Bakken Midstream seeks 'fundamental change' for North Dakota natural gas industry

Natural gas is flared at a well site north of Killdeer along North Dakota Highway 22 on Dec. 12.

A methane fee that is divorced from actual emissions is raising alarm bells with a broad swath of businesses across the energy supply chain, who say the fee will not only cause rising consumer prices, but will also distort markets and could potentially attract retaliation from America’s trading partners.

The fee is outlined in the Methane Reduction Act of 2021, which could wind up in the Senate’s version of the reconciliation package. The fee is designed to force companies to reduce methane emissions, but because it’s not tied to actual emissions could create a perverse disincentive for reducing emissions, the American Petroleum Institute wrote in a letter signed by more than 130 business, trade, and labor organizations, including the Montana Petroleum Association, North Dakota Petroleum Council, and North Dakota Chamber of Commerce, among others.

“(We) are concerned the bill will have unintended environmental, as well as economic, impacts and could put us on the wrong path when it comes to addressing climate change,” the letter states. “For instance, because the bill would tax companies based on the amount of oil or natural gas they produce or handle, not based on their actual emissions, it could perversely disincentivize facilities with higher emissions intensities relative to the basin average from reducing their emissions. At the same time, this approach could unfairly punish high production operators with lower emissions intensities.”

Direct regulation of methane is a better method for encouraging reduced methane emissions in an equitable manner, tied to actual emissions.

“EPA is best-suited to address the challenges in reducing methane emissions because regulation stipulates the installation of cost-effective control technologies — as well as leak detection and repair requirements — that prevent and reduce methane emissions at oil and natural gas facilities,” the trade groups wrote.

EPA is also already required to set methane emission standards, which means the fee is duplicative effort.

“What’s more, a methane tax will be difficult to implement,” the trade groups wrote. “Carbon dioxide emissions result primarily from combustion, whose point sources make it cost-effective to estimate, measure, and verify for the purpose of carbon pricing. In contrast, methane emissions often result from fugitive and intermittent sources that are challenging to quantify.”

The fee could also reverse recent reductions in greenhouse gas emissions. Around two-thirds of the reductions since 2005 have been achieved by switching to natural gas for electric power, which burns cleaner and has fewer emissions than coal. Higher prices for natural gas would drive power consumers to seek a cheaper source of energy — likely, coal.

“In addition to potentially detrimental environmental outcomes, the Methane Emissions Reduction Act could have adverse and disproportionate economic impacts nationwide,” the groups wrote. “The potential direct cost of the bill to the economy, not including import fees, could be as high as $14.4 billion, increasing 5 percent above inflation annually. As many as 155,000 jobs could be impacted by the tax, with the largest impacts concentrated in the health care and social assistance industries.”

The formula for the fee itself is also quite complicated, and will be difficult to levy in a fair and equitable manner.

The fee starts with a baseline $1,800 per ton in 2023, increasing 5 percent above inflation annually, along with fees for individual companies that are based on their share of production or handling, rather than emissions, as well as the average emissions intensity in the oil and gas basin where they operate. There’s also an import fee that would be levied on each company that imports crude oil, natural gas, or natural gas liquids to the United States.

The United States imported 9.14 million barrels per day of petroleum from 90 different countries in 2019, according to EIA figures. Given that, and the fact that natural gas and petroleum together account for 70 percent of energy consumption in the United States, the tax is likely to have a broad ripple effect across the economy, at a time when inflation appears set for a pandemic-induced take-off.

“The basin-focused approach of the bill could also alter where oil and natural gas is produced and thereby impact the state governments’ balance sheets,” the trade groups wrote. “Taxes and fees collected by states based on volume produced could fall significantly where the calculated basin average fee rate is high. A regulatory approach would likely be much less disruptive to state budgets than the tax this bill would impose.”

The bill has not yet been the subject of a Congressional hearing, API added.

“The unintended and adverse environmental and economic consequences have never been addressed or considered,” API wrote. “Meanwhile, the Biden Administration is on track to regulate methane emissions and continue methane reduction progress.”

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