From mid-2020 into early 2021, flared-gas volumes in the Permian dramatically fell from the levels seen in previous years. Impressive as the momentum has been, detailed analysis suggests that reductions are highly uneven. Today’s Energy Market Insight compares flaring performance for a key group of operators along a standard metric of flaring intensity to analyze what has driven this reduction and what can be expected in the future.
A portion of the reduction in flaring is due to decreased activity under the pandemic price slump and a portion is due to the start of Permian Highway Pipeline in 2020 that provided new pipeline capacity to the region. Historically, much of flaring occurs in the early months after a well is tapped when gas volumes are highest and gathering infrastructure may be lagging. For this reason, reduction of completion activity would be expected to result in some flaring reduction. Furthermore, as BTU Analytics examined in the July 2021 Upstream Outlook, recent activity in the Permian has been heavily driven by private operators whereas major and other public operators have been slow to reinvest. A nuanced analysis requires a standard metric which minimizes bias from fluctuations in the level of activity across time and operator group. One solution is to only take data from wells during their first year of production; though flaring also occurs at older wells, typically first-year wells make up the bulk of flaring volumes and are more representative of the emerging industry trends.
Using first-year wells to compare flaring intensity, public operators, including majors, are seen to have steadily reduced flaring intensities. The volume flared, as a portion of total production in gas equivalent units, was already declining for these groups well before the market shocks of 2020, and now sits near 1%. Private companies without private equity-backing not only show the greatest flare intensity, but also appear fickle in their reductions. Whereas the other groups of operators appear to be following an emissions agenda, these independent private companies may be less committed to a set reduction target, and their flaring intensity may be determined by other factors. Private equity-backed firms have shown a steady decline, though it is slower than that of public operators. Comparing to a 2019 benchmark, private equity-backed companies have not achieved the same scale of reduction as have public operators, yet their flaring intensity is well below that of other private operators.
Among different private equity players, trends have diverged. Some private equity firms appear to have put pressure on their operators to reduce flaring consistency. Consistent with its ESG-consciousness, EnCap has brought the average intensity of its operators down from 16% to 3%. Meanwhile, operators affiliated with NGP have maintained a multi-year plateau between 5-6%. The diversity of these results suggest that private equity may effectively pressure operators to limit flaring, though that pressure is not uniform across firms.
As these trends have unfolded, implications for the future are becoming evident. A look at the operators who flare the most from first-year wells reveals that flaring is becoming more concentrated. As total volumes have gone down, the top 20 highest-flaring operators represent 91% of all volumes flared from first-year wells, though they contribute only 4% of production for these vintages. This concentrated flaring is increasingly coming from private companies, including private equity-backed companies. For instance, NGP’s portfolio includes the number 1 operator by flaring volume along with two others ranked in the top 20, whereas none of these operators ranked in the top 20 during 1Q19.
As majors and public companies have already achieved flare intensity rates below 1% on new wells, further reductions in overall flaring will depend on private companies matching the progress made by public companies. These distinctions will become more pressing if private enterprises continue to outpace their counterparts in the post-Covid Permian. To further analyze flaring data by operator and region, BTU Analytics is offering a new feature through its BTU View platform.