Oil and Gas Lawyer Blog
The fight between Williams and Exco over whether Exco can continue to flare gas from its wells has moved to District Court in Travis County.
Exco filed an application with the Texas Railroad Commission for permission to flare gas from more than 130 Eagle Ford oil wells on the Briscoe Ranch. Exco bought the wells from Chesapeake. Williams protested Exco’s application. It owns the gathering system, which it purchased from Mockingbird Midstream, at that time an affiliate of Chesapeake. Under RRC Rule 32, a company must obtain a permit to flare gas. After a hearing, the administrative law judge recommended that the permit be granted, and the RRC granted the permit.
Exco’s wells had been connected to the Williams gathering system and dedicated to the gathering contract between Chesapeake and Mockinbird Midstream when the two companies were affiliated. Exco and Williams disputed whether the Exco wells were still under that contract. Exco was in bankruptcy, and that dispute was in the bankruptcy court.
Exco argued that it would lose money if it had to sell gas on the terms offered by Williams. Exco testified, and the ALJs found, that “utilizing the Williams gas gathering system is unecomical at this time, resulting in a calculated net loss of $146,305,496.24.”
In its appeal Williams argued that the RRC has applied the wrong test to determine whether flaring would be uneconomical. The RRC compares only gas sales revenues to the cost of producing the gas, when the proper test is to compare the cost of producing the gas to the sale of oil and gas revenues. In other words, even if Exco had to sell its gas at a loss, it still should not be allowed to flare as long as the revenue from sales of oil is more than enough to cover the loss. The sale of gas at a loss should be considered a cost of producing the oil, and gas should not be “wasted” even if selling the gas reduces the oil revenues. If operators can flare whenever it is more economical than selling the gas, there would be no reason for a rule prohibiting flaring.
A copy of Williams’ petition can be seen here: Wms Operating v RRC