Commentary: Oil production in North Dakota keeps gaining, but increased flaring threatens regulatory action

Oil Production in North Dakota Keeps Gaining, but Increased Flaring Threatens Regulatory ActionBy Tim Daiss and Michael J. Economides

In what is surely one of the biggest stories in the US oil and gas industry over the past 30 years, oil production in North Dakota keeps gaining, reaching new highs along the way. In fact, production in July hit a new record as oil companies brought more wells online once summer rains stopped, the state regulator said on Friday.

Monthly data issued by the North Dakota Industrial Commission’s (NDIC) Oil and Gas Division showed that output in July jumped by 55,000 barrels per day (bbl/d) from the month before, to just below 875,000 bbl/d. One million barrels per day is just around the corner, an amazing feat, considering that only five years ago oil production in the state was trending towards zero.

Most of the new production came from the Bakken and Three Forks shale formations where horizontal drilling and multiple hydraulic fractures are used to tap the state’s massive oil resources. Companies produced slightly more than 810,000 bbl/d of oil from the Bakken Shale in July.

In 2005 to 2007, US oil consumption exceeded 20 million barrels per day, peaking at 20.8. A price of oil of $40 per barrel in 2004 shot to almost $150 by July 2008. The US was then importing 12 million barrels per day of oil putting into question America’s energy makeup and security. But starting after the economic collapse of 2008 was the sharp increase in US oil production, to a large extent a by-product of the “shale revolution”. From a production of 8.2 million barrels per day in 2005 and 8.4 in 2008, it has increased to 11.5 million barrels per day today, an increase of about one third. With a reduction in total demand to about 18 million barrels per day, the net impact on imports is a reduction of more than 5 million barrels per day, a truly spectacular turn of events.

North Dakota’s uptick in oil and gas production is part of a larger picture that has the potential to help lift the US out of its five-year economic slump. A McKinsey Global Institute (MGI) study released in July projects that US shale gas and oil development could contribute $380 billion and $690 billion, respectively, to the country’s GDP by 2020.

The study says that American natural gas output has grown at a rate of 51% annually over the last five years and the impact will extend to energy-intensive manufacturing industries and beyond. MGI added that the US now has the potential to reduce net energy import to zero – but only if it can successfully address the associated environmental risks.

EnergyTomorrow.org says that the oil and natural gas industry supports 9.2 million American jobs and represents 7.7% of the US Economy. Industry contributions to the US economy in 2010 equaled roughly 60% of the 2009 stimulus package.

Clearly those are impressive numbers, which are still growing and should spur the Obama Administration to action. Currently, around 15 LNG export projects are waiting for Federal approval, while the Keystone XL pipeline remains a divisive issue and still unapproved.

However, there are some others concerns as well: Controversy over property rights, pipeline disputes and safety and environmental disagreements over fracking, which started the shale revolution in the first place.

Yet, for North Dakota (which, along with Texas accounts for around 90 percent of US shale production) there is an additional dilemma that is garnering bad press and pitching environmentalists and some citizens on one side against the oil and gas industry on the other – the problem of natural gas flaring, the burning of associated gas which is produced with oil at the well head.

Perhaps North Dakota is a victim of its own success. The more oil the state produces the more gas it has to flare due to lack of pipelines in place and necessary infrastructure.

North Dakota’s Flaring Problem

“Rapidly rising crude oil production in North Dakota has triggered a surge in natural gas flaring there, which is damaging the environment and lowering revenue for oil and gas producers,” a recent Ceres report said. The report “Flaring Up” states that in 2012, the vale of flared gas in North Dakota was $1.2 billion – about $100 million per month, or $3.6 million per day. Of course this pales by comparison to the value of produced oil, about $90 million per day.

However perceptions do count and flaring is a growing problem in North Dakota because many of the oil fields in the state are new and the size of young fields greatly exceed the amount of gathering infrastructure in place, while appropriate gathering pipelines can’t be built prior to well completion. Additionally, North Dakota has harsh winters and a limited construction season. Also, the natural gas gathering and processing industry is usually separate from the exploration and production side, therefore lack of coordination exacerbates the problem.

North Dakota’s Department of Mineral Resources (DMR) said in August that about 1,500 oil wells in the state are flaring gas and not connected to any pipelines, while upwards of 450 are in such remote locations that it’s unlikely they will ever get connected.

In fact, the problem of flaring is starting to challenge the drill- baby-drill sentiment in parts of North Dakota, while local newspapers are voicing concern over the problem. The Bismarck Tribune said on August 25 that DMR director Lynn Helms needs to take a harder line on flaring, adding that natural gas flaring has begun to get “pushback” from the North Dakota Industrial Commission. “While there has been small success in dropping the percentage of natural gas flared – from more than 30% to 28%, the volume of gas flared has doubled over a two year period ending in May,” the article states. It recommends that Helms reduce the number of extensions that allow companies to flare beyond the one-year limit. In August Helms approved 21 new extensions while 117 were pending.

According to the EIA North Dakota producers can flare natural gas for a year without paying taxes or royalties on it. They can also ask for an extension due to economic hardship of connecting the well to a natural gas pipeline. After a year, or when the extension expires, producers can continue flaring but are responsible for the same taxes and royalties they would have as if they sent the gas to market.

The Bismarck Tribune article wraps up advocating that industry players reduce natural gas flaring on their own. “Otherwise,” the paper states, “the state will feel obligated to write more restrictive regulations.”

Michael Economides is Editor-in-Chief of the Energy Tribune