A recent article at the Oil & Gas Financial Journal takes a very interesting look at the issue of natural gas flaring in the Bakken oil fields. For those who don’t know, gas flaring takes place during oil well drilling and production. The gas is a natural by product of oil extraction that is released from the shale along with the oil.
Releasing this gas into the atmosphere is considered too environmentally destructive, so the gas is burned at the wellhead instead, which while obviously very wasteful, it preferable from an environmental standpoint than releasing the actual gas itself. Currently, about 32% of natural gas released from oil production in the Bakken is flared, according to the North Dakota Industrial Commission.
But there’s another major reason for gas flaring:
The second reason for flaring is economic. If you drill a well for oil and start production, you can capture the oil in tanks and transport it to market in trucks long before pipeline infrastructure is available. Oil is much easier to store and transport than gas. Any associated gas produced from the well is not feasible to capture and transport to market until a gathering pipeline infrastructure is in place. The companies that invest in gas gathering pipelines and the gas processing infrastructure necessary to treat the natural gas before transporting it to market will only make such an investment once they know how much associated gas is being produced. The answer to that question is not easy to predict until oil production gets underway. So if you ban flaring (assuming that venting is verboten) then you would be banning oil production and you would never know if the associated gas could be recovered because you would not be drilling the well in the first place.
Flaring is therefore allowed (usually through a permit application to the State), in order to burn associated gas that has no route to market. This allows oil production to start, revenue to flow, taxes and fees to be paid, and gas volumes to be assessed by infrastructure companies.
Unfortunately, the ongoing flaring of a valuable resource can again be blamed on lack of infrastructure in the Bakken region. Oil companies have been struggling to get the more profitable oil to market, much less deal with capturing and transporting the natural gas. Recent depressed gas prices no doubt play a role in that decision as well. But, flaring is almost non-existent in Texas, which is also doing a lot of oil shale development, due to an existing infrastructure to capture the natural gas.
Bakken flaring occurs during the time lag between when an oil well starts producing and when gas gathering system infrastructure is installed. North Dakota State regulations allow flaring to occur during the first 12 months of production without penalty. After that, producers need to get an exemption for flaring that requires them to justify the “economic feasibility” of flaring based on the cost of connecting to the nearest gas pipeline being greater than the return they would get by selling the gas. If the exemption is not granted, then the producer has to pay royalties and taxes on the flared production.
When we previously covered Bakken gas production takeaway in “Border Wars – Will Bakken Producers Muscle Out Canadian Gas?” we learned that there is considerable natural gas takeaway capacity in North Dakota via the Northern Border and Alliance (wet gas) interstate pipelines and WBI Energy Transmission. These pipelines provide delivery access to Midwest markets such as Chicago. The issue with associated gas in the Bakken is therefore not pipeline takeaway capacity but rather with the gathering pipeline infrastructure and gas processing capacity required to get wellhead gas processed ready for shipping on the interstates.
So, although pipeline infrastructure exists nearby, the collection apparatus and processing capacity does not. Again, the Bakken faces the usual challenges of reduced infrastructure and workforce limitations to begin to build this out. Winter and spring working conditions also play a role, as does the distributed nature of the frack drilling taking place.
New gas-processing plants are in the works which should reduce the need for flaring, but as always with Bakken oil production, the rapid oil field development and rising production are outpacing related infrastructure. For this reason, some gas flaring is probably inevitable as development continues. But, companies would be wise to anticipate increasing environmental concerns about flaring, as well as rising gas prices in the future.
Burning off nearly one third of released natural gas is not a tenable model for development. Bakken oil companies should face this fact and start planning accordingly, or they will be forced to play catch up in the future, either by state or federal regulators, or by simple economics.