Oilfield Flares Provide a Glaring Reminder of the Drive To Produce More Oil

Abstract

Natural gas flared in just two major US shale plays exceeded the amount of gas consumed last year in Colombia and Israel. The prolific waste from the Permian and the Bakken (Figs. 1 and 2) is a side effect of rising oil production in plays where gas growth is so strong pipeline construction cannot keep up. Flaring is a glaring reminder of the realities of the never-ending rush to drill that is driving down the cost of oil and gas around the globe. These oil-producing wells also produce more gas than processing plants and pipelines can move to market. Pipelines and refineries have recognized that ultralight oil in the Permian is fundamentally different from West Texas Intermediate (WTI), with a make-up that puts it somewhere between oil and gas•liquids. As those wells age, oil production falls as the output shifts to gas. And the cost of sustaining production for the vast majority of producers has consistently exceeded the cash generated by these wells (Fig.• 3). The gap between capital expenditures and revenues was “a staggering $4.7•billion” during the first quarter of 2019, according to a study by Alisa Lukash, a senior analyst on Rystad Energy’s North American shale team, who described it as a “tremendous overspend.” Both the US Energy Information Administration (EIA) and Rystad have raised outlooks that already predicted strong US oil growth. Flaring growth and overspending have accompanied a rebound in growth in the Permian and Bakken, which are the flaring leaders by far in the US. More than half of the total comes from the Permian, which has surpassed the Bakken by more than tripling the volume of gas burned per day since early 2017. The severity of the problem, though, is more acute in the Bakken. While Rystad said about 5% of the Permian gas is flared, in the Bakken, 19% of the gas is flared, according to the oil and gas division of the North Dakota Industrial Commission. The Permian produces far more gas but has the advantage of being close to growing markets for it—chemical plants, export pipelines to Mexico, and natural gas liquefaction facilities—while North Dakota is a distant option for Midwestern markets well supplied by other plays. Limited pipeline capacity means those shippers without contracts ensuring they can move their gas are paid little or less than nothing—prices at Waha gas hub in west Texas repeatedly sank into negative territory over the winter, and pipeline shortages will linger until a big new pipeline goes into service. Oil pipeline construction also has lagged supply growth in the Bakken. Trains and trucks can ship oil, but that is a costly option. North Dakota oil regulators reported that Bakken prices hovered around $50/bbl early this year when the benchmark US oil grade was about $10/bbl higher.