Underreporting could make current natural gas production limit symbolic
Opponents of a limit affecting natural gas production from Oklahoma’s most prolific wells called Wednesday for regulators to do away with what they call a largely “symbolic” restriction.
Elected members of the Oklahoma Corporation Commission made no decision on that request this week. But they might agree the current restriction has no teeth.
It turns out, operators of at least some gas wells across the state have not been meeting a regulatory requirement to provide the agency with annual production tests showing what their wells could produce at maximum levels.
In fact, Oklahoma only has production capability data on about 25% of currently permitted natural gas wells in the state that regulators in the agency’s Oil and Gas Conservation Division deem would be capable of meeting current production limits (about 900).
Regulatory and industry records show there are between 40,000 and 50,000 operating unallocated gas wells in Oklahoma (until about three decades ago, Oklahoma tied wells to established production basins, setting production limits accordingly).
Most recent data provided by the division estimated wells in Oklahoma produced about 8 billion cubic feet of natural gas daily, with most reporting either no or very limited production.
Duncan Woodliff, a production and compliance manager with the division, discussed the lack of documented production capabilities for many of the capable wells during a technical conference with producers on the current limit that the division held Wednesday.
Despite a lack of data though, Woodliff told conference participants and two participating elected commissioners that he could reasonably estimate most wells aren’t affected by current production limits, based on data his agency possesses.
The current restriction, effective through Sept. 30, requires operators limit an unallocated gas well’s absolute open flow to 50% of its potential, or to cap its maximum allowable production at 2 million cubic feet per day (mmcf/d), whichever is greater.
The question commissioners will have to decide in late August is whether to leave that limit in place or to make some kind of adjustment.
What they're saying
Some industry representatives argued Wednesday it should be abandoned entirely.
“Over the course of the year, there has been an ongoing trend where differentials (between prices in north Texas versus Oklahoma) are narrowing,” said Dean Foreman, chief economist for the American Petroleum Institute.
Production cuts caused by the pandemic related energy crisis, the activation of the Mid-Ship pipeline and other factors all are playing roles that are difficult to define, he observed.
Still, he noted Oklahoma producers must compete against operators in Texas, Pennsylvania, Ohio, Pennsylvania and elsewhere that are breaking even on production costs with market prices as low as $2 per million British thermal units.
“If Oklahoma were to provide the right incentives (by doing away with the limit), it could encourage drilling activity in the state,” he said.
Foreman’s call for Oklahoma to do away with a proration requirement was echoed by Shane Smith, a production engineer at Devon Energy, and Shea Loper, director of government relations with Ovintiv.
Devon would prefer to see proration abolished, Smith said.
“A lower allowable limit creates a disincentive to drilling gas wells,” he said.
Overly burdensome regulations influence where his company spends its dollars to drill and complete wells, Loper said.
“Competition for capital is driven by a number of factors, and those include the policies of the state,” he said.
But Chad McDougall, of JMA Energy in Oklahoma City, argued the limit continues to be needed.
He also noted the commission first needs to actually enforce the current limit before it should make any attempt to consider whether or not the restriction should be modified.
McDougall said that must begin with the agency requiring well operators to submit required production data, which he complained largely doesn’t happen.
“The market is still over-supplied, even at reduced production levels,” McDougall said. “There is a lack of enforcement by the commission, both for having the tests done and to file those results with the agency. We have seen people operate at 100% of open flow, and the issues need dealt with.”
McDougall’s comments caught the attention of both Commissioner Dana Murphy and Commission Chairman Todd Hiett, leading them to ask questions about how the agency is addressing the required reporting gap.
“If we have prorationing, then people need to comply,” Murphy remarked.
Division representatives said the agency is working with well operators to get the required information submitted, in part through the addition of more staff workers, but it wasn’t clear Thursday if the agency could sanction operators in any way for failing to comply.
Since 1999, commissioners routinely have set proration formulas for natural gas production from unallocated wells. Until the current limit was established earlier this year, operators were allowed to run wells at 65% of open flow (technically as much as a well can produce), or to produce 2 mmcf/d.