How Much Will New Emissions Rules Hurt These Natural Gas Producers?
"EPA will assess several potentially significant sources of methane and other emissions from the oil and gas sector. EPA will solicit input from independent experts through a series of technical white papers, and in the fall of 2014, EPA will determine how best to pursue further methane reductions from these sources."
-- White House Blog post
More regulation on natural gas producers and pipeline operators is coming. If you're on the side of more regulation to reduce emissions, this is a positive. If you're of the opinion that this will just increase costs for the operators -- which will just end up getting passed down to consumers -- and not really have an effect on reducing carbon emissions, then there's not much to like here. For investors in Chesapeake Energy , ExxonMobil , and Ultra Petroleum , three of the most prominent producers of natural gas in the U.S., what could this mean? Let's take a look.
Methane emissions have fallen. Why new regulations?
When reached for comment, Ultra Petroleum deferred to Jeff Eshelman, VP of public affairs for the Independent Petroleum Association of America. Eshelman sent this response:
In last year's Greenhouse Gas Inventory, EPA found that methane emissions from natural gas systems had fallen 10.2% since 1990, and emissions from field production had fallen 38% since 2006. Those emission levels were already well below the threshold for natural gas to retain its environmental benefits. In its latest report, EPA finds that methane emissions fell even further to 16.9% since 1990, with field production emissions falling more than 40% since 2006.
Eshelman also said that reducing methane emissions is just good business; methane not captured is methane that can't be sold. However, it's still a matter of profitable capture, meaning there will always -- from a business perspective -- be a "reasonable" amount of leakage, if containment costs exceed the value of captured methane. The EPA's job, frankly, is to make sure that emissions considered reasonable by private enterprise are also reasonable for public health.
With natural gas production expected to keep growing over the next decade, the EPA has an obligation to study the progress that the industry has made and determine whether additional efforts -- ones that might increase costs for producers, yet still yield measurable reductions in methane emissions -- are in the public interest.
Who is affected? How much?
Any new rules would will only affect drilling and production on federal lands. For Ultra Petroleum, this could be a big impact, since almost all of the company's production in Wyoming -- which makes up about 70% of the company's total production -- is on public land. Utah is a mix, and essentially all of the company's production in the Marcellus and Utica in Pennsylvania takes place on private land.
Chesapeake Energy gets a significant portion of its production from the Marcellus and Utica. In the fourth quarter of 2013, almost 34% of Chesapeake's average daily production came from these plays. Another 39% of Chesapeake's Q4 production came from the Barnett, Eagle Ford, and Haynesville Shale plays in Texas and Louisiana, which are all largely on private lands as well. This indicates that at least two-thirds of Chesapeake's current production is probably unaffected by any potential new EPA rules on methane emissions.
ExxonMobil's XTO Energy unit is the largest producer of natural gas in the U.S., meaning that it could also experience an outsized impact of any additional regulations to reduce methane emissions at production sites. The company operates on a large number of both public and private lands, but much like Chesapeake, it appears that the majority of its current production takes place on private lands. It's also worth noting that ExxonMobil is potentially exposed to regulations affecting its midstream business as well. The White House announcement was specific in that it would look at "practices to capture methane from venting and leaks across the entire oil and natural gas value chain," and not just production.
Final thoughts: Early in the game, probably nothing too onerous will result
The risk of costly government regulation comes part and parcel with investing in oil and gas producers. While any potential new rules would affect only federal lands, chances are states like Pennsylvania -- already a heavy regulator of fracking -- could choose to adopt similar rules to those the EPA implements. The point is, some type of additional regulation is likely, and isn't necessarily a bad thing even if it does increase costs a little bit.
One of the benefits new regulation could bring? Improving the total emissions picture of natural gas. Despite strong evidence that natural gas is definitely cleaner "at the tailpipe" versus gas and diesel, and versus coal in power plants, the methane leakage clouds the picture. If additional rules helped push total emissions lower, enhancing the public perception of natural gas as a "clean" fuel could be worth the price. That's a win for the industry, and investors.
The reality is, any new rules that come out of these studies are unlikely to be too onerous for these three companies, which are all known for their heavy focus on efficient production that minimizes loss and maximizes return. All three have been awarded by the U.S. Bureau of Land Management in the past for their environmental stewardship. The thesis of continued growth in demand and production of natural gas will remain intact, no matter what new EPA rules are a result of this latest release. For investors in Ultra, ExxonMobil and Chesapeake, keep that in mind before acting on this new piece of information.
3 stocks that could cut your tax bill, while you make money in the Energy Boom
Record oil and natural production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You To Make This Energy Investment. you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. click here to access your report -- it's absolutely free.
The article How Much Will New Emissions Rules Hurt These Natural Gas Producers? originally appeared on Fool.com.Jason Hall owns shares of Ultra Petroleum. The Motley Fool recommends Ultra Petroleum. The Motley Fool has the following options: long January 2016 $25 calls on Ultra Petroleum. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.