Flaring Ticks Up in Texas Oil Patch, Showing Limits of ESG Pressure

After years of curbing the practice of burning off excess gas, producers led by Diamondback Energy are rekindling fires in the Permian Basin.

(Bloomberg) — It has been the US oil industry’s biggest environmental success story in recent years. Gas flares that once lit up the night skies were shut off, curbing a wasteful practice that generated millions of tons of planet-warming emissions. 

But after years of declines, flaring is on the rise again in the biggest US oilfield. Altogether, producers in the Permian Basin in Texas and New Mexico flared about 97 billion cubic feet of the fuel in the year ended June 30, a Bloomberg News analysis shows. That’s enough to meet the nation’s entire natural gas needs on a typical day. 

The increase is being led by a handful of producers including Diamondback Energy Inc. and Permian Resources Corp., which both cut flaring earlier. While flaring remains well below historic highs, the uptick underscores the limits of relying on investor pressure and voluntary initiatives to stem a major contributor to climate change.

“Individual leadership by companies is necessary, but it’s not sufficient,” said Andrew Logan, director of the oil and gas program at sustainability-focused investor group Ceres. “This is going to keep coming back as a problem as long as regulators continue to let it be a problem.”

Flaring is one of the oil industry’s biggest direct sources of carbon dioxide emissions, and one that’s often avoidable. Worldwide, the International Energy Agency says the practice added about 500 megatons of carbon dioxide equivalent to the atmosphere last year. That’s why Wall Street investors focused on climate risks have pushed producers to rein it in. 

While New Mexico is in the process of phasing in restrictions that eventually will prohibit flaring on the scale that Diamondback and Permian Resources are doing, there are no meaningful limits on the Texas side of the basin. The US Environmental Protection Agency is considering some restrictions nationwide, although a rule is probably years away.

As a share of gas produced, flaring in the Permian jumped about 9% in the year ended June 30 compared with the previous 12 months, reversing years of steady declines, the data show. Bloomberg based its findings on the most recent monthly gas production and flaring records that producers file with Texas and New Mexico regulators.

Diamondback did not comment for this story. In investor presentations, it has insisted that recent flaring problems were caused by the actions of companies responsible for transporting its gas to market. Permian Resources told Bloomberg its flaring jump was temporary and also placed the blame on others. 

As the Permian boomed last decade, companies chased oil profits while paying little heed to the gas produced alongside it. Construction of gas pipelines, compressor stations and processing plants lagged behind drilling. Instead, producers just burned it off. By one estimate, the amount of waste gas burned in Texas in 2019 was more than that used in all of the state’s homes. 

While some flaring is unavoidable because of malfunctions or equipment maintenance, companies can eliminate most of it by waiting for gas infrastructure to be available before bringing a new well online. In 2021, BlackRock Inc., the world’s largest asset manager, called for the “near elimination” of flaring. By then, most large, publicly traded US oil companies were taking steps to curtail it.

The change was dramatic. In 2019, Exxon Mobil Corp. flared about 5% of the gas it produced in the Permian, and BP Plc burned more than 10%, the state data show. By this year, each was burning less than 0.3%. The combined rate for all producers in the basin fell from about 3.7% in 2019 to less than half of that by 2021. 

Industry advocates highlighted this progress as they argued against government regulation. “Voluntary industry-led efforts typically drive the most significant and lowest cost solutions,” the Texas Methane and Flaring Coalition said in a 2020 report. Promising results from voluntary efforts helped convince Texas regulators not to impose meaningful limits on the practice when they weighed rule changes in 2020.

Diamondback is one of the basin’s biggest producers, and until recently it was helping lead the way. After cutting its flaring rate by more than two-thirds from what it was in 2019, the Midland, Texas-based company last year targeted a further cut to 1% and made part of its top executives’ bonuses contingent on meeting the goal. The company’s website says it’s on a “path to being an industry leader on ESG matters,” shorthand for environmental, social and governance.

But rather than fall further, Diamondback’s flaring jumped last year, exceeding the target and costing Chief Executive Officer Travis Stice part of his bonus. Diamondback flared even more in the first half of this year — about 1 billion cubic feet of gas per month, the data show, or about 3% of production. That makes it an outlier among the basin’s 10 largest gas producers, the rest of which flared less than 1% of production during that time.

In a September report to investors, Diamondback blamed last year’s surge on what it calls “poor performance” at its midstream partners, without naming any companies. These are the pipeline operators that carry and process the company’s gas to market. Disruptions in those systems can strand gas at the wellhead. More recent flaring permit applications point to midstream problems, too. Reached by phone on Sept. 11, a Diamondback spokesman said he would look into Bloomberg’s questions. The company didn’t respond to subsequent phone calls or emails. 

Permian Resources also blamed recent flaring on its pipeline partners without naming any of them. After successfully cutting its flaring rate below 2%, the company this year increased flaring to 3.7% of production, the Bloomberg analysis shows. “In light of recent one-time substantial third-party midstream issues in New Mexico, we are actively working with our midstream providers and have committed our own capital to improve midstream capacity,” the company said in a statement.

If pipeline operators are to blame for the recent rise in flaring, that hasn’t affected every producer equally. In the two Texas counties where Diamondback’s recent flaring was concentrated, other companies operating there, including Pioneer Natural Resources Co. and Exxon, managed to flare far less. In the New Mexico part of the basin, Permian Resources isn’t one of the top producers — but it flared more than anyone there this year.

Constrained pipeline capacity is likely to lead to more flaring in the coming months, according to a March report from researchers at Validere Technologies Inc. and East Daley Analytics. Gas production in the basin may exceed pipeline capacity by 500 million cubic feet per day by May 2024, the researchers estimate — and much more if planned pipelines fall behind schedule or production grows faster than forecast. 

Under New Mexico regulations, companies like Permian Resources that waste more than 2% of the gas they produce must show improvement or risk being denied new drilling permits. The Railroad Commission of Texas, the state oil regulator, has the power to deny permission to flare but rarely exercises it.

“The Railroad Commission in every case allows operators to get exceptions to the venting and flaring rules,” said Virginia Palacios of Commission Shift, a group critical of the agency. “I was just at the Railroad Commission regulatory conference, and when I asked, ‘In which cases would you not approve a venting and flaring permit?’ I was told that they pretty much always approve them. And the only reason why they wouldn’t approve one is if it was submitted after the deadline.”

The Railroad Commission noted in a statement that it had made changes to the flare permit application process in 2020 and pointed to the longer-term trend of lower flaring since 2019. “Let there be no doubt of the RRC’s and industry’s commitment to reducing flaring to protect the state,” the agency said.

Overall, producers on the New Mexico side of the Permian have flared at a lower rate than in Texas in recent years, the data show.

Elizabeth Lieberknecht, a regulatory and legislative manager at the Environmental Defense Fund in Austin, Texas, said the EPA should strengthen and adopt a rule proposed last year to restrict certain types of flaring nationwide. 

“It’s great that many companies are prioritizing reducing flaring,” she said. “But they are not a replacement for rules that create a floor that companies have to comply with.”

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