Student Post: Is natural gas just a by-product in the Bakken? One Developer says no despite historically low prices.

Our textbook authors noted that initially gas was only a by-product of oil production, and that in the common practice was for “operators [to] simply flare[] casinghead gas at the wellhead, burning it off rather than collecting it to sell or use.”[1]  The authors also related an interesting anecdote that “[m]any Houstonians can still remember driving at night to Galveston beach, 30 miles away, through oil fields so brightly illuminated by the gas flares that they could read a newspaper.”[2]

North Dakota has had a similar experience in the oil producing areas of the state, with many producers flaring off the natural gas that is coming out of the oil wells.  According to one newspaper article McKenzie County, ND, “glow[s] in the dark” because there is so much fared gas in that county.[3]  With the increased search for oil, the incidence of flaring has increased dramatically, largely due to the nature of gas and the Bakken formation itself.  In 1999, only 3% of the gas produced in North Dakota was flared, whereas in 2007, 20% was being flared.[4]  The flaring has taken off in the last five years, so that now 30% of the gas produced in North Dakota is burned off.[5]

Like our textbook authors noted, natural gas is difficult to capture because it requires specific channeling infrastructure that is not currently in place where the new production in North Dakota is happening.  Also, returning the gas into the ground is not feasible in the Bakken, because the shale formation resists having the gas put back down.[6]  And, given the current price of natural gas, many oil producers do not see the economic incentive to invest in the serious upfront costs to capture this gas.[7]  Further, current law allows producers to flare their gas for one year after production starts with no real penalties for doing so, and thereafter only imposes upon the producer the requirement to pay royalties and taxes on the flared gas.[8]  However, if the producer puts in the front costs to gather the gas, they would have to pay royalties and taxes anyway.  Further, the statute authorizes the regulators to exempt the well from the “penalty.”[9]

While all this seems like gloom and doom about how wasteful North Dakotans are (and the NYT article certainly makes us look like this), there is some good news in this gas that one company is at least pegging its hopes on.  Oneok has just opened a new gas processing facility in Western North Dakota that will bring gas in from 750 oil wells that are currently flaring their gas.[10]  The company plans to bring on two more plants that will have a same capacity to collect gas from oil producers, pressurize it, and send it to market.[11]  The company claims to have these plans despite a 10-year low in prices of natural gas of only $2.50 per thousand cubic foot.[12]  The only thing that seems to be giving Oneok some incentive is that the gas produced in the Bakken is “very liquids rich” and so the company has a more marketable type of gas that can be turned into propane, butane, and even gasoline.[13]

Even with the new plants and collection lines coming on, flaring will continue to be a large problem in North Dakota with having so many new wells coming into production.  Given the low price of gas, and the lack of incentives to the new wells to think about flaring from the start, it looks like Western North Dakota will likely continue glowing.

-John Schroeder

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[1][1] Bosselman, et al., Energy, Economics and the Environment 450 (3d ed. 2010).

[2] Id.

[3] Lauren Donovan, North Dakota’s Newest Natural Gas Plant Aims to Curb Flaring Problem, Bismarck Trib. (Jan. 20, 2012), http://bismarcktribune.com/news/state-and-regional/north-dakota-s-newest-natural-gas-plant-aims-to-curb/article_a716f46e-43b8-11e1-b99a-0019bb2963f4.html.

[4] Dave Hvinden, So Why Are All These Gas Flares Burning In The Oil Fields?, ND Dept. of Mineral Resources Newsletter, Winter 2009, at 5, https://www.dmr.nd.gov/ndgs/newsletter/winter09/PDF/So%20why_gas%20flares.pdf.

[5] Clifford Kraus, In North Dakota, Flames of Wasted Natural Gas Light the Prairie, N.Y. Times (Sept. 26, 2011), http://www.nytimes.com/2011/09/27/business/energy-environment/in-north-dakota-wasted-natural-gas-flickers-against-the-sky.html?pagewanted=all.

[6] Id.

[7] Id.

[8] N.D. Cent. Code § 38-08-6.4.

[9] Id.

[10] Donovan, supra note 3.

[11] Id.

[12] Id.

[13] Id.