American Oil and Gas Reporter - August 2018 - 36

Oil and gas producers have seen their
steel costs jump 25 percent, relates Liaison
Committee Chairman Mike Elyea, senior
vice president of Burk Royalty Co. in Wichita Falls, Tx. Other participants at the
meeting indicated that service companies
were seeing their costs increase too.

back on that because they can go in and
say legitimately that, while the policy
may make sense generally, it makes no
sense for this industry," he suggested.
"Eventually, there is going to be a problem
and then there is going to be a huge lag
to catch up, but right now people don't
understand our problem because this
country is making more oil than it has
since the 1970s."
Conservation Measure?
In light of the country's production
surge, Mike Cantrell of Cantrell Investments LLC suggested a contrarian might
deem the steel constraints a conservation
measure.
"The price or production of oil always
has been controlled by somebody, whether
it was Rockefeller, the Texas Railroad
Commission, the Oklahoma Corporation
Commission or the Organization of Petroleum Exporting Countries," he considered. "I'm not saying I support it, but
this is, in effect, a conservation measure
to limit the amount of steel that comes
in. Don't hang me an effigy, but there is
an upside to that."
"We are kind of running at open choke,
huh?" posed Permian Basin Petroleum
Association President Ben Shepperd.
"That is exactly right," Cantrell responded.
Nevertheless, maintained Liaison Committee Chairman Mike Elyea, senior vice
president of Burk Royalty Co. in Wichita
Falls, Tx., oil and gas producers definitely
have noticed the difference. "The long
and short of it is, our steel prices are up
25 percent," he said.
"You are going to see it indirectly in
service costs, too," warned Association
of Energy Service Companies Executive
36 THE AMERICAN OIL & GAS REPORTER

Vice President Kenny Jordan. "All the
well servicing contractors have gotten
notice that wire rope products are going
up 25 percent immediately, and perforating
guns increased 25 percent, too."
Independent Oil and Gas Association
of West Virginia Executive Director Charlie
Burd suggested that the Trump administration's efforts to help the steel industry
nevertheless might undermine its efforts
to assist coal producers. "This country's
coal industry supplies almost all the metallurgical coal China uses to build the
pipe it sends back to us," he observed.
"If China does not need to build as much
pipe to supply us, we will not need to
send as much coal across the ocean. Metallurgical coal is where the money is
really made. It is a double-edged sword."
A Big Pile Of Coal
A prime example of the executive
branch's intent to support the coal industry
is its efforts to invoke a provision in the
Defense Production Act of 1950, Fuller
commented. "It passed during the Korean
War and allows the government to take
certain steps to protect national security,"
he detailed. "The administration is arguing
that there is a national security issue associated with having coal and nuclear plants
as reliable components of the electric grid,
and it has shifted the issue to the National
Security Council, where the feedback tends
to be a vague, undefined concern about
cybersecurity and pipeline systems."
Although natural gas producers have
an interest in arguing against market distortions that weaken demand for their
product, Fuller suggested midstream companies must take the lead on the issue.
"The pipelines have to explain how
their cybersecurity is sound, how the
power plants' backup-backup-backup
processes work, and show how well gas
has stood up during events such as hurricanes and polar vortexes," he advised.
Unfortunately, Fuller conceded, policymakers unfamiliar with the midstream
sector often are bewildered by its jargon.
"People start getting lost in the issue of
firm versus intermittent capacity, who
gets what, and in what order it goes out,"
he acknowledged. "If you are not familiar
with all that, it is a complicated conversation versus a simple pile of coal in the
backyard that you drag into the power
plant and burn."
OOOOa Bifurcation
Another subject the Liaison Committee
dealt with was the dynamics of EPA's efforts to revise its Subpart OOOOa New
Source Performance Standard for methane.
Fuller noted that EPA had sent the Office
of Information and Regulatory Affairs a

proposal on the matter that was likely to
be published later in the summer.
According to Fuller, the proposal probably will bifurcate the regulation such
that one aspect will focus on changes to
the methane regulation-such as its lack
of a low-production well exclusion, the
structure of a fugitive emissions program,
professional engineering certification requirements, and such-and another aspect
will address whether the rule also should
regulate volatile organic compounds instead of methane.
"The big problem with the methane
rule is that it opens an existing source
pathway that is really problematic if there
is no framework for low-production wells,"
Fuller assessed. "We have been urging
EPA to reinstitute a low-production well
provision, but to also reinstate an offramp as wells decline. We also encourage
EPA to look into using the stripper well
definition in the tax code to determine
what constitutes a low-production well
because that is a known standard."
"That methane rule was one of the
worst things the former administration
released when it was putting out its midnight regulations," Tintera assessed. "Virtually every state asked EPA to reconsider
its methane regulations and exempt stripper
wells, and EPA did exactly the opposite.
It was a clear example of a lack of due
process because EPA did not even respond
to that issue."
According to Fuller, those dynamics
were driven by an Environmental Defense
Fund study that characterized small wells

Policymakers unfamiliar with the midstream sector often do not understand
its jargon, warns IPAA Executive Vice
President Lee Fuller. He warned that
would be a consideration in conversations about electric power reliability because "a big pile of coal" is much easier
to understand than explanations about
ﬁrm versus intermittent capacity.

American Oil and Gas Reporter - August 2018

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