The Answer to Increasing Environmental Compliance Costs: Regulatory Reform or Technological Advance?

Abstract

Abstract Environmental compliance requirements on the U.S. E&P (E&P) industry continue to rapidly evolve and become more stringent. Controlling the costs of environmental compliance, without sacrificing industry's and governments' commitment to environmental quality, will continue to be a priority, especially in a world of sustained low prices. This paper examines a number of potential legislative and regulatory initiatives that could affect environmental requirements on the U.S. oil and gas E&P industry. The paper provides a quantitative assessment of these initiatives on oil and gas supplies, government revenues, and industry activity (e.g. drilling, E&P expenditures, etc.). The paper also examines some of the major emerging technological developments that could reduce the E&P industry's future expenditures for environmental compliance. These technological developments include the use of synthetic drilling fluids in offshore operations, evolving technology for downhole separation of produced water and oil, and improved technology and industry practices to reduce emissions of toxic air pollutants and potential greenhouse gases. The paper will compare and contrast the potential benefits associated with the two alternative approaches to reducing compliance costs – regulatory relief and technological advance – and provides some thoughts on the relative benefits and potential liabilities associated with each approach. This study concludes that for the period 2000 to 2010, a stringent regulatory compliance scenario could result in $11.7 billion more expenditures by industry for environmental compliance, relative to a less stringent, risk-based regulation scenario. Potential compliance requirements related to drilling and drilling waste management are estimated to account for about one third of the potential environmental compliance expenditures, and potential requirements related to stringent regulation of hydraulic fracturing are estimated to account for almost half the potential compliance expenditures. In contrast, aggressive development and implementation of environmental compliance technology results in approximately $1.8 billion in savings in overall industry expenditures for environmental compliance during the same period. An estimated 90 percent of this potential savings is associated with downhole water separation. In the regulatory case comparison, where the risk-based case is considered the baseline, the more stringent regulatory scenario results in a 38 million barrels per year drop in oil production by 2010. Similarly, the more stringent regulatory scenario results in a 90 Bcf per year drop in gas production by 2010. In the technology case comparison, where the risk-based regulation case is considered the baseline, the aggressive environmental technology case results in a 37 million barrels per year increase in oil production by 2010. Similarly, the environmental technology scenario results in a 40 Bcf per year increase in gas production by 2010.