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THE WALL STREET JOURNAL: Energy Sector’s ‘Flaring’ Draws Crackdown

Natural-Gas Burnoff
By Oil Firms Rises 14%
Amid Remote Drilling
By SPENCER SWARTZ
September 18, 2007

London

The world’s energy industry has never been keener to tap the commercial potential of natural gas. But ironically, some nations are wasting more gas than ever before, as producers burn it off straight into the atmosphere.

A World Bank-financed study released this month found the industry burned off, or “flared,” about $40 billion of gas globally in 2006, up 14% from 2004, partly because of higher oil and gas prices. The study also found that 22 countries, including Russia and China, flare much more gas today than a decade ago, as companies pump more oil from new and more remote areas.

Flaring is a decadesold industry practice used to dispose of natural gas that is often found with deposits of crude oil but can’t easily be used for economic activities, because of a lack of pipelines and other infrastructure. The process is similar to the flame flowing from a cigarette lighter magnified a thousand times.

The World Bank says flaring accounts for just 2% of the total carbon emissions believed to help cause global warming. But that number masks the damage flaring does to local environments and the irritation it causes people with asthma and other respiratory ailments.

This is now causing serious concern in the world’s top flaring countries, Nigeria and Russia, which together flared at least $16 billion of gas in 2006, according to industry data.

Both countries say they will soon force all energy firms to stop flaring. “Such squandering cannot be tolerated,” Russian President Vladimir Putin was quoted on the Kremlin’s Web site as telling Russian state energy firms last month.

President Putin has said bigger ecological penalties and tougher demands on producers in oil-development licenses could end flaring. Analysts say they have little reason to doubt Russia’s resolve to sharply cut flaring in light of the firm manner in which the Kremlin has dealt with foreign oil companies in recent years.

Indeed, flaring has dropped sharply in recent years in countries like Norway and Canada. A stiff carbon tax, for example, implemented in the 1990s in Norway has been enough of a penalty to substantially cut the amount of gas burned off there. Even in Nigeria, long the worst flaring country in the world, big reductions have been achieved with the rise of gas-exporting projects, though it is still the largest flarer in the world alongside Russia.

Attracted by the profit potential in rising gas prices, the energy industry globally spent $56 billion from 2001 to 2005 on projects aimed at producing gas-derived consumer goods like plastics and at exporting gas, according to the International Energy Agency. Gas is also used more today for producing electricity because it burns more efficiently and pollutes less than other fossil fuels.

Russia, for example, has seen the biggest increase in flaring of any country in the past decade as its energy industry recovers from its dilapidated post-Cold War state and companies invest billions of dollars in new oil and gas production.

“It’s been difficult to reduce the overall quantity of gas flared because oil production world-wide has increased the past 20 years,” says Bent Svensson, who leads the World Bank’s Global Gas Flaring Reduction program. Global oil production last year was about 85 million barrels a day, up around 25% from 1992.

A big reason for this is that private and state firms are drilling for oil in more distant and remote places, like at sea, where no infrastructure exists to deliver the accompanying natural gas economically to markets.

Energy companies say building pipelines and other facilities to commercialize all the gas produced alongside oil can be too costly, so they burn off a lot of it from the drilling site. They also reinject some gas into reservoirs to maintain pumping pressures.

But environmentalists say energy companies simply aren’t doing enough to reduce flaring. “It’s cheaper to flare than to stop it. But these companies should be doing more. They have plenty of money,” says Hannah Griffiths of environmental group Friends of the Earth in London.

Yet government policy has helped perpetuate flaring in many instances. Nigeria has failed to offer financing for joint flaring-reduction programs, according to oil companies and analysts. The joint programs are aimed at sharing the costs between foreign companies and Nigeria’s national oil company.

The Nigerian government says it will enforce its 2008 “no flare” deadline but won’t require companies to comply by shutting any production of crude, which is often found alongside gas in Nigeria, says Olusegun Adeniyi, spokesman for Nigerian President Umaru Yar’Adua. Cutting oil output in order to reduce flaring would mean lower oil revenue for crude-dependent Nigeria.

Artificially set gas prices and state control of pipelines in many nations, like Russia, also make U.S. and European companies often unwilling to take on costly gas projects from which they are unable to recoup investments. The result often leads to big volumes of gas flared.

Despite many failed past efforts to crack down on flaring, Nigeria, Russia and Equatorial Guinea say they will impose fines by 2008 or thereafter that may amount to hundreds of millions of dollars for Exxon Mobil Corp., Royal Dutch Shell PLC and other companies if they don’t end the practice.

Nigeria and Russia have been vague about what fines might amount to, but Equatorial Guinea has threatened Exxon Mobil with a $300 million fine if it doesn’t come up with a plan to stop flaring. The government and company are discussing how the country’s new oil law, which bans flaring, will apply to Exxon Mobil, a government official says.

Shell, Exxon, Chevron Corp., and others are unlikely to meet Nigeria’s deadline despite spending billions of dollars on new gas-export projects in the West African country, executives from those companies say.

–Elena Murina and Geoffrey T. Smith in Moscow contributed to this article.

Write to Spencer Swartz at [email protected]

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