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Flaring Gas: How Not to Waste a Valuable Resource

On Nov. 2-3, the Columbia Center on Sustainable Investment (CCSI) will host the 11th annual Columbia International Investment Conference, entitled “Climate Change and Sustainable Investment in Natural Resources: From Consensus to Action.” The conference, taking place one week before COP22, will offer a high-level opportunity to explore the complex challenges of the Paris Climate Agreement in light of sustainable development, the Sustainable Development Goals, and the real challenges facing developing countries within the global economy. This blog series will help to frame some of the questions and issues that will be raised at the conference. For more information about the conference and to register (for free), visit the conference website.

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By Shay Banerjee and Perrine Toledano

Every year, oil fields around the globe burn, or “flare,” an estimated 3.5 percent of the world’s natural gas supply. Such gas, known as “associated petroleum gas” (APG), is produced alongside oil and must be disposed of during the production process. This flaring, however, causes considerable damage to global atmospheric conditions and human health. Eliminating flaring would reduce CO2 emissions by as much as removing 77 million cars from the road. Moreover, flaring APG wastes a valuable non-renewable energy resource that could otherwise drive positive economic outcomes. If all APG currently subject to flaring were used for power generation, the world would enjoy an additional 750 billion kWh of electricity—more than the entire African continent’s current electricity consumption.

Rather than flaring, oil producers could re-inject the gas into the oil field or implement strategies to use the gas in local and regional power generation. They often fail to adopt this approach, however, because of technical, regulatory, and economic barriers preventing the cost-effective implementation of such utilization strategies. For instance, the amount of gas that can be re-injected into the field or utilized for on-site power generation is typically much lower than the amount of APG that a field produces. And while many countries where flaring occurs possess anemic energy access rates, pipeline projects to transport the gas to regional power generators require the securing of substantial ex ante investments and the overcoming of numerous obstacles, including the accumulation of monopoly power by the pipeline operator.

Thus in 2015, the World Bank launched the “Zero Routine Flaring” initiative to identify productive ways to reduce flaring by encouraging the utilization of otherwise flared APG. To contribute to this global effort, as well as to that promoted by the Paris Agreement obtained by COP21 in December 2015, the Columbia Center on Sustainable Investment recently released “A Policy Framework to Approach the Use of Associated Petroleum Gas.” The framework builds on 13 case studies from around the world to devise a broad and innovative policy strategy to unlock the value of APG that is currently wasted in order to improve energy efficiency, expand access to energy, and contribute to climate change mitigation, thus promoting sustainable development.

Our approach to flaring reduction centers around four key policy recommendations that in combination are designed to promote an enabling environment for sustainable investment in APG utilization infrastructure. The four recommendations are: (1) delegation of regulatory oversight to an independent agency; (2) implementation of a robust “no flare” policy; (3) utilization of carefully targeted fiscal incentives; and (4) development of a comprehensive and value chain-sensitive commercial guidance.

In our first recommendation, we find that successful flaring abatement regimes typically involve a strong, independent regulatory body to measure and report requirements, monitor flare and vent volumes, enforce regulations, and compel the payment of penalties. We find the regulatory environment in Texas to be “state-of-the-art” in this respect, as the state utilizes two independent agencies to regulate flaring that in combination serve as a credible counterbalance to oil and gas interests. Conversely, in Nigeria, the enforcement of anti-flaring regulations is lax, largely because the enforcement agency is controlled by the same entity that operates the state owned oil company.

We recognize, however, that use of a fully independent regulator is often not feasible for financial or logistical reasons. In such cases, a non-independent regulator can take positive steps to encourage utilization by establishing itself as a credible financial partner to potential investors.

For example, Sonangol, the state-owned oil company in Angola, is widely regarded for never defaulting on its equity obligations, a reality that has contributed to its successful implementation of multiple APG utilization projects, particularly since the end of the civil war. (Unfortunately, when mobilized more recently in other policy contexts, the financing mechanisms used to ensure these positive results for APG have become less transparent, with fewer controls put in place on their use. This has enabled abuse of such mechanisms for corrupt purposes).

In our second recommendation, we argue for a robust prohibition on flaring activities within a country, subject to certain exceptions. In certain circumstances, flaring will be necessary for safety reasons, and for these instances the regulator should have in place a system for issuing flaring permits and ensuring that such flaring occurs in the most environmentally friendly manner possible. The Directive 060 framework implemented in Canada is a good example in this regard.

In our third recommendation, we outline a general fiscal strategy for governments to incentivize the optimal utilization of otherwise flared APG. Here, we find that strictly enforced penalties, combined with a robust “No Flare” policy, will properly internalize the negative externality caused by flaring. Thus, utilization strategies that exclusively benefit the oil company, such as on-site power generation, should not be subsidized. Where the gas is being utilized to produce a wider social benefit—such as increased energy access—the government may decide to appropriate public funds for such activities.

Our fourth and final recommendation calls for regulatory guidance that is sensitive to the particular commercial and geopolitical environment in which the flared APG is produced. The value chain for utilizing and marketing natural gas is quite complex, and the particular utilization strategies available will vary depending on the chemical composition of the gas, location of the field, volume of APG produced, and market conditions in the country.

For example, we find that on-site power generation is particularly attractive for a country like Russia, where the price of electricity sourced from the grid has risen substantially in recent years. Conversely, in countries such as Iraq or Nigeria, where a substantial portion of the population does not have access to energy, we recommend a reformed approach to domestic gas pricing that disincentivizes the use of APG for augmentation of the country’s power generation capacity. As the framework discusses, comprehending the particular environment in which a country’s flaring occurs is key for regulators seeking to attract investors to gas utilization projects.

Promoting utilization as a replacement for APG flaring is a necessary step for achieving Sustainable Development Goal 13 on climate action and moving towards implementation of the Paris Climate Agreement. However, in the absence of an enabling regulatory and policy environment, companies will be unwilling to commit the financial resources necessary to complete utilization projects. We hope that the multi-faceted strategy outlined in the framework is a step in the right direction and encourages countries to address any lingering institutional and regulatory issues standing in the way of progress.

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