Pipeline capacity constraints in the Permian are affecting not only surging oil production. There’s a shortage of natural gas pipelines as well, and operators across West Texas and New Mexico have been flaring natural gas at higher rates as gas production has soared together with oil production.
In the fastest-growing oil patch in the United States, surging volumes of natural gas have become a kind of a side product that drillers prefer to burn off instead of shutting in wells and missing out on monetizing the oil production gushing out in the Permian. Company executives admit that they wouldn’t flare as much gas as they do if they had a choice.
According to estimates by The Wall Street Journal, every day in the Permian companies burn around US$1 million worth of natural gas. The greenhouse gas emissions from the burning of gas are equivalent to the emissions from 2 million cars. In total, drillers in the Permian flare some 3 percent of the gas they pump alongside oil, the WSJ has estimated.
The regulator of the Texas side of the Permian fields, the Railroad Commission of Texas, has approved all 20,000 requests in the past five years from companies to flare gas, according to the WSJ review of the data, confirmed as accurate by Texas officials.
In New Mexico, regulators also allow companies to burn gas, but in 2015, they started requiring drillers to report how much gas they are flaring.
In North Dakota, the home of the Bakken shale formation, regulators stepped in years ago to limit flaring by imposing the so-called gas capture goals that progressively increase the goal to use the gas between 2014 and 2020. Current gas capture goals require drillers to capture 85 percent of gas through October 31, 2018. The goal will be lifted to 88 percent beginning November 1, 2018, and to 91 percent starting November 1, 2020. Related: Can We Expect An Oil Price Spike In November?
However, with strong oil production volumes in North Dakota this year, gas flaring exceeded the state-wide limit of 15 percent for a third consecutive month in June 2018, data by North Dakota Industrial Commission compiled by S&P Global Platts shows.
With the stricter limit on flaring from November onwards, companies may also limit their oil production in North Dakota, analysts say. There are new gas processing plants in the works, but until they come online by probably late 2019, companies may find it harder to comply with the new flaring limits.
In the Permian, Apache CEO John Christmann told Bloomberg in June: “In a perfect world, I don’t want to flare,” because you are also “burning revenue.”
While companies target mainly oil in the Permian, they don’t think that high gas flaring rates is a sustainable and acceptable business decision.
“That’s not the way we want to operate,” spokesman Kelly Swan of Oklahoma-based WPX Energy Inc told the WSJ, noting that the company flared 10 percent of its Permian gas production in Q1, and reduced the flaring rate to 6 percent in Q2. WPX Energy has been building a gas processing plant to capture the gas it produces.
The lack of enough infrastructure and pipelines in the Permian, coupled with surging production, has depressed natural gas prices at the Waha hub in the area. This year through August, prices were on track for their lowest annual average since 1999, according to Reuters calculations. The discount of Waha prices to the U.S. benchmark Henry Hub so far this year has been two times wider than last year’s discount and the widest since 2008, Thomson Reuters data shows.
Without reasonable action from the Railroad Commission of Texas, rising gas production and insufficient pipeline capacity could lead to companies flaring more gas, Colin Leyden, Senior Manager, State Regulatory & Legislative Affairs – Natural Gas at the Environmental Defense Fund, wrote in an op-ed in June. Related: The Biggest Threat To The Oil And Gas Industry
During the previous upswing in production, Permian operators in Texas flared in 2015 enough gas that would have served all of the household needs in the Permian counties of Texas for two and a half years, Leyden said.
Some companies are doing a good job to minimize flaring as much as possible, but overall, there are major gaps in the flaring practices of various Permian drillers, according to an EDF flaring report from November 2017.
Until pipeline and infrastructure capacity constraints are overcome, which analysts expect at some point in late 2019, gas flaring would be inevitable, according to Venetta Seals, the mayor of Pecos, the seat of the Reeves County in Texas.
“Without the infrastructure being here, the only other solution is what, they stop drilling?” Seals told The Journal.
By Tsvetana Paraskova for Oilprice.com
More Top Reads From Oilprice.com:
- Oil Nears $80 Per Barrel
- The Collapse Of Venezuela's Imaginary Oil Currency
- Houthis Claim Successful Attack On Aramco Oil Facility