For cattle rancher Vawnita Best, the struggle by North Dakota regulators to keep up with the oil boom strikes close to home: She can see the natural-gas flares of an oil well from her front porch.With natural gas prices depressed due to gas production in the Marcellus Shale in Pennsylvania, and with oil prices over $100, the economics push for pumping oil as fast as you can and not waiting for, or investing in gas infrastructure. So the companies aren't investing in the required infrastructure to collect the gas, and they aren't paying royalties on the flared gas, even though they are supposed to. Now I have a few inherent biases toward the shale plays, and there are explanations for each action thatplay right into those. For one, is it worth investing in the gas infrastructure if the well field is going to peak relatively quickly? Why not flare off the low-priced gas and pump as much high-priced oil as you can? It is apparent that the state of North Dakota is mainly interested in as much oil production with as little environmental protection as possible. Might as well flaunt the rules as long as they do nothing. As for the royalties, there are two very plausible explanations for that. 1. Oil companies will screw over landowners every chance they get. 2. The companies are pumping as much as they can to keep rolling their debt and getting the cash to drill more, so they don't have the free cash flow to pay the gas royalties. Considering the price of oil, number 1 seems more likely, but this story might point toward number 2. Whichever it is, we'll be finding out in the near future whether the shale oil is as good as its proponents claim, or whether it was a temporary blip on the long slow decline of the oil era.
"It's been flaring for nearly a year," she said amid the rolling hills of her Elkhorn Creek Ranch. "It's absolutely ridiculous to be so wasteful," she said. "They're flaring gas and using diesel to fuel the pumps—it's like something Homer Simpson would do."
The well is one of thousands dotting the landscape and producing gas as a byproduct of hydraulic fracturing and horizontal drilling for oil in the Bakken Shale. Because North Dakota lacks adequate infrastructure, drillers are forced to burn off whatever they can't capture and ship to market. In April alone, such wells burned 10.3 billion cubic feet of natural gas, according to the state, valued at nearly $50 million.
As flaring wells spread like a prairie fire, North Dakota's regulations have struggled to keep pace. Beyond being an eyesore, burning off natural gas degrades air quality. Critics also say producers aren't paying all the royalties and taxes owed on the gas that is flared. Energy companies lose out on gas revenue, too, but that is offset by what they generate from Bakken crude oil.
"It's a failure of regulation. There was an opportunity to do this the right way, but you can't unring the bell," said Matt J. Kelly, a lawyer at a Bozeman, Mont., law firm representing Bakken mineral-rights owners claiming unpaid royalties for flared gas.
Stung by criticism that it has allowed oil producers to flare wells indefinitely, the North Dakota Industrial Commission on June 1 adopted rules requiring that gas-capture plans be submitted for companies to get a new drilling permits. The rules require producers to identify gas-processing plants and proposed connection points for gas lines but don't affect permits that already had been issued.
The commission, which promotes as well as regulates the drilling industry, on Tuesday is expected to announce measures to limit flaring of existing wells. The federal government also is considering new limits on flaring.
Tuesday, July 1, 2014
North Dakota To Tighten Flaring Regs
Wall Street Journal: