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Julianne Geiger

Julianne Geiger

Julianne Geiger is a veteran editor, writer and researcher for Oilprice.com, and a member of the Creative Professionals Networking Group.

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Burn, Pay, Or Shut It Down: Three Evils For Permian Drillers

There was a time when natural gas was a welcomed byproduct of crude oil drilling, and drillers in the prolific Permian basin enjoyed this consolation prize--at least when natural gas prices were on the rise. All good things come to an end, though, and the amount of natural gas now exceeds the capacity to get rid of it.

With pipeline capacity fully exploited and natural gas prices squarely in the red, Permian drillers today are faced with three lousy choices: burn off the natural gas, pay to have the gas removed, or slow oil drilling activities to staunch the flow of natural gas.

Crude oil and natural gas are like two peas in a pod: when you find oil, you often find gas. 

Crude oil is pumped out of the well, and a small amount of natural gas comes almost inevitably comes with it. 

But over time, this ratio changes: less oil, more natural gas. 

Now, there is simply too much natural gas, and drillers in the American shale patch must face the not-so-pleasant music, with only one question remaining: which shale drillers can hold on until more pipeline capacity comes online?

Burn, Baby, Burn

The first option for drillers trying to weather the natural gas storm is to burn it off. 

This is flaring--and it’s a rather unpopular method, publicly speaking, due to the negative impact on the environment. For drillers, though, it’s a cost-effective way of dealing with the glut, and since they all must answer to shareholders and lenders, flaring is the first choice when it comes to watching the bottom line. 

Flaring has increased exponentially in recent years as the discrepancy between natural gas and pipeline capacity increased, creating unfavorable market conditions and leaving drillers holding a bag of unwanted natural gas. 

In fact, we’ve seen an increase from 123 billion cubic feet annual of vented and flared gas in Texas in 2017, to 238 billion cubic feet annually in 2018, according to the EIA

North Dakota, which has tighter flaring regulations, saw an increase from 88 billion cubic feet annually in 2017 to 147 billion cubic feet in 2018. 

Related: The Best And Worst Oil Predictions Of 2019

Overall, the U.S. saw an increase in flaring and venting from 282 billion cubic feet in 2017 to 468 billion cubic feet in 2018--and oil production has increased by 1 million bpd since 2018.

According to Rystad Energy, flaring and venting in the Permian basin reached an all-time high from July to September 2019--at 750 million cubic feet per day. 

(Click to enlarge)

Venting and flaring may be the cheapest option for oil and gas companies, but it’s also the most harmful to the environment, with flared and vented gas contributing to greenhouse gas emissions. Venting releases methane into the atmosphere, while flaring--which gets rid of the methane--still releases carbon dioxide into the air.

Pay to Take Away

Another method open to oil and gas companies in the Permian is to have their natural gas taken away. Oil drillers who come up with natural gas as a byproduct can--and do--pay to have it removed. 

Typically, as producers pay pipeline companies for use of the pipeline. They recoup their cost through natural gas profits, and those will longer term deals are essentially immune. For those companies who don’t have long-term contracted rates and contracted shipments, they are now paying others who have allotted space to take it--and at a huge loss, which has recently been considered a rather unpleasant cost of doing business in the oil industry. Related: Oil Prices Head Higher Despite OPEC+ Skepticism

This is cringeworthy for companies who are fastidiously watching their bottom line, all while their competitors are getting permits to flare it into the atmosphere largely for free.

Shut it Down

Finishing off our list of terrible options for oil drillers is to slow production until more pipeline capacity can be brought online. Oil production in the United States has increased by 1 million barrels per day from the beginning of the year.

In the Permian specifically, oil production has increased from less than 2 million barrels per day just three years ago to nearly 5 million bpd today. And according to the EIA’s Monthly Drilling Productivity Report, January is expected to increase by 48,000 bpd over December. 

(Click to enlarge)

And with it, of course, natural gas production in the region is rising as well, with a projected 213 million cubic feet per day increase from December 2019 to January 2020. 

(Click to enlarge)

With every month, the natural gas problem grows. And as oil prices climb, the thought of shutting wells in looks less and less attractive.

The Pipeline Resolution

All is not lost for Permian drillers. 

There are pipelines in the works set to increase the natural gas takeaway capacity in the region, which will alleviate the current burden on oil drillers. 

On the pipeline horizon is Kinder Morgan’s Permian Highway, which should increase takeaway capacity in the region by 2.1 Bcf/d by late 2020, Stonepeak’s Whistler (2.0 Bcf/d) by summer 2021, Permian 2 Katy (1.7 Bcf/d to 2.3 Bcf/d), Pecos Trail (1.9 Bcf/d), Permian Global Access (2.0 Bcf/d), Bluebonnet Market Express (2.0 Bcf/d), and the Permian Pass (2.0 Bcf/d). 

Until such time as these pipelines come into service, venting and flaring in the Permian is here to stay.

By Julianne Geiger for Oilprice.com

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Leave a comment
  • Lee James on January 01 2020 said:
    The responsible thing to do is to somehow agree to reduce production. Working out an agreement is the hard part. Once production levels are adjusted downward, likely oil and gas prices will rise a bit.

    We all need to burn less petroleum. As we slow production in various ways, alternatives to burning fossil fuel must be developed. Unless we agree on a significant nation-wide price on burning carbon, solutions will consist of a wide variety of state and local regulations and voluntary action by responsible businesses, such as we are seeing in the high-tech industry.
  • Mamdouh Salameh on January 02 2020 said:
    US shale oil industry is not only bankrupt but it is also facing a steep oil rig count decline, confirmed production slowdown, declining well productivity and investments and eventual demise. 2019 was the year in which the hype around US shale oil production finally burst. And despite the hype by the US Energy Information Administration (EIA), US production is over-stated by at least 2 million barrels a day (mbd). This means that US oil production would have averaged 10.8 mbd in 2019 and not 12.8 mbd as the EIA claimed and it is projected to average around 10 mbd or less in 2020 and will continue its decline until its demise in 5-10 years from now.

    Moreover, the US shale oil and gas industry is causing an environmental disaster. The flaring and venting of natural gas in the US continues to soar, reaching new record highs in recent months. The volume of gas that was burned or simply released into the atmosphere by oil and gas drillers in the Permian which is the heart of US shale oil production has seen an increase from 123 billion cubic feet (bcf) in Texas in 2017 to 238 bcf in 2018 according to the International Energy Agency (IEA). Overall, the U.S. saw an increase in flaring and venting from 282 bcf in 2017 to 468 bcf in 2018.This practice is a disaster on many levels. It is wasteful, it worsens air quality and it exacerbates climate change. Venting gas is much worse than burning it since it releases methane into the atmosphere, a potent greenhouse gas.

    Nd with drillers trying to benefit from relatively higher oil prices, they face a conundrum of what to do with unneeded gas. They have only three options currently, namely, burn it, pay for it to be disposed of or shut it down. Vanity and hope of making a semblance of profit dictate that shale drillers will continue pumping oil even at a loss. They take their cue from a federal government which has decided to withdraw from the Paris Climate Change Treaty.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Nick Howe on January 02 2020 said:
    There is another option, re-injection. Yes there is a cost but it increases production pressure and is potentially recoverable.
  • Stephen St Angelo on January 02 2020 said:
    North Dakota has tougher Natgas Flaring restrictions??

    According to the North Dakota DMR, the state is currently flaring 18% of its total natural gas production versus only 3% for the Permian.

    So, how tough are the Natgas Flaring restrictions in North Dakota?
  • bob josephs on January 02 2020 said:
    Nostradamus? More from Salameh circa 2008
    Conclusions
    Global conventional oil production peaked in 2006. The current price fluctuations for
    crude oil are a manifestation of the peak.
    A peak in oil production would manifest itself by rapidly escalating prices, a slowdown in
    production, a growing supply deficit, declining discovery rate of new oil and also a
    declining Energy Return on Investment ratio. All these characteristics exist today.
    Peak oil is not only a reality but is already impacting on oil prices, the world economy
    and the global energy security. The almost quadrupling of oil prices since 2002 is not an
    anomaly but a picture of the future. With the peaking of global conventional oil
    production, geopolitics and market economics will result in even more significant price
    increases and security risks. Oil wars are certainly not out of the question. The
    governments of the major oil-consuming countries as well as the multi-national oil
    companies and some international organizations are in a state of denial about the
    implications of peak oil. Moreover, the days of inexpensive, convenient and abundant
    energy sources are quickly drawing to a close.
  • Elias Rodriquez on January 03 2020 said:
    "international oil economist"? pppbbbbbtttttt!!!
    Nick Howe is right: recycle the gas.
    Most of those Permian leases have vertical wells whose production rates have petered out. Convert some of those to injection wells and recharge the bottom hole pressure with all that excess gas. You'll most likely see a boost in oil production rates from offset wells, and that boost in oil production rates should cover gas injection costs, and produce some profit. Such gas recycle projects have been used successfully for nearly 100 years in Texas oilfields.

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