Remember the Bakken boom? It may have been subjugated to the backseat behind the Permian with respect to oil industry activity and media coverage, but it’s still producing like crazy. The EIA ranks North Dakota second in the U.S., producing more than 36 million barrels of oil in October 2017.
But the oil in North Dakota comes with what was originally an albatross: associated natural gas. Gas gathering and handling infrastructure was mostly nonexistent in the early days of the play, and North Dakota’s oil producers developing the Bakken/Three Forks oil play had to find ways to handle the associated natural gas that is produced along with crude oil in their wells.
By law in North Dakota, it is illegal to vent natural gas. So associated natural gas is flared instead, for both safety and environmental reasons. Venting involves releases produced gas without combustion, which includes potentially environment-damaging chemicals like propane and butane. The yielded CO2 from flared gas has much less environmental impacts compared to vented hydrocarbons. Flaring means simply burning off the gas.
To the numerous operators seeking to cash in on strong Bakken/Three Forks oil production, low prices for natural gas compounded by a severe lack of natural gas gathering and processing capacity in the region made flaring the producers’ method of choice to dispose of the unwanted gas in the formation.
But in 2014, the North Dakota Industrial Commission set gas capture goals intended to reduce flaring to 10% by 2020.
Reaching 100% gas capture is very difficult and requires designing, permitting and putting the right infrastructure in place, a highly capital-intensive venture, plus significant coordination between midstream providers and gas producers.
Strict rules imposed to slow down flaring
Nonetheless, North Dakota installed strict rules to reduce what the state considered excessive flaring of produced gas from its oil producers.
North Dakota’s rules and regulations handbook says gas produced with crude oil from an oil well may be flared during a one-year period from the date of first production from the well.
After a well’s first year, operators have a few choices. According to state rules, flaring of gas from the well must cease and the well must be:
- Capped;
- Connected to a gas gathering line;
- Equipped with an electrical generator that consumes at least seventy-five percent of the gas from the well;
- Equipped with a system that intakes at least seventy-five percent of the gas and natural gas liquids volume from the well for beneficial consumption by means of compression to liquid for use as fuel, transport to a processing facility, production of petrochemicals or fertilizer, conversion to liquid fuels, separating and collecting over fifty percent of the propane and heavier hydrocarbons; or
- Equipped with other value-added processes as approved by the industrial commission which reduce the volume or intensity of the flare by more than sixty percent.
What if you don’t stop flaring?
North Dakota says that if operators continue to flare associated gas after the initial year of permitted flaring, they must pay royalties to owners and production taxes to the state.
- For a well operated in violation of this section, the producer shall pay royalties to royalty owners upon the value of the flared gas and shall also pay gross production tax on the flared gas at the rate imposed under section 57-51-02.2.
An article published by the EIA makes it clear there is insufficient infrastructure to collect, gather and transport all the produced natural gas in North Dakota.
The result is that about one fifth of North Dakota’s natural gas production is flared rather than marketed. Increased drilling activity (more production per rig) has resulted in an increase production of natural gas, even though the rig count in the area has declined since the downturn hit the Williston basin hard in 2015.
Source: EIA
U.S. News reported in December that North Dakota operators burned off over 300 million cubic feet of natural gas per day in September and that regulators planned to limit oil production from three Sinclair Oil wells in December for failing to meet September’s gas capture targets, according to North Dakota’s Department of Mineral Resources. Regulators are withholding drilling permits until the company demonstrates it can capture the gas, according to the DNR.
To the rescue: Hess, Targa to build “LM4” gas processing plant, gathering infrastructure in North Dakota
Two companies are investing $250 million in a gas processing plant and gathering system that should help Bakken/Three Forks operators comply with flaring rules in North Dakota. The project is expected to be completed in Q4 2018.
Hess Midstream Partners (ticker: HESM) announced the formation of a 50/50 joint venture with Targa Resources Corporation (ticker: TRGP) to construct a new 200 million standard cubic feet per day gas processing plant called Little Missouri Four, or LM4.
The new plant will be located at Targa’s existing Little Missouri facility, south of the Missouri River in McKenzie County, North Dakota. Targa will operate and manage the construction of LM4.
Hess Midstream’s interest in the joint venture will be held by Hess TGP Operations LP, and be split between Hess Midstream and Hess Infrastructure Partners LP, 20% and 80% respectively.
The companies said they expect construction costs for LM4 to be approximately $150 million.
In addition, Hess Midstream and Hess Infrastructure Partners will invest approximately $100 million gross for new pipeline infrastructure to gather volumes to the LM4 plant.
With these investments, Hess Midstream will have total processing capacity of 350 million standard cubic feet per day of gas in the Bakken, with export optionality north and south of the Missouri river. Hess Midstream retains the option to further expand processing capacity by de-bottlenecking the Tioga Gas Plant in the future and, as a result, the previously planned turnaround at the Tioga Gas Plant in 2019 is expected to be deferred.
Source: Hess Midstream Partners
