A major pipeline operator is suing the Texas Railroad Commission — the state agency that regulates oil and gas drilling — alleging that it has blatantly disregarded longstanding state law that restricts the controversial and growing practice of burning off natural gas.
The lawsuit, filed Nov. 20 in Travis County District Court, is the latest development in a first-of-its-kind dispute between Tulsa-based Williams Cos. and Exco Operating Co. over the Dallas-based company’s authority to flare natural gas that comes up with the oil it pumps from the Eagle Ford Shale in South Texas. In December 2017, Exco asked the Railroad Commission for permission to burn off excess gas from dozens of oil wells and later asked for a two-year extension of that authority.
The request was unusual because the wells were already connected to a pipeline gathering system owned by Williams that's capable of transporting the fossil fuel to market. When oil and gas producers ask the Railroad Commission for permission to flare, which they have increasingly done amid a historic oil boom in the state, it is often because they are unable to hook up to a pipeline.
But in this case, Exco, which emerged from bankruptcy in July, said it was because the company didn't have a contract with Williams and couldn’t afford its rates to transport the gas even if it did. The company also noted that Williams historically had only been able to accept 70% of its gas, so it would need a permit to flare, anyway.
With oil production reaching historic levels in the Permian Basin as new pipeline construction has lagged, the price of natural gas in West Texas has traded in negative territory several times this year, prompting oil producers to flare it or pay pipeline operators with spare capacity to take it away.
Williams filed a protest with the commission early last year, arguing Exco didn’t need to flare because it had the ability to move the natural gas to market — and that the cost-benefit analysis Exco submitted to justify its flaring request used only revenues from dirt-cheap natural gas and omitted revenues from far more valuable oil so the Railroad Commission would think the company was barely scraping by.
According to Williams, it was the first time anyone had ever protested an oil producer's request for long-term flaring. Approving the request, the company argued, would be an unnecessary waste of the state’s valuable natural resources, which is heavily restricted by state law and frowned upon in the state constitution.
Natural gas flaring, a controversial practice that spews pollutants into the atmosphere that also contribute to climate change, has long been restricted in Texas because energy producers have been known to abuse the practice to rid themselves of unwanted gas when it emerges from oil wells.
In past decades, the three-member elected Railroad Commission cracked down hard on rampant flaring, shutting down entire oil and gas fields — moves that the courts backed up.
But it also has authority to grant temporary exceptions under certain circumstances, including lack of pipelines, and an investigation last year by The Texas Tribune and the Center for Public Integrity found it has done so with increasing frequency in recent years, approving an escalating number of permits to flare for six months — and granting dozens of extensions last year alone.
State regulations allow producers to flare gas for up to 10 days after they're done drilling an oil or gas well. After that, state regulations allow the commission to issue flaring permits administratively in 45-day increments for up to six months; anything beyond that must be approved formally by commission vote.
Still, the Exco-Williams dispute sparked a significant debate among the three elected railroad commissioners at meetings over the summer, with commissioners acknowledging it raised legitimate questions — or, according to Commissioner Christi Craddick, an "interesting conundrum" — about what constitutes waste under state law and how much they should consider economics in granting flaring requests. But the commission ultimately approved Exco’s flaring extension request 2 to 1 on Aug. 6, with commission Chairman Wayne Christian casting the lone dissenting vote.
Commissioner Ryan Sitton vigorously defended the decision, saying that the commission has authority to exempt producers from state flaring rules if they present information that shows they absolutely need to do it. While Exco may be physically hooked up to a Williams gathering system, he said, Exco wasn't able to transport the gas because it didn't have a contract with Williams to do so and it was not the commission's job to force such an agreement. He added that it didn't make sense economically for the commission to force Exco to go through the motions to sell natural gas when it brings such a low price.
"Philosophically whether I look at it from a purely a rule-based perspective or philosophically from a waste perspective, either way says we should grant the flaring exception," he said.
Onlookers, including environmental groups and industry attorneys, said they were only somewhat surprised — the commission hadn’t denied a single flaring application in years, and it typically approved them by unanimous vote. All three commissioners also have well-documented ties — financial, professional or political — to the industry and are open about wanting to make it as easy as possible for it to flourish.
But while the measure passed, the split vote gave a glimmer of hope to those who have pressured the commission to curb the dramatic uptick in flaring. “I think Christian has probably, maybe decided that he agrees that it’s not good,” said Colin Leyden of the Environmental Defense Fund, which published an analysis earlier this year that shows producers are vastly underreporting how much they flare. “He has a little bit of a religion on this.”
Breaking from his fellow Republican commissioners, Christian — a former state representative — rebuked the commission’s recent tendency to approve any and all flaring requests and expressed concern over whether it had approved others out of convenience rather than necessity.
Before voting against another flaring request from Exco at a meeting in late October, he described the company's economics argument as disingenuous because it claimed a potential loss of $40,000 a month per well if it was forced to sell the natural gas when it earns $98,000 a month per well selling the oil. And he said Williams has told the company it wouldn't charge a fee to open the valve to the pipeline.
"It's a cost of doing business," Christian said. "I see nothing but profits here."
In a statement, Williams said it "believes that the 'gas only' economics model to allow flaring that ignores oil revenues from the same wells is flawed and virtually guarantees the grant of every flaring request."
In its petition, Williams described the Railroad Commission’s vote as setting a dangerous precedent and said it “reflects an evolved practice at the Commission under which it has not denied any of the more than 27,000 requests for flaring permits received in the past seven years.
“Natural gas flaring has long been recognized as wasteful and environmentally harmful,” the company said in its petition. “The Railroad Commission of Texas is vested with the duty to prevent the waste of oil and gas. … In practice, however, for some years now the Commission has effectively disregarded its rule in the granting of flaring exceptions.”
Before the Aug. 6 vote, Sitton dismissed that criticism, reading from past court decisions that placed emphasis on economics over waste and saying it was unreasonable for the commission to do something that would significantly cut into profits.
"I don't think we are departing — in fact, I think we are being consistent with — decades of commission practice to find that in this case it would be unreasonable for us to force Exco to shut in the wells until a contract could be signed to capture this gas, which is basically what we would do if we didn't grant the flaring exception," he said.
Railroad Commission spokesperson Ramona Nye declined to comment on the Williams lawsuit, saying the agency doesn’t weigh in on pending litigation. Christian's office did not respond to an interview request.
In a July 2018 interview, then-Commission Chairman Christi Craddick told the Tribune that she thinks flaring is a shame but predicted that it would subside as more pipelines come online. Still, the state keeps breaking its own flaring records. Last month, the research firm Rystad Energy said that the level of natural gas flaring and venting — in which gas is simply released into the atmosphere — happening in the Permian Basin reached an all-time high in the third quarter of the year, averaging more than 750 million cubic feet per day. While still a small percentage of the gas produced in Texas, that's more than the entire state's residential gas use per day.
Ahead of the Aug. 6 vote on Exco's application, Christian asked commission staff to look into how many wells had received long-term flaring permits and were flaring despite being connected to a gas pipeline. Sitton also asked staff to determine whether those wells are connected to gas gathering systems and processing plants, and whether those systems had available capacity.
Asked for the resulting analysis, Nye provided a summary that said it had identified 3,073 wells operating under 234 long-term flaring permits — 180 days or longer — while also being connected to pipeline systems, or roughly 1% of all wells in production in the state. In May 2019, those wells flared about 5.4% of the gas they produced, the analysis found; that’s compared with a statewide flaring rate of about 1.34% during the same month.
The wells are mostly in the Permian Basin and Eagle Ford shale, the analysis found. It concluded that there are "continued geographical constraints on getting gas from wells on a lease to a gas plant" and that there is a "need for more gathering systems to connect the wells to market."
But, it said, "Flaring is not occurring continuously as operators appear to be selling gas for a few months and then flaring intermittently during the year."
Thomas Singer, a senior policy adviser with the Western Environmental Law Center, said it's normal to see companies occasionally flaring because pipelines can be temporarily shut down for things like power failures and unscheduled maintenance. But he said the commission's analysis was too limited to give a full picture of the problem, which could help the commission come up with long-term solutions.
"What staff could and should have done is to identify wells that are reporting consistent, long-term flaring, not only in May 2019 but over a longer period," he wrote. "The key is that in primarily oil-producing regions, neither producers nor midstream operators have adequate incentives (certainly not at current gas prices) to ensure that gas makes it to market. They are acting rationally, but the system is broke and the (Railroad Commission) could intervene."
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