Bakken Natural Gas Flaring: A Giant Step Backward or an Opportunity in Disguise?

David Fessler
by David Fessler, Energy & Infrastructure Strategist

Bakken Natural Gas Flaring: A Giant Step Backward or an Opportunity in Disguise?

by David Fessler, Investment U Senior Analyst

Friday, September 30, 2011

In North Dakota, the Bakken oil shale field has created tens of thousands of jobs, a resulting housing shortage-driven boom, the lowest state unemployment in the country and sorely needed tax revenue.

But it also created something else, a problem that has nothing to do with oil. It's all due to a process known as natural gas flaring. (See the typical flare picture below.)

Natural Gas Flaring

Most of the oil wells also produce natural gas. When the mixture comes to the surface, the oil is pumped to the surface and stored in tanks.

The natural gas is separated from the oil. Most of the natural gas is sent through pipelines to processing plants. Some Bakken producers simply send it up a vertical pipe with an igniter at the end and burn it...

The Problems With Natural Gas Flaring

While natural gas flaring is bad for the environment, simply venting the raw gas without burning it is even worse. Natural gas is made up largely of methane, and that's far more onerous than carbon dioxide.

How much of it gets burned? According to a recent article in The New York Times, about 100 million cubic feet per day (Mcf/d). That's enough energy to heat 500,000 homes.

It can't directly generate electricity, since it hasn't been processed or cleaned of impurities, as is normally done. (If you missed it, I recently wrote an article about natural gas processing.)

Burning that much natural gas spews about two million tons of carbon dioxide into the atmosphere annually. According to the Times, that's as much as 384,000 cars, or one moderately sized coal plant, throw off.

The 100 Mcf/d flared equates to 30 percent of the natural gas produced in the Bakken. No domestic field in the United States flares anywhere near that much. Established oil and gas fields already have a network of pipelines to gather and process both the oil and gas.

Not so in the Bakken. Its rapid development has led to a similarly rapid rise in flaring, as pipelines and processing plants have lagged behind.

Incredibly, in the United States, there are few state regulations (and no federal regulations) that limit or prohibit the practice of flaring.

North Dakota is on Top of the Flaring Problem

After reading the Times article, which called North Dakota's flaring "a step backward for a domestic energy industry," I decided to do some investigation of my own.

I spoke with Justin J. Kringstad, the Director of the Pipeline Authority for the Oil and Gas Division of North Dakota's Department of Mineral Resources. It turns out that North Dakota isn't just turning a blind eye to the flaring problem...

"We already have 16 natural gas processing plants in the state. They have a combined capacity to process nearly 800 million cubic feet per day (Mcf/d) of raw gas.

"That represents a tripling of gas processing capacity in just the last five years. By the end of 2012, gas processing and transport capability will rise to just over 1.1 billion cubic feet per day."

Impressive, especially for an area that wasn't even producing much oil five years ago. Kringstad said the level of investment in natural gas processing and gas transportation systems over the next two years would be roughly $3 billion.

Some Oil Companies See a No-Brainer Natural Gas Value Play

As natural gas becomes more popular as a transportation fuel, its price will begin to increase. One of the companies banking on that is Hess Corporation (NYSE: HES). It's more than doubling its natural gas processing capacity at its Tioga facility from 120 Mcf/d to 250 Mcf/d by the end of next year.

Whiting Petroleum Corporation (NYSE: WLL) doesn't believe natural gas prices will remain this low for much longer, either. In addition to Hess' efforts, it and others are making significant investments over the next several years to build plants and pipeline networks to gather and clean the gas and sell it in Midwest markets.

Whiting says the gas from the Bakken contains large amounts of propane and butane, valuable gases that can only be had by processing raw natural gas and separating them from the methane.

Whiting has reduced flaring to 20 percent of all of its wells, from 80 percent when it first started drilling in 2007. Its goal is to further reduce flaring as it brings more processing capacity online. Eventually, it wants to capture all the natural gas it produces.

Environmentalists are anxious for the additional processing capacity. The 5,000 wells already in place are expected to increase to nearly 50,000 in the next 20 years. It would be a shame to waste all that gas while having to import crude oil.

Both Whiting and Hess's shares have been hammered down to very low levels, as they have had their share of weather-related problems. Both expect to ramp back up to higher levels of production next year. They'll both benefit even more as natural gas prices continue to firm. So will their shareholders.

Good investing,

David Fessler

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