279 privatesector P U B L I C P O L I C Y F O R T H E NUMBER NOTE 2004 Gas Flaring and Venting OCTOBER Franz Gerner, A Regulatory Framework and Incentives for Gas Utilization Bent Svensson, and Sascha Djumena Every year oil producers flare and vent gas equivalent to the combined gas consumption of Central and South America. Africa flares Franz Gerner (fgerner@worldbank.org) and vents gas equivalent to half its power consumption. To reduce is an energy specialist, this practice, governments need to develop and enforce an Bent Svensson appropriate legal and regulatory framework. They need to reform the (bsvensson@worldbank.org ) a program manager, PRESIDENCY gas market, getting rid of subsidies for competing fuels and making and Sascha Djumena room for private operators to develop gas infrastructure. And they VICE (sdjumena@worldbank.org) a senior energy specialist, need to avoid tax and royalty systems that discourage operators from with the World Bank using the gas associated with oil production. Group's Oil and Gas Policy Division. Most developing countries that produce oil also continent and more than twice that of Sub- DEVELOPMENT flare and vent large volumes of associated gas, a Saharan Africa (excluding South Africa). While blend of hydrocarbons released when crude oil the value of gas differs in every market, exporting SECTOR is brought to the surface. This practice of burn- the volumes flared and vented annually to U.S. ing gas or releasing it into the atmosphere not or European markets today would fetch around only harms the environment, including by US$20 billion (based on a natural gas price of PRIVATE adding significantly to greenhouse gas emis- US$4 per million Btu, or British thermal units). sions. It also deprives developing country con- Developing countries account for more than sumers of an energy source that is cleaner and 85 percent of gas flaring and venting, with often cheaper than others available and reduces Nigeria, Iraq, and the Islamic Republic of Iran GROUP potential tax revenue and trade balances. each flaring or venting 10­20 bcm of associated The World Bank estimates the annual volume gas annually (figure 1). The Russian Federation BANK of natural gas being flared and vented worldwide flares about 16 bcm a year. Conversely, the uti- at about 110 billion cubic meters (bcm), enough lization of associated gas tends to be low in devel- to provide for the annual gas consumption of oping countries, as shown by the volume of gas Central and South America or that of Germany flared and vented relative to oil production. It is WORLD and Italy. The gas flared annually in Africa (37 particularly low in Cameroon, Equatorial Guinea, bcm) could produce 200 terawatt-hours of elec- and Iraq, which flare or vent 31­61 cubic meters THE tricity, about half the power consumption of the of associated gas for every barrel of oil produced. G A S F L A R I N G A N D V E N T I N G A R E G U L A T O R Y F R A M E W O R K A N D I N C E N T I V E S F O R G A S U T I L I Z A T I O N Figure Flaring and venting per barrel of oil reveals some large utilization capacities 1 Volume of gas flared and vented, 2003 Cubic meters per barrel Billions of cubic meters of oil produced 20 70 60 16 50 12 2 40 8 30 20 4 10 0 0 Iraq of y Nigeria States Federation Rep. Algeria Angola Guinea Gabon Tobago Indonesia Norwa Cameroon KingdomAzerbaijan United and Islamic United Russian Equatorial Iran, Trinidad Source: World Bank data. In contrast, gas utilization is much higher in such ing, including reinjecting associated gas into oil countries as Norway, the United States, and the fields and developing infrastructure to export United Kingdom, which flare or vent less than 2 gas or supply domestic markets. cubic meters for every barrel of oil. Flaring and venting is an important safety Regulations on flaring and venting measure at oil production facilities, safely dispos- Another recent study investigated the role of ing of gas during emergencies, power and equip- regulation in gas flaring and venting in 44 oil- ment failures, or other upsets in oil production producing countries (GGFR 2004a). It found that might otherwise pose hazards to workers or that most developing countries in the group nearby residents. But in most oil-producing lack efficient, effective regulations on flaring developing countries the practice goes far and venting. And in many of these countries beyond normal operational and safety levels. institutions have inadequate capabilities and In theory, the economics of associated gas overlapping responsibilities, and companies dictate that operators will reduce flaring and that are supposed to be regulated are often venting until the marginal costs of gas utilization themselves responsible for regulatory functions. in a field exceed the marginal benefits. But The biggest problem in most developing many other factors bear on operators' decisions countries is the lack of clear and transparent about what to do with associated gas. A recent operational processes and efficient regulatory study identified three main barriers to its uti- procedures. Operational processes, designed to lization: lack of an efficient regulatory frame- limit the health, safety, and environmental work, poor access to local and international impacts of flaring and venting gas, typically energy markets, and financing constraints for include required burn technologies and prac- projects that reduce gas flaring (GGFR 2002). tices for flaring, limits on the timing and duration Governments can help reduce flaring and of flaring, guidelines on the location of flaring venting in developing countries by increasing its stacks, and limits on smoke, heat, and noise gen- opportunity costs and by creating a legal, regu- eration. Regulatory procedures include those for latory, and financial environment that encour- approving flaring and venting permits, monitor- ages operators to utilize gas. Operators can also ing flaring and venting volumes, and enforcing help, by adopting best practices in oil produc- operational standards. Where effective opera- tion and by evaluating all alternatives to gas flar- tional processes and regulatory procedures are lacking, operators tend to follow their own oper- subsidies for competing energy sources (oil, ational practices, often based on vague refer- coal, nuclear, hydropower), which lead to low ences in production contracts to international prices for competing fuels. best practices for oil production. But in many oil-producing countries the per- ceived value of associated gas has changed with Contractual rights to associated gas the rise in international natural gas prices since Oil production contracts affect the volume of gas the early 1970s and as economic and budgetary that is flared and vented through provisions gov- pressures have led governments to abolish energy erning the rights and obligations of operators and subsidies. Higher gas prices have encouraged 3 governments with respect to associated gas. While many governments and companies to develop gas contractual provisions vary among developing infrastructure,eventuallyprovidingopportunities countries, most contracts recognize that opera- to market associated gas domestically or interna- tors can use associated gas in their oil field opera- tionally. Some oil-producing countries, such as tions to optimize oil production, by reinjecting Algeria and the Arab Republic of Egypt, have the gas into fields or using it to generate power or developed domestic gas markets and earmarked fuel equipment. But their right to sell associated a substantial share of domestic production for gas to third parties has traditionally been con- export. Even so, many operators in developing strained by "preemptive rights," which give the countries continue to view associated gas, and the host government exclusive rights to associated gas requirement to develop gas infrastructure, as a not used for field operations, often at no cost or a hindrance to increasing oil production. greatly reduced price. Yet governments and state- owned utilities in developing countries often lack Financing and incentives the financial means or technical know-how to Fiscalincentivescandomuchtoreduceflaringand build the gas networks needed to use the gas. venting.Suchincentivesastaxes,duties,royaltypay- Although many of these traditional contrac- ments, and the government share in production tual arrangements have been modified in recent sharing contracts can directly affect gas flaring and years, preemptive rights are still common in venting or indirectly affect the practice by promot- many developing countries. ing gas production and the development of gas markets and networks. But fiscal incentives tend to Energy markets and prices be effective only if they are sufficiently large com- Where operators have the right to sell associated pared with the overall value of oil production. gas, they will decide in favor of that option rather Traditionally operators tended to look at the than flaring or venting only if they have access to economics of associated gas in isolation from oil domestic or international energy markets and if production. But some operators have adopted a energy prices are favorable. Many developing more integrated approach in the development countries lack both a domestic gas market and the of new oil fields, determining the economics of infrastructure (liquefied natural gas facilities, associated gas jointly with those of oil produc- export-oriented pipelines) for selling associated tion. Flaring and venting of associated gas is con- gas in international markets. Moreover, domestic sidered a negative externality of oil production, sales are often hindered by distorted energy pric- and the costs of this externality are taken into ing, monopolistic behavior by vertically inte- account in assessing the viability of an oil field. grated state-owned utilities, and lack of a Other operators as well as regulators may also transparent legal and regulatory framework allow- adopt this approach. ing third parties to build and own a network for Still, projects aimed at reducing gas flaring selling gas to industries and power generators. compete with other projects for major oil com- In many developing countries the relatively panies, so host governments will need to enact low financial returns developers can expect policies and regulations that increase their from investing in the construction of a gas net- financial attractiveness. A large share of such work have undermined the prospects for devel- projects are located in some of the least credit- oping a gas market. Part of the problem is often worthy countries, where commercial financiers G A S F L A R I N G A N D V E N T I N G A R E G U L A T O R Y F R A M E W O R K A N D I N C E N T I V E S F O R G A S U T I L I Z A T I O N are unwilling to take the full commercial risk. tic or international gas markets. The measures Smaller international companies and some included establishing an efficient legal and regula- national oil companies may have difficulties self- tory framework, reforming and restructuring natu- financing or borrowing from private capital ral gas markets, allowing private participation in the markets for these projects. Since the projects development of gas infrastructure, and creating viewpoint will reduce greenhouse gas emissions and thus financial incentives that encouraged operators to have an element of global public good, they may utilize associated gas. Equally important, govern- need to be evaluated in a global context, with ments, regulators, and operators collaborated is an open forum to concessional financing considered in this light. closely in developing policies and strategies that encourage dissemination of One possible source of financial incentive for were consistent with the country's resource man- public policy innovations for projects that reduce gas flaring is carbon credits agement and environmental objectives and the private sector­led and under the Kyoto Protocol's Clean Development operators' objectives of ensuring that projects were market-based solutions for Mechanism. Such countries as Algeria and commercially viable and did not jeopardize future development. The views Indonesia are preparing methods for measuring oil production. published are those of the reductions in carbon emissions and building No single approach to reducing flaring and authors and should not be institutional capacity to establish eligibility for venting is best for all countries. Every developing attributed to the World trading carbon credits with industrial countries. country has distinct characteristics--in its legal, Bank or any other affiliated political, and institutional framework and in its organizations. Nor do any of A global standard oil production--and thus needs to develop its the conclusions represent Voluntary standards, though legally nonbinding, own mix of regulations, energy market reforms, official policy of the World can also play an important part in reducing gas flar- and other measures. Bank or of its Executive ing and venting in developing countries. In May Directors or the countries 2004 the Global Gas Flaring Reduction Public- they represent. Private Partnership endorsed a voluntary standard for reducing global gas flaring and venting, devel- Note To order additional copies oped by operators, governments, and nongovern- 1. Besides the World Bank, the partnership includes contact Suzanne Smith, mental organizations (GGFR 2004b). Aimed at the governments of Algeria, Angola, Canada, Chad, managing editor, pushing the oil industry beyond prevailing practices Room F 4K-206, Ecuador, Equatorial Guinea, Indonesia, Nigeria, Norway, in many countries, the standard focuses on reduc- The World Bank, the United States, and the region of Khanty Mansijsk in the 1818 H Street, NW, ing barriers to the utilization of associated gas in Russian Federation. It also includes oil companies (BP, Washington, DC 20433. developing countries. It emphasizes collaboration ChevronTexaco, ENI, ExxonMobil, Norsk Hydro, Shell, among stakeholders to achieve reductions by: SNH, Sonatrach, Statoil, and Total) and the Organization Telephone: Encouraging an integrated approach, includ- of Petroleum Exporting Countries (OPEC). The partner- 001 202 458 7281 ing developing markets and infrastructure, ship started operating on January 1, 2003. For more infor- Fax: commercializing associated gas, strengthen- mation, visit http://www.worldbank.org/ggfr. 001 202 522 3480 ing regulations, and trading carbon credits. Email: Providing a framework for governments, References ssmith7@worldbank.org companies, and other key stakeholders to GGFR (Global Gas Flaring Reduction Public-Private consult with one another and take comple- Partnership). 2002. "Report on Consultations with Stake- Produced by Grammarians, mentary actions. holders." World Bank­GGFR Report 1. Washington, D.C. Inc. The standard is now being implemented by ------. 2004a. "Regulation of Associated Gas Flaring members of the partnership, which covers more and Venting: A Global Overview and Lessons from Printed on recycled paper than 70 percent of global flaring and venting.1 International Experience." World Bank­GGFR Report 3. Washington, D.C. Lessons for developing countries ------. 2004b. "A Voluntary Standard for Global Gas Countries that have substantially reduced flaring Flaring and Venting Reduction." World Bank­GGFR and venting--such as Canada, Norway, the United Report 4. Washington, D.C. Kingdom, and the United States--introduced a combination of regulatory and nonregulatory measures and their operators had access to domes- T h i s N o t e i s a v a i l a b l e o n l i n e : h t t p : / / r r u . w o r l d b a n k . o r g / P u b l i c P o l i c y J o u r n a l