. These ten producers account for 60% of oil production in the region and 61% of natural gas production. Each of these producers have reduced their average flaring intensity in 2021 relative to peaks in 2019.  ExxonMobil and Devon have reduced their average flaring intensity the most.  However, this does not necessarily indicate that these producers are the closest to reaching their zero routine flaring goals.   ExxonMobil and Devon Energy flared more by volume than any other major producers in the Permian in 2019, collectively representing one-third of all flared volumes among top producers.  Despite significant improvements, Exxon and Devon remain the producers with the highest average flaring intensity in the Permian through 3Q 2021.  On December 6th, 2021, ExxonMobil updated their flaring goals from reducing flaring 35%-45% by 2025, to eliminate the practice altogether by the end of 2022. This currently represents the most ambitious goal of any of the top ten gas producers in the Permian. Eliminating routine flaring does not necessarily eliminate flaring going forward though. In 2017-2019, flaring volumes hit record levels due to gas takeaway constraints in the region that forced operators to flare to grow oil production. Thus, operators may eliminate routine flaring but still see a surge in non-routine flaring as gas volumes in the region are again on a path to exceed gas takeaway capacity as highlighted in the chart below.

The chart above depicts two gas production scenarios.  The Higher Growth scenario takes average pace of Permian rig additions in 2021 and applies that rate of change into the future. The Lower Growth scenario is a projection of current activity and assumes rig counts stay constant through time.  In the Higher Growth scenario, Permian gas takeaway is overtaken by natural gas production as early as the end of this year (2022). In the Lower Growth scenario, existing Permian gas takeaway is surpassed by production in just over two years (by 3Q 2023).  With gas takeaway constraints looming in the near future, it is possible that producers who have not previously secured enough transport on existing pipelines will not be able to meet their flaring goals without investment in new gas takeaway infrastructure.  The window to have a new pipeline operational in the next two years to support even the Lower Growth scenario is already upon us. For more detailed analysis on the impacts of gas pipeline project timing on Permian oil and gas production, request a copy of BTU Analytics’ Upstream Outlook Report.

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Michael Hosmer is an Energy Analyst for BTU Analytics, focusing on the publication of the Upstream Outlook report. Michael earned his bachelor’s in Economics from the University of Vermont.

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