WMB Williams Companies Inc

By Rebecca Elliott 

A pipeline company is challenging Texas' practice of allowing drillers to set unwanted natural gas on fire, in a case that could test state limits for how much of the fuel can legally go to waste.

As shale companies turned America into the world's top oil producer, they unlocked massive quantities of natural gas as a byproduct and Texas has allowed them to freely burn off vast volumes as area pipelines fill up. The process is known as flaring.

Now, shale producer Exco Resources Inc. is seeking to flare nearly all of the gas produced by a group of South Texas wells, even though its operations are already connected to a network of pipelines. Williams Cos., the operator of the pipelines, is challenging the request, in what is believed to be the first such dispute on record.

Williams attorney John Hays Jr. told commissioners in a hearing last month that granting Exco's request would open the door to wasting gas any time doing so is more profitable than transporting it.

The Texas Railroad Commission has received more than 27,000 requests for flaring permits in the past seven years and has not denied any of them, records show.

"It just doesn't feel right, quite frankly, to have a standard that says, any time there's an application, you get an exception," Mr. Hays said. "Then why have the statute in the first place?"

Exco has said that rejecting the company's permit application could force a shutdown of the wells. Attorney David Nelson argued at the hearing that doing so potentially would reduce long-term oil production. The company recently emerged from bankruptcy. It declined to provide additional comment.

The case underscores the tensions surfacing in Texas as the state grapples with booming oil production and its side effects. It also exposes a growing rift between frackers and pipeline companies as the natural-gas glut is set to worsen.

Natural-gas pipeline construction in Texas, home to America's hottest oil field, the Permian Basin, has lagged far behind production growth, in part because producers have been reluctant to commit to long-term contracts. The state's gas output is expected to increase about 30% over the next five years, according to consulting firm RBN Energy.

In the region's two largest oil basins, the Permian Basin and Eagle Ford, operators flared or vented -- where gas is released without being burned -- into the atmosphere an average of about 740 million cubic feet of gas a day during the first quarter, according to public data compiled by energy analytics firm Rystad Energy. That gas would be worth about $1.8 million a day at current prices and produced greenhouse gas emissions equivalent to that of nearly five million cars driving for a day, according to estimates from the World Bank and the Environmental Protection Agency.

Case examiners for the Railroad Commission recommended that Exco's permit be approved, but the agency's elected commissioners delayed their vote last month. They are expected to revisit the matter as soon as August.

Railroad Commission Chairman Wayne Christian declined to comment. Williams Cos. declined to provide additional comment pending the Railroad Commission's ruling.

Regulators' decision will have consequences, regardless of which way it goes. Restricting flaring could cause drillers to curtail oil production and give pipeline companies additional leverage to secure contracts and build new infrastructure. Granting flaring permits in cases such as Exco's could make pipeline companies less willing to risk building new conduits.

"If they're not willing to limit flaring in this case, then there's really no regulatory limit on flaring in Texas," said Gary Kruse, research director for analytics firm LawIQ.

Exco and Williams are fighting over how much the producer should pay to access the pipeline network.

If the price is too high, Exco says, then it is cheaper to flare gas than pay for transportation. Although the case involves wells in South Texas, the conditions mirror those for many operators in the Permian Basin, the center of Texas' boom.

"The question is: How much onus or economic burden should be put on a producer to force them to capture and connect that gas?" said Robert W. Baird & Co. analyst Ethan Bellamy. "Where is the tipping point?"

Write to Rebecca Elliott at rebecca.elliott@wsj.com

(END) Dow Jones Newswires

July 17, 2019 07:14 ET (11:14 GMT)

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