Will the oil crash help clean up the Permian Basin?

By Jim Magill, Contributor June 23, 2020 Updated: June 23, 2020  houstonchronicle.com

Most analysts predict the oil price crash that has led to steep losses, thousands of layoffs and a growing number of bankruptcies will force the energy industry in the Permian Basin to consolidate as stronger companies take over weaker ones.

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

Industry analysts and environmental advocacy groups say the companies that survive the unprecedented collapse in energy demand will be the largest and best funded operators, with the money, technology and expertise to take on the twin environmental issues vexing the region: high levels of burning off unwanted natural gas in a process known as flaring and unintentional releases of methane, a potent greenhouse gas, into the atmosphere.

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

“It’s generally true that the larger companies do a better job, certainly of managing flaring,” he said. “So, if there’s major rollup of these smaller private companies, that to me seems like it would improve the picture in terms of how much gas is flared and also make it less likely that this is going to occur down the road.”

In addition, the companies most likely to do the consolidating are large, publicly traded companies such as Chevron and Exxon Mobil, which face pressure from shareholders worried about the potential impact of environmental practices on both the planet and the companies’ bottom lines

In recent months, shareholders have had some success in their efforts to drive major oil companies to change their ways of doing business regarding climate change and environmental issues. Last month, for example, Chevron shareholders approved a resolution urging the company to issue an annual report disclosing how its lobbying expenditures lined up with the goals of the 2015 Paris climate accord, an international agreement aimed at reducing greenhouse gas emissions to slow the pace of climate change.

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

“It’s no doubt that companies that are publicly traded listen to the larger investor groups,” Colin Leyden, the director of regulatory and legislative affairs for the Environmental Defense Fund. “That’s an additional pressure point for those companies. Let’s face it, money talks.”

Hundreds of players

The Permian Basin, which stretches from West Texas into eastern New Mexico, is home to hundreds of players, encompassing the smallest mom and pop-producers to some of the largest 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 nation’s reemergence as a top global producer.

The boom, however, has not come without environmental costs. Output quickly outstripped pipelines and transportation networks to bring the vast amounts of natural gas produced along with oil to market, leading companies to burn off the excess gas in record volumes.

In addition, improper flaring operations combined with leaks in pipelines and other oilfield equipment has allowed the release of methane, the primary component of natural gas, directly into the atmosphere.

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

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

The plunge in the rig count reflects the precarious economic situation facing oil and gas producers. Some, particularly those carrying a lot of debt, will be forced into bankruptcy, said Charles Beckham Jr., a partner with the Haynes & Boone law firm. Since the beginning of the year, at least 18 North American oil and gas companies have filed for bankruptcy.

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

The process of consolidation in Permian Basin, where approximately 400 companies operate wells, has already started, with positive impact on the environment. In January, Parsley Energy, an Austin company with one of the best records on flaring, completed an approximately $2.3 billion acquisition of the Denver firm Jagged Peak Energy, which the Environment Defense Fund had listed among the “bad actors” regarding flaring.

Stephanie Reed, a Parsley senior vice president, recently told the Texas Railroad Commission that Jagged Peak flared a much as 20 percent of associated natural gas from oil drilling. Since the acquisition, Parsley is flaring less than 3 percent.

“This did not happen by accident,” she said.

View from New Mexico

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

“Who knows where demand is going to go? Who knows when production is going to increase, and whether the companies are going to be better at their environmental compliance or worse?” he said. “One can just hope for the best.”