The environmental regulatory climate is dynamic, and the cost to comply with increasing environmental requirements can have a significant impact on oil and gas exploration and production operations. Identification of potential future requirements can allow operators to build environmental compliance into project designs, saving costly retrofit as new requirements are imposed. This paper describes many of the initiatives currently being considered under several major federal environmental statutes, discusses the potential cost of compliance, and examines the potential impacts of these initiatives on oil and gas supplies.
The requirements for environmental protection in the U.S. are becoming increasingly complex and costly, with the domestic oil and gas exploration and production (E and P) industry facing a wide range of federal, state, and local environmental regulations which continue to evolve and become more stringent. Over the last decade, environmental compliance costs for the E and P industry increased at a rate of 3% to 5% per year, with compliance costs estimated at $2 to 3 billion in 1990 (all cost references in this paper are in U.S. dollars). In the 1990s and beyond, environmental concerns will become increasingly more difficult to define and assess, and further controls will be more complicated and expensive. Considering only potential regulatory requirements that have already been proposed or considered as part of federal regulatory and legislative initiatives, a four-fold increase in the costs that the E and P industry must incur to comply with these requirements is possible, with state and local requirements potentially adding to these costs.
In contrast, the combination of the maturity of U.S. resources and the recent, relatively sustained, downturn in prices is driving many domestic producers out of business. For example, petroleum industry earnings in the first quarter of 1992 were down over 50% compared to the same quarter in 1991. Since the mid-1980s, U.S. well abandonments have continued to increase, averaging over 16,000 wells per year since 1985 (Figure 1). At the same time, average oil well productivity in the U.S. has continued to drop from an average of 18 barrels per day (B/D) [2.86 m3/day] in the early 1970s, to between 13 and 14 B/D [2.06-2.22 m3/day] in the late 1980s. Increased production costs associated with more stringent environmental compliance requirements can only exacerbate this trend.
Given this situation, oil and gas producers should incorporate explicit consideration of potential environmental requirements when pursuing new E and P activities and expansions of ongoing operations. Better anticipation of future regulatory requirements will assist in identifying and specifying more cost-effective compliance practices and technologies in a project's planning phase, often resulting in substantial cost savings over later retrofitting these operations when more stringent requirements are promulgated.