By - Michael Drost

3 Reasons Why New Oil and Gas Rules Are Not a Bad Thing

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By Michael Drost

On January 14, the U.S. Environmental Protection Agency announced that it will unveil plans to regulate methane emissions by oil and gas drillers. Two weeks later, the Obama administration announced that it will ask Congress to designate 12 million acres of Alaska’s Arctic National Wildlife Refuge (ANWR) as wilderness, closing off for now the refuge’s oil-rich coastal plain to oil and gas exploration, to the chagrin of just about every politician and industry leader in the state.

And that is only the first month in what may prove to be a combative final two years in office for President Obama, who is seeking to establish his legacy as a champion of the environment. In addition to the proposed rules on methane, further regulations on offshore drilling technology, hydraulic fracturing, and crude oil trains are also in the mix for the last 24 months of this administration, whereas the President hardly addressed the oil and gas industry at all for the previous 6 years. That is not even counting the administration’s  refusal to approve the Keystone XL pipeline, even as a majority of lawmakers on both sides say it is time to approve and move on.

To no one’s surprise, the oil and gas industry for the most part has not been receptive of the new initiatives. Already getting squeezed by collapsing oil prices, being told it cannot drill in some places or will have to pay more or risk hefty fines to drill in others is not what the industry was hoping for to start the New Year. Some industry insiders have called the proposals an “onslaught” and that they do not “reflect a positive environment for the oil and gas industry.”

But those who look on the new regulations with dread or disdain may be ignoring potential benefits that could outweigh the costs. Here are some reasons why new federal regulations could be a blessing instead of a curse.

Regulations address waste….literally

Methane leaks are annoying to any producer, as it is the equivalent of cash falling out of a woman’s purse while she walks across the street. Leaky infrastructure and flaring currently costs the industry about $1.8 billion each year, while methane is a significantly more harmful greenhouse gas than carbon, so any efforts to reduce the amount of methane leaked into the atmosphere will be good for both business and the environment. Reasonable people can disagree as to whether the EPA regulations are the best way to address this problem; however evidence is piling up that similar initiatives done at the state level have been successful in reducing methane emissions without impacting production. Drafting regulations that apply to all oil and gas producers across the country will also create business planning certainty and enable the screening out of “bad actors”.

Regulations can improve a company’s social license to operate

Whenever a terrible accident occurs, such as the BP oil spill or the Le Megantic oil train disaster, the immediate question people ask is: why didn’t they do more to prevent this? Whether it’s being able to conceal the chemicals in fracking fluid or having inadequate safety specifications for different crude types, sometimes when companies follow “industry standards” they aren’t necessarily embracing best practices, which can have devastating results for both the public and the industry itself. State and federal regulations can address this by enforcing the most advanced and effective safety and environmental standards industry wide, eliminating the possibility of companies taking unnecessary risks, either with the environment, the lives of their employees, or the lives of the public. This can improve a company’s social license to operate, as the public can be assured that companies are acting with their best interests in mind, and will be punished if they are not. An example of this can be found in industry standards regarding disclosure of chemicals in fracking fluid. Research finds that companies which provide sufficient information to investors and the public about the exact nature of the chemicals they utilize in fracking operations are more likely to avoid the type of public backlash seen in other areas where reporting is not as prevalent, including outright bans on fracking operations. Although more comprehensive disclosure may not stop all efforts to ban fracking, it can at the very least eliminate the often-used talking point that accuses producers of being too secretive, putting the ball in anti-fracking crowd’s court to prove wrongdoing, as supposed to merely suggesting it.

Regulations can deter bad investments

It is often said that the invisible hand of the market is the best way to gauge where to invest resources. This advice, like any other, is both true in some instances and false in others. It is true that market indicators are a useful tool in deciphering where the best possible investment lies with the least amount of risk, but they also ignores the human aspects of the investor. People, including company CEOs, are not machines. They are capable of making sound decisions based on the best available information, but they are also capable of ignoring that information, or reading too much into it, and deciding on a different course of action, risking people’s jobs and their money in the process. This can work out well, but it can also work out poorly, especially if there doesn’t seem to be any risk involved to the company itself. U.S. banking industry behavior just before the 2008 Great Recession is a good example of when a failure to regulate encourages bad behavior, as banks were encouraged to recklessly bundle subprime mortgages and dumped them onto investors, without the slightest worry that their bad bets might come back to bite them, to the detriment of pretty much everyone. Likewise, major players in the energy industry are also capable of catastrophically bad judgment, and it is sometimes in the industry’s best interest that these risks be avoided whenever possible, or to shield the public from possible damage if a company chooses to engage in such risk. Regulations which discourage risky or bad behaviors by either making the company pay for its own mistakes or banning them altogether can be useful in encouraging more sound investment strategies, and that is good news for everyone.

As always, these benefits must be taken with a grain of salt. The state is certainly capable of being a burden to a corporation’s success, and there are plenty of examples of government overreaching in its zeal to reign in a supposedly dangerous industry practice. Nevertheless, it is not wise to simply dismiss any perceived regulatory burden as a non-starter, as some industry players have done. Regulations, when enacted properly and involve the input of all interested parties, can often work to the benefit of all: protecting the public from a perceived danger, while also protecting the industry from its own bad judgement, ensuring a safer, more productive, and more competitive business environment for all.

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