U.S. Natural Gas Flaring Is Attracting Increased Attention
Story by Gurinder Goel, Manager, Natural Gas and Power Fuels Group
Black & Veatch’s management consulting division
New oil drilling in the Bakken shale formation of North Dakota has propelled a surge in natural gas flaring.
To the uninitiated, it may seem like a flagrant waste of resources, but it is primarily driven by economics. Companies find it more cost-effective to burn off the gas than to build infrastructure to collect it and use it. This is particularly the case in remote locations far from any pipeline network.
Aside from the issues of price and market access, there is concern that the practice in the next couple of years will also be decided on environmental regulatory grounds.
It is hard to estimate the gas price point at which flaring becomes uneconomic, since this gas is a byproduct of oil production. The oil-to-gas price ratio would be a better indicator of the economic limit for flaring. While usually volatile, the ratio historically averaged around 9:1, although the relationship began widening steadily in early 2009.
The oil-gas price ratio is now running at about 28:1, although it broke 50:1 in April 2012. High oil prices and low gas prices are inducing producers to discard gas since they get their value from oil. Over the next couple of years, as oil prices likely drop and gas prices are likely to rise, the ratio will come back down. An oil-to-gas ratio of 15:1 or lower would be an economic disincentive to flare gas.
The tip of the expected regulatory spear is the latest version of the New Source Performance Standards (NSPS) that the Environmental Protection Agency (EPA) has proposed for the oil and gas industry. The new NSPS would require that by January 2015, “green” completions will apply to all new Bakken wells to capture, rather than flare, the gas. Flaring would be permitted only as a temporary measure.
As of now, North Dakota regulators still make the call, operating under NSPS authority delegated by EPA Region 8. The question is whether EPA will want to renegotiate this delegation of authority, or will the state feel the need to toughen its stance on flaring?
World Bank data shows that U.S. gas flaring has grown rapidly over the past five years, from 78 billion cubic feet in 2007 to 251 billion cubic feet in 2011, a 223 percent increase. This rate of growth is faster than all other major gas-flaring nations, of which Russia is the largest. Other major players include Nigeria, Angola, Libya and Brazil.
Nevertheless, only a small portion of gas production is flared. The U.S. Energy Information Administration said that less than 1 percent of gas is flared from U.S. oil fields and less than 3 percent worldwide, the Associated Press (AP) reported.
The increase in U.S. flaring is driven by the increase in oil production from the Bakken shale, which is rich in associated gas. Since the Bakken is a newer production area, it has limited potential for reinjecting the gas back into the geologic formation. EIA data shows that in 2011, oil and gas companies flared more than 30 percent of the gas production in North Dakota.
Producers in North Dakota can flare gas for one year without paying taxes, royalties or penalties. Producers can also request an extension due to economic hardship associated with connecting the well to a gas pipeline.
The lack of adequate gathering infrastructure, coupled with expanding oil production, is leading large numbers of operators to gain exemptions from the flaring regulations. Industry sources say that a strict adherence to the restrictions in the current infrastructure environment could potentially increase costs by 25 percent. In North Dakota, oil makes up more than 90 percent of wellhead revenue.
The state, however, is taking another look at the tax-royalty exemption. A bill is under discussion in the state legislature that would extend the exemption if a company collects at least 75 percent of the gas at well sites, AP reported. Proposals have been made to use flared gas to produce petrochemicals, anhydrous ammonia fertilizer, compressed natural gas and for electric generation
Oil and gas companies plan to invest more than $3 billion in infrastructure to capture natural gas in the Bakken. However, the biggest obstacle in expanding the gas gathering system is land access. Since 82 percent of the land in North Dakota is privately owned, acquiring the right of way or easements across private property to lay pipeline is the biggest limiting factor. Current laws require one pipeline per easement, but state lawmakers are considering changing the legal framework to allow a quicker development of gas gathering infrastructure.