I seem to be one of the few persons commenting so far who actually lives in the region and regularly reads local reporting on issues in North Dakota (a state neighboring my state). Western North Dakota, where the Bakken Shale oil boom is occurring, is very sparsely populated and historically had minimal infrastructure. It takes TIME to build pipelines to move the natural gas brought up by oil drilling operations to natural gas customers. Pipeline proposals are currently in regulatory review. There isn't even pipeline infrastructure in place yet for all of the petroleum production in North Dakota--much of the oil produced there is brought to broader markets in tanker trucks, and the truck traffic volumes are putting a lot of stress on highway roadbeds until the highways can be upgraded.
Right now there is a boom economy in western North Dakota, with extremely high wages, low unemployment, a shortage of single women,
and established businesses in the region importing workers from as far away as Illinois just to keep up normal operations as workers quit to join oil field crews. There hasn't been time to build infrastructure yet to move away the natural gas to markets that will pay for the gas--especially because the price of natural gas all over the United States has crashed because of the huge increase in production in the last few years. But given time, yes, there will be infrastructure in place to transport Bakken Shale gas to other markets, and I'm sure that we here in Minnesota will be as glad to have North Dakotan natural gas to supplement our nuclear-powered energy grid as we already are to have North Dakotan petroleum brought in by truck. Once more pipelines are built, the entire United States energy economy will become more flexible.
Still to be figured out is the economics of converting natural gas deliquefaction terminals (those cost BILLIONS of dollars and years to build or convert) along the Gulf Coast into liquefaction terminals, so that the United States can get into the business of exporting liquified natural gas. It could happen. North Africa and the Arabian Peninsula used to flare off all of their natural gas incidentally brought up during petroleum production--there was no local market for it. It took a long time to develop natural gas liquefaction; now there is international trade in natural gas that was undreamed of when I was growing up.
The amount of gas being flared in North Dakota is about 150 million cubic feet per day [0], worth (at $3.95/thousand cubic feet, at the wellhead [1]) $220 million per year.
The amount of oil being sold is 728,000 barrels per day [2], at $95/barrel, worth $25.3 billion (B) per year.
For the oil producers, this flaring is a financial rounding error (<1%). I think it's credible that $200M/year of gas, distributed over hundreds of oil wells, can be unprofitable to recover.
In various metrics: the natural gas flared / oil produced is
The problem is less capturing the gas profitably as it is shipping it. Natural gas can be transported in pipes or multi-modally as liquefied natural gas (LNG). LNG liquefaction/gasification terminals, however, are , politically volatile multi-billion dollar, multi-year [1] fixed investments.
Localisation is an un-solved problem - natural gas trades at 3.48 USD/MMBtu in the U.S [2]. Japan is importing LNG at 16.49 USD/MMBtu [3] - that's nearly five times the American price.
North Dakota presently lacks the pipeline capacity to export even its crude - lorries are commissioned to truck the stuff to refineries. As mentioned, you can't truck gas. So it's a choice between (a) releasing it into the atmosphere directly, (b) flaring it into the atmosphere, or, (c) delaying American crude production until a natural gas pipeline can be constructed. B is less environmentally harmful than A. C is economically a bad decision (time value of money/resources).
The issue with that, is that here in North Dakota, we don't have the infrastructure in place to take that electricity out of state. We already have a coal plant along with a hydroelectric plant that produce more than the state needs (along with some wind towers in several places).
In September 2012 a Boston-based energy group announced that it expected to complete an 800MW natural gas power plant in Oregon within 4 years at an expected cost of $850 million [1]. Let's use this as our naïve project cost paid up-front in equity. Thus, production begins at t+4 (2017).
Let's use uvdiv's estimate [2] of $220 million of natural gas being flared each year. Let's create a paramater, capture, for the fraction of the flared gas one is able to burn in the plant. I have no idea how to estimate this; it shall be the variable we solve for. Given that from 2008 to 2011 Chesapeake Utilities Corporation (NYSE:CPK), a natural gas distributor (close enough), ran a quck-and-dirty EBITDA margin of about 40% [3] we'll assume our annual cash flows from the operation be around $220 million * capture * 40%.
The State of North Dakota believes the Bakken wells "will take 15-20 years to develop" [4]. Some guy on the internet (in the Oil & Gas Journal) thinks the fields could sustain for 30 years [5]. Thus, we are going to assume a constant quantity of natural gas gets flared each year from now until 2045. Actually, it's worse than that, since we're assuming a constant $220 million of natural gas being flared (you hedged natural gas prices for the next thirty years with IKB Deutsche Industribank).
Chesapeake Utilities pays about 6% YTM on its 2031 non-callable bond [6]; we're going to use that as our discount rate.
Assuming the universe explodes in 2045, i.e. ignoring the salvage value/cost of the plant after thirty years, our hypothetical natural gas power plant breaks even provided you can capture at least 85% of the flared gas.
Let's allow natural gas flaring, and thus our cash flow production, to decline by 3% annually (approximate decline in U.S. petrol production from 1980 to 2000) for 20 years from 2045 through 2065. Given that we built our model around the cost of an 800MW plant, I allowed both the cost of the plant and capture efficiency to vary; here are the results: http://imgur.com/h9yaa. I'd say plausibility is sustained.
∴ Back-of-the envelope it doesn't look like a strikingly profitable proposal, but with proper connections to the national electricity grid and some clever financing it could be a deal. Bakken & Three Forks is only half a decade old.
* The extra flaring is temporary, because gas pipeline which could/would be built isn't there [0]. The issue isn't capturing gas in general, but capturing it right away, this year. Your four-year power plant construction doesn't solve this.
North Dakota even has a shortage of oil pipelines [1]; they are shipping out oil by rail, at a $5-$10/barrel premium, rather than delay.
* The "interesting" part of the cost is the capture/distribution at the well. These wells are small and remote. There are 8,000 of them [2]. The amount of flared gas is just $25,000/year per well (naive average).
Already 70% of the associated gas is captured; presumably, the 30% that is flared is more difficult.
* If they extract shale gas on a large scale, they can build long-distance pipelines cheaply. There is no economic need to site power plants near the gas field -- this is a solution in search of a problem.
* If they extract shale gas on a large scale, the amounts would be much larger than the amount being flared: they will purposefully seek out gas pockets. What they're flaring now is gas they don't want to extract.
* There's incentive to delay shale gas projects: there's an enormous gas glut in the US, which is depressing prices. Things which could be otherwise profitable are temporarily not.
This is not proposing a shale gas project. No pipes. It's best thought of as a waste-to-product project, similar to companies who bake slag into bricks.
There is a supply of gas in search of demand. The infrastructure to move the gas does not exist and is costly to erect. The infrastructure to move electricity is easier to erect (do-able in the 4 years a plant would take to put up). The arbitrage is in converting the natural gas into electricity, which can more easily be exported. Again, no pipes.
Yes, there is good reason to delay shale gas projects. But this is not a shale gas project. The gas is an input. Low gas prices are a plus.
How would you get it from the 8 000 wells to the plant? Initially, probably by truck (they do this in Kazakhstan). Laughing? I recently worked on a deal that transported oil, by truck, from Oklahoma to the Gulf of Mexico, because there was insufficient rail or pipe capacity. The cracking spread was wide enough. The argument here is that the oil companies would be willing to part with the waste gas for a nominal fee, particularly if one could get an environmental agency on one's side. You'd be "buying" natural gas below market and selling electricity at market.
"Back-of-the envelope it doesn't look like a strikingly profitable proposal"
I think this requires more than a look at the bottom line of the gas companies. You've got to include the heath risks and quality of life from the prospective of the residents of the state.
If a gas power plant is more environmentally friendly than flared stacks (I have no idea if it is) then it would be amazing just to break even on this deal because you're profit is the health of the citizens.
Continuing this thought, the gas companies are theoretically losing $200 million a year by not doing anything. That means, if a gas plant is more environmentally friendly, they don't even have to break even on the deal. The gas companies can lose ~$200 million a year on a project like this, have the same financial outcome and still come out ahead environmentally.
Edit: My math was off. I was figuring that they were spending ~$220/year, which they are not. That means my last statement is incorrect though I still feel that losing money on a more environmentally safe solution could be worth it.
"If a gas power plant is more environmentally friendly than flared stacks (I have no idea if it is) then it would be amazing just to break even on this deal because you're profit is the health of the citizens."
If I were proposing this deal, I would approach the State of North Dakota and surrounding localities with a request for tax incentives, etc. to increase the probability of the project going through on precisely those grounds.
This is a perfect opportunity for government regulation. Tax the waste so that it becomes something more than a rounding error. Government gets a source of revenue, get the environmental benefits of increased natural gas use, and it's not like the oil companies are going to pack up and leave because of a tax, because the oil isn't going to leave with them.
Tax the waste so that it becomes something more than a rounding error.
So what exactly, an arbitrary 1,000% tax just to make it expensive, because of a subjective emotional reaction that says this particular 3% ineffeciency is pure evil, where 3% ineffeciencies elsewhere are natural and understandable engineering compromises?
The incentives are absolutely correct in my view. The "waste" here is apparently less expensive than the alternative (low-value gas pipelines). Maybe some peoples' guts say gas flares are an "evil" type of waste, whereas the human labor spent installing thousands of miles of unproductive pipelines is a "good" waste. I hope those peoples' guts aren't put in decision-making positions.
The incentives are completely screwed, because flaring off that gas represents a mere opportunity cost to the oil company, yet imposes a heavy externality on the rest of the world. The waste is only "less expensive than the alternative" because the person doing the wasting isn't the one paying the price.
So yes, absolutely: impose a carbon tax, where the person burning any fossil fuel pays a price that actually reflects the externalities of their choice. That's not arbitrary at all. If it still makes financial sense to flare rather than capture, fine. But there's no pretending that everything is all right with the existing equation.
But isn't the point that the externality is in fact not that heavy? That implies that the process is at most 97% efficient, which is actually pretty damn good (of course, there'll be other inefficiencies, but nobody's complaining about those). If the rest were burnt in internal combustion engines to move cars about, it's almost certainly < 30% efficient and very often < 20%, which implies most of the externality comes from people further down the chain.
Just to make sure we're on the same page: I'm talking about the externality of global warming, which at present is completely absent from the oil pricing system.
As a result, I'm not sure it's as simple as a straightforward efficiency calculation, because under a system where the consumer bears the currently externalised costs of burning fossil fuels, both the cost of flaring would go up, and the oil value captured by the drilling company would go down. I have no idea what a sane level for a carbon tax would be, and I'm certainly not economist enough to predict the ramifications for global fuels pricing; like I say, it may well work out that flaring remains cost-effective. But the costs of an action should be borne by the party that benefits, otherwise the incentives are, as I say, totally screwed.
I believe the implication is that the environmental impact of building natural gas pipelines criss-crossing the U.S. so we don't have to see flares in North Dakota may outweigh the marginal impact of the CO2.
It's not entirely subjective. I think the underlying reasoning is that regardless of current prices, gas and oil are non-renewable resources that should not be wasted.
That may not be entirely true: using hydrolitic disproportionate of super-critical water and heated crushed coal slurry, dropped 10000 feet down in a closed continuous feed chamber, the coal slurry will break into shorter segments and reform as hydrocarbons using the hydrogen from the super-critical water. The same process may also be applicable to bio-mass, such as plant material.
Punitive tax -> higher oil price -> shipping oil from overseas is more competitive -> more fuel used and environmental impact to get the oil from overseas
You should probably just be advocating a carbon tax since that addresses this externality in a more general way.
A carbon tax makes sense, but probably wouldn't impact this behavior explicitly, since the natural gas is being burned before it even reaches the market.
A carbon tax can apply here as well. In fact, it's probably best to make producers pay carbon tax where possible, since they will be simpler to tax (and the tax will be harder to evade for them).
It seems barely anybody is concerned by this. Sure if it's 2.6%, 97.4% will be released in some form at some point, but those 2.6% are lost with a utility/greenhouse ratio of effectively zero. That's 150 million cubic feet per day flared into heat+CO2 for naught. I don't know how this stacks up against other means of getting oil.
FWIW, France could economically benefit from fracking, but it has been decided at the political level to ban the practice until it can be made provably safe and sound.
So what? Since when is French Politics any indicative of good decisions? France has the tradition for like 20-30 years now to ban stuff out of "precautionary principle", meaning that they do not even consider the possibility of doing anything if there is any single risk involved, instead of thinking of how to manage the risks.
Sure if it's 2.6%, 97.4% will be released in some form at some point, but those 2.6% are lost with a utility/greenhouse ratio of effectively zero.
But the marginal utility of capturing that gas is negative: less than zero.
(By the way it's 4.2%, not 2.6%; my post has an error and I can't edit it. There's a mismatch between the gas flaring and oil production figures: one is from 2011 (NYT article), the other 2012 (WSJ). It's a large error because oil production doubled in the space of a few months).
Given their current estimates, it looks like this will keep going for at least another decade and a half. It has had a affect on attendance at some of the community colleges in the western part of the state as young folks with homes in the area get paid extremely good wages with little time to spend it.
It does have an effect on other parts of the region. Road construction projects that needs lots of trucks to haul rock / dirt take longer because most drivers are hauling oil / equipment in Western ND. Welders are getting bumps in pay to keep them from going with some welders being recruited from Canada. Many of the towns along the highways have bypasses paved to lessen the problems of so many trucks. A lot of the lights at night are trucks snaking down the highways. Traffic is Twin Cities rush hour 24x7 and no hotels are available.
The state is socking the money away and a lot of the mayors are pretty smart about how they are expanding their towns.
Food trucks are a fact of life as well as man camps and RV parks. If I had the cash I would have put up a capsule hotel in the area with a Walgreens-type place, lockboxes, and laundry.
Like anything there are problems with adding so many people and I am a little worried since this winter looks to be a cold one by local standards (-21°F to -40°F at night or -29.4°C to -40°C without windchill). It hurts a bit to have anti-fracking movies funded by Abu Dhabi Media hit the big screens[1]. It probably doesn't jive with some people's core belief that "the USA cannot be energy self sufficient".
Delta bought a refinery and is looking at getting crude from ND[2].
It takes TIME to build pipelines to move the natural gas brought up by oil drilling operations to natural gas customers.
Perhaps it would be prudent to wait for that TIME to pass before beginning extraction? If my excuse for dumping trash in a nearby river was that it takes TIME to come up with a way to dispose of it, and I could be being doing other things meanwhile, I don't think the authorities would look kindly on it.
No one is history has ever built a pipeline before doing the drilling. It cost money and you need to the drilling to justify the pipeline both economically and regulatory. Your trash analogy does not fit the situation.
If there is not proven money to support infrastructure, then it won't be built, and to prove it with oil, requires pumping. People who build the infrastructure first in some grand plan fail at a pretty high rate (see the history of the USSR and some MN small towns that thought they would be bigger).
You need to drill before you'll know where/if that pipeline will be needed. Once you have estabilished that the oil is coming from that exact spot, only then you can start pouring in money to connect that spot and not the dozens of others which are dry.
There's an old army joke - the sargeant tells the troops: "You start digging here, here, and there; while I'll go find out which direction is needed".
Interesting. I have a friend who works in the shipbuilding industry in Korea; he says that they're booked for the next few years for LNG ships. They're even experimenting with making larger ships than what currently exist. I always assumed that this was because of demand from the US. But if you're thinking of exporting gas...where is the market? Which countries want gas so badly?
I guess the usual suspects are India and China. Somehow, I expected the demand from US would dwarf that from China and India.
The market is global, LNG is a commodity like any other. Unless a producer has a particular contract it will be sold to a broker who will sell it to a consumer. All that LNG is likely being sold on the open market.
A lot of demand is transfer: due to shale extraction technology, the cost of US gas is significantly lower than the cost many consumers pay in other countries. Therefore, they can replace their current supply with US production at a lower cost (even after the relatively high cost of liquefaction and transport).
Exactly, but I don't know the exact numbers.
I'm waiting impatiently for the fracking to begin in Europe so we can say "bye bye" to the expensive Russian gas and petrolum.
This is the 'other side' of the development argument. These things take time, OR money. You have to be willing to invest one or the other. It happens all over the world. China has the same issue, not enough time to build infrastructure, so 'waste' is disposed of via undesirable methods. This triggers protest, which triggers debate, which I think is good. Probably speeds the development of infrastructure. Now in the interest of full disclosure, I've worked with Halliburton moving between Houston and DC. So I'm pretty big on infrastructure.
I'm also familiar with all sides of this argument. I'm unsure how you accomplish what we are trying to accomplish, without incurring some downsides. I think it's important to ask, in an informed manner, whether the good outweighs the bad. Everyone has to do this, America, China, Indonesia, Malaysia etc. Now you, personally, may not like the answers that the policy makers agree on. But that's how it works.
Sometimes that means that there are fires visible from space. But it also means that there will be less conflict in the MidEast region in the future. A lot of these things are connected.
The "We should do bad things, else someone else will" defence isn't really valid. It is a false dichotomy, as it assumes an 'either or' circumstance. You can not do bad things, and assist in stopping others from doing so as well.
I would suggest that what we are missing is credible
Agreed plans to minimise the downside costs
Perhaps these exist, but I would like to see seni-contractural agreements between the regulator and each frakker piblically available with defined milestones so we can be reasonably assured that the damaged being caused is going to be dealt with and done so to a piblically decent timescale
(Yes this is partly what regulators do anyway, but the important part is the transparency - cos we have no expectations regulators are independent of industry)
The oil isn't going anywhere, what's the hurry? Why not wait until the fossil energy resources can be fully captured before extracting it, especially given that once it's used up there won't be anymore.
The "obvious"[1] solution would seem to be to find a way of storing it until the transport/processing infrastructure can be implemented.
There are afaik existing schemes already using depleted gas fields as storage reservoirs[2] into which they pump the gas, for re-extraction later. Other underground gas storage such as for compressed air[3] is another possibility (although the problems of leakage/explosion/fire would be much more serious with NG).
I wonder if it wouldn't even be possible to re-inject the gas back into the wells via the water/mud/whatever pumping systems they're using to extract the oil in the first place.
[1] Disclaimer: from someone who knows very little about the practicalities of such things, per https://xkcd.com/793/
We have a 3000km+ long gas pipeline coming all the way from Bolivia to the south of Brazil, crossing a dozen mountains and rivers. How long did it take to build? Two and a half years, at a $2B "cost" (which pays for itself).
The current administration in the US is not really a friend to pipelines (see Keystone). Not to get conspiratorial, but I cannot shake the thought that Warren Buffet (a billionaire friendly to the administration) bought a railroad (BNSF) that stands to make a lot of money if no pipeline is ever constructed.
I thought that the export potential was limited because the competitive edge of American natural gas will vanish once fracking technology reaches those countries?
Where abouts do you live? I am planning on visiting Rapid City, South Dakota in a month or two and would love to have a Hacker News meetup somewhere nearby.
It might be worthwhile to just require flaring sites to have local storage and dispensing equipment for say two days worth of gas, and only when that was full could they flare it off. Nearly-free is a powerful motivator for innovation.
Right now there is a boom economy in western North Dakota, with extremely high wages, low unemployment, a shortage of single women,
http://www.twincities.com/national/ci_22382285/north-dakota-...
and established businesses in the region importing workers from as far away as Illinois just to keep up normal operations as workers quit to join oil field crews. There hasn't been time to build infrastructure yet to move away the natural gas to markets that will pay for the gas--especially because the price of natural gas all over the United States has crashed because of the huge increase in production in the last few years. But given time, yes, there will be infrastructure in place to transport Bakken Shale gas to other markets, and I'm sure that we here in Minnesota will be as glad to have North Dakotan natural gas to supplement our nuclear-powered energy grid as we already are to have North Dakotan petroleum brought in by truck. Once more pipelines are built, the entire United States energy economy will become more flexible.
Still to be figured out is the economics of converting natural gas deliquefaction terminals (those cost BILLIONS of dollars and years to build or convert) along the Gulf Coast into liquefaction terminals, so that the United States can get into the business of exporting liquified natural gas. It could happen. North Africa and the Arabian Peninsula used to flare off all of their natural gas incidentally brought up during petroleum production--there was no local market for it. It took a long time to develop natural gas liquefaction; now there is international trade in natural gas that was undreamed of when I was growing up.