Texas Regulators Say Yes to Flaring Over Pipeline Company’s Objections

After approving thousands of permits allowing producers to flare gas, the Texas Railroad Commission finally heard a case objecting to the practice.

The three-member commision ruled in favor of the oil company, Exco Resources, allowing it to continuing flaring gas from its Eagle Ford wells, but it was a split vote by commissioners who  described the case as a “conundrum.”

Complicating the issue was the fact that the Exco wells have been connected to a pipeline system, dating back to when it when it acquired 120 Eagle Ford wells from Chesapeake in 2013. That sets the company apart from the many Texas oil producers that do not have access to pipelines with available capacity. Texas flaring limits do not apply to companies without pipeline access.

The company that challenged Exco’s permit application, Williams, owns the gathering system tied into Exco’s wells. It said Exco was violating the Texas law banning gas waste by flaring the gas rather than using the pipeline to ship it to market. Exco said the rates offered by Williams made burning the gas a better option.

It was the first such challenge heard by Kristi Reeve, the administrative law judge on the case who advised commissioners to approve the permit. The Wall Street Journal estimated that prior to that case, the commission had approved about 27,000 uncontested flaring permits.

“Flaring is a critical part of the well construction process and it is important companies be able to continue to use this tool,” Railroad Commission Chairman Wayne Christian said in a statement. But he explained his opposition to Exco’s request by saying: “I have a duty to my constituents to prevent waste and believe that if an operator has the ability to transport their gas to market, they should. I am aware of the economic reasons to flare, but if an operator is going to make money on the aggregate after selling their oil, it does not seem in our long-term best interest to flare the gas.”

The word waste looms large in this case and in the Texas law giving the commission the authority to regulate oil and gas production.

That wording dates back to the 1930s, when the combination of an oil boom—the East Texas Field produced 1 million B/D soon after it was discovered—and the weak demand caused by the Great Depression, led oil prices to fall to as low as 10 cents/bbl.

Texas responded to the crisis, by empowering the Railroad Commission to set strict production quotas to reduce the oil glut and raise prices. That effort lead to years of battles. While most of them were in a courtroom, at one point the National Guard was called in to quell opposition in East Texas.

A chronological history of the Railroad Commission follows the rapid evolution of the law during those years. By 1935 it included language that “prohibits the production of gas in such a way as to cause underground waste.”

Now the commission is dealing with a different sort of production boom in shale plays, which has driven down oil and gas prices.

The attorney for Williams, John Hays, argued that the issue, in this case, was simple: “flaring is waste” if a company has pipeline access. Exco’s attorney complicated matters by redefining waste by saying that if Exco was not allowed to flare the gas it would have to stop producing, leading to wells that ultimately produce less oil.

“If these wells are shut in, if that is only option available, there is potential damage to the reservoir. That damage could reduce the total amount of production from that reservoir. That is what we define as waste,” David Nelson, Exco’s attorney, said during the June hearing before the commission.

At that time, Hays questioned whether a shut in would lower ultimate production, and said a decision based on operator economics means that “anytime there is a negative cost—you do not get as much (money) as you get otherwise—you can flare. If that is the standard, there is no need for a flaring statute,” Hays said.

The back and forth led Railroad Commissioner Ryan Sitton to say he was struggling with the question, “what is waste.” Ultimately, he voted for the permit, noting that if the commission blocked production of oil it would prevent burning of gas worth a fraction as much as the oil production lost.

Commissioner Christi Craddick, said she voted for issuing the permit because denying a permit would be “forcing a contract” by requiring Exco to reach a deal with Williams or shut in its wells. She added that approach “would be something new for us.”

Exco had nothing to add after winning. In July, it announced it completed a bankruptcy case, reducing its debt by $1.1 billion.

Williams’ statement after the ruling did not suggest it would be challenging this decision, or other flaring permit requests. “Clearly we are disappointed with the Railroad Commission’s ruling; however, we do appreciate the agency’s attention to the matter. We are committed to continuing to work with our customers in a productive manner to provide the market with effective natural gas-gathering solutions.”