Did This Proposed EPA Regulation Put Oil and Gas Stocks on Notice?

By Markets Fool.com

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Coal isn't the only energy source being targeted by the EPA's climate change agenda. Regulations proposed earlier this year by the agency and the Obama Administration will take aim at methane emissions from the oil and gas sector. While most natural gas producers will escape relatively unscathed, pipeline operators won't be so fortunate.

Knowing how costly the EPA's carbon dioxide-slashing Clean Power Plan will be to coal power plants, investors may be wondering how the latest proposed regulations affect pipeline operators such as Williams Partners LP and Kinder Morgan , which own thousands of miles of natural gas pipelines. Will this create a headache or an opportunity?

Clean Power Plan vs. Methane Emissions
When the U.S. Environmental Protection Agency announced the Clean Power Plan in summer 2014, the agency's intentions were obvious. The Clean Power Plan aims to reduce by 30% the amount of carbon dioxide emissions from the power sector by 2025 compared to levels reached in 2005. Since coal power plants accounted for 28% of total carbon dioxide emissions in the United States in 2013, the EPA was clearly singling out the energy source.

It was a wise move. After all, with natural gas stockpiles soaring the EPA had a golden opportunity to turn up the pressure on dirty coal and make substantial progress with its climate change agenda. But carbon dioxide is just one of the major greenhouse gases created from human activities. You don't need a wild imagination to see that it was only a matter of time before the agency moved onto methane, the second highest priority pollutant. And that's exactly what happened.

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Earlier this year the Obama Administration and EPA announced ambitious plans to slash methane emissions from the oil and gas sector 40% to 45% from 2012 levels by the year 2025. Natural gas and petroleum systems accounted for 29% of total methane emissions in the United States in 2012 and are expected to rise 25% by 2025 without intervention, so the newly proposed goals represent a significant turnaround.

This summer the EPA will begin to officially solidify rules for both sets of regulations, which look pretty similar on the surface.

Clean Power Plan

Methane Emissions Targets

Greenhouse Gas Targeted

Carbon Dioxide

Methane

Industry Affected

Power Generation

Oil and Gas

Energy Source Most Affected

Coal (28% of all CO2 emissions in 2013)

Natural Gas (23% of all methane emissions in 2012)*

Baseline Year

2005

2012

Reduction Goal

30%

40%-45%

Goal Deadline

2030

2025

Current Progress (2013)

10% reduction, or one-third of goal

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*Natural gas and petroleum systems accounted for 29%. Source: EPA, Whitehouse.gov

However, dig a little deeper and you'll notice some major differences between the two proposed regulations, especially when it comes to implementation, execution, and net effect on the targeted industries.

The Clean Power Plan targets carbon dioxide emitted from combusting fossil fuels. Unless power plants attempt to capture and store the greenhouse gas, there is essentially no way to avoid emissions. That puts coal in an awkward and helpless position.

By contrast, the largest source of methane emissions is not the combustion of fossil fuels, but rather leaks from natural gas wells, pipelines, and distribution infrastructure. That makes sense considering methane is the largest component of natural gas. It also means that reducing methane emissions from leaky pipelines will allow more optimal monetization of natural gas assets. In other words, more natural gas will make it from a drilled well to an end market at the other end of a pipeline.

That's good news for Williams Partners and Kinder Morgan in the long run, but a heavy component of the new regulations will focus on monitoring methane leaks from pipelines with remote sensors. Upfront costs to install monitoring equipment on thousands of miles of pipelines could become overwhelming relatively quickly.

What's at stake?

Both Williams Partners LP and Kinder Morgan have extensive pipeline assets, although the latter (also the third largest energy company in North America) owns substantially more.

Pipelines

Capacity (cubic feet per day)

Williams Partners LP

11,600 miles

11.2 billion

Kinder Morgan

68,000 miles

One-third of total American consumption

Source: Company disclosures.

Both companies have also discussed the potential need to install additional methane leak detection systems to their pipelines under pending legislation from the Pipeline Safety Act of 2012, so investors can't say they weren't warned. Kinder Morgan shareholders even attempted to get ahead of the issue by holding a vote to require the company to file a report on methane leaks from its assets, but the proposal only garnered 18% approval.

Unfortunately, even if shareholders knew the extent of pipeline leaks, it's too soon to determine what it would cost to install leak detection systems across each company's holdings. Newer pipelines are constructed with added safety and monitoring technology, while older pipelines could be lacking leak detection systems. Investors will likely be hearing a lot more on the subject from management in 2015 as the rules are finalized.

Even without hard numbers, you're probably wondering, "Is it really worth the extra cost? How much natural gas can be saved from reducing methane leaks?" Actually, a lot. The EPA believes the rules can save up to 180 billion cubic feet of natural gas per year by 2025. That's equivalent to 4% of all natural gas used in American homes in 2013, or equivalent to the annual capacity of the anticipated Constitution Pipeline being built by Williams Partners LP to move natural gas from the Marcellus Shale. In other words, investors should cheer the new rules.

What does it mean for investors?
Unlike the Clean Power Plan, the newly proposed set of regulations aimed at reducing methane emissions up to 45% by 2025 compared to 2012 levels is not an attempt by the EPA to squeeze natural gas players. While retrofitting existing pipelines with remote monitoring sensors will represent an additional cost for the industry in the near term, reducing methane emissions will be a large net positive for oil and gas stocks in the long run. Fewer methane emissions will lead to more profitable natural gas production and distribution. There's no reason to worry, although investors will want to keep an eye on the proposals officially released by the EPA later this year.

The article Did This Proposed EPA Regulation Put Oil and Gas Stocks on Notice? originally appeared on Fool.com.

Maxx Chatsko has no position in any stocks mentioned, although he did accidentally leave a heating vent open in his unfinished basement last month, which resulted in a gas bill that was 3x his monthly average. So he knows how costly leaks can be.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.