Flared natural gas is a loss to the state in taxes and royalties

Mar 29, 2013

We recently reported that the federal government – and consequently Wyoming – might be getting shortchanged when it comes to royalty payments on coal going overseas. Turns out, the government is missing out on royalties in other ways, too. Wyoming Public Radio’s Irina Zhorov reports that right here in Wyoming, companies are quite literally burning up both federal and state royalty money when they flare natural gas.

IRINA ZHOROV: A flare is used to burn off natural gas that, for whatever reason, can’t be captured. The flare stacks stand like giant candles by the well sites. The practice has led to environmental and health concerns. But in addition to those problems, there’s also the issue of money. If operators are just burning the stuff instead of selling it, do the mineral owners still get paid?

The answer is no, no one gets paid. Historically, the state hasn’t seen so much flaring, but lately, the Wyoming Oil and Gas Conservation Commission has started allowing companies to flare beyond the standard testing period of about 15 days for new wells.

Director of the Office of State Lands and Investments, Ryan Lance, says royalties aren’t applied because it’s not considered waste.

For example, it’s not waste if the flaring is an emergency or is part of well testing.

RYAN LANCE: But then there’s this other more broad application that operators can submit that is really the evidentiary discussion that they have with either the supervisor or the commission and they have to lay out the reason for the flaring, the duration, the estimated volumes.

ZHOROV: Basically, that technical waste definition can be flexible when considering the flaring extension permits…if there’s a good reason…

LANCE: Most important for our determination is how far are you away from a pipeline?

ZHOROV: And here is the issue. The relatively new oil plays in the state are being developed for the lucrative oil…the gas is just a byproduct, one for which there is limited infrastructure in place and one for which prices are so low that there isn’t a huge motivation to get the separate gas pipelines built.

Wyoming Petroleum Association President, Bruce Hinchey, says the economics of building the gas pipelines don’t make sense.

BRUCE HINCHEY: There’s just not enough gas to pay for the pipelines so therefore it’s a product that’s not going to get sold and if you…I guess if you want to pay a royalty fee on it it’s just going to reduce the amount of revenue to the operator and to the state.

ZHOROV: It’s true that if operators are made to pay royalties on gas they are just flaring off, they will be parting with more money. The state’s loss in Hinchey’s statement is based on the old adage that if operators are taxed more they will drill less or go elsewhere, thereby contributing less overall revenue to the state.

But, there’s also evidence showing that the state stands to gain. Because there’s no money in flaring now how much is flared off isn’t tracked carefully and nobody really ever did the math on how much money was being lost until Lance did some rough calculations.

LANCE: We’ve seen that one operator had 9 wells on state trust lands flare volumes that would be equal in terms of a royalty rate on a $3 gas price, about $189,440. If you add severance taxes on that at the 6% rate the amount of severance taxes on those 9 wells would be $68,197.

ZHOROV: There’s also an ad valorem tax that would increase total gain. That’s over two years, for wells flaring from 2010 to 2012. Lance recognizes that those numbers aren’t huge, but he adds this:

LANCE: If you multiply that over time we’re talking about real money, especially when you consider the budget picture that we face today in the state with declining revenues or at least static revenues. These are wasting assets that frankly we never get a chance at again. And we better get it right.  

ZHOROV: Currently, there are 65 wells with flaring extension permits. The vast majority are for over 100 days, with 11 for a full year. Ten are on state lands, while the rest are on federal and fee lands. The federal policy is very similar to the state policy, so the feds are losing out, too. One thing that makes state trust land leases different, though, is that they directly and almost exclusively support schools.

LANCE: These are resources that are non-renewable, that support public education, and basically by condoning flaring and not collecting a royalty on that gas stream, we’re giving that up forever. And we’re doing that in the context of supporting public education.

ZHOROV: Interim Supervisor of the Oil and Gas Conservation Commission, Bob King, says that it’s not the Commission’s role to add costs to a company’s production, even when the state’s losing money.

BOB KING: We certainly can’t dictate that a company be forced to lay a pipeline to a well if it’s not a viable project on their end.

ZHOROV: In other words, King, who determines whether a company can drill or not, is not willing to take a stand on this issue.

KING: That issue, I don’t know if it would be appropriate for the regulatory agency to take a position one way or another.

ZHOROV: However, King is apparently thinking about this issue. He opened the Commission’s most recent hearing with concerns regarding flaring and said the Commission’s staff was looking at requiring more diligent, monthly reporting of flared volumes from operators. A clarification of rules about a year ago has led to more transparency about flaring, if not more money, from industry. And the Revenue Committee is looking at the tax side of the issue, which would inevitably include a conversation about royalties, as an interim topic.