North Dakota's flaring is visible from space. Photo credit: NASA.
With oil production in North Dakota surging to over 1 million barrels per day, the state now produces more oil than two members of OPEC. However, that output increase from fracking has created a big issue that the state hasn't yet adequately addressed: about 30% of the natural gas produced along with oil in the state is flared into the atmosphere. By comparison, Texas produces even more oil but flares just 1% of that natural gas. This has become an out-of-this-world problem that North Dakota is finally beginning to face down.
Reduce flaring or else
North Dakota's Industrial Commission wants to capture 74% of natural gas by the fourth quarter of this year and 77% captured by the first quarter of 2015. That reduction can come in one of two ways: the gas can be piped to processing plants and then sold, or producers can curb production until pipes can be built and the gas processed and sold. Needless to say, the forced production curb should be more than enough incentive to persuade energy companies to make plans to reduce flaring.
Natural-gas infrastructure has lagged oil production growth, largely because the economic incentive to get the gas into pipelines hasn't existed until now. The Industrial Commission's new demands should be all the incentive producers need. Investors should watch the situation closely as it will create profitable opportunities to those companies providing solutions.
Source: Hess.
Who wins?
Some companies already have solutions in place to reduce flaring. Hess (HES 0.69%), for example, recently tripled the capacity of its gas processing facility in the state to handle greater volumes of Bakken shale production. Hess' vice president for the Bakken noted in a recent Wall Street Journal article that the company saw no alternatives other than the plant expansion. However, Hess is now freed from the same threat of production curbs that its oil-producing peers face.
One company working on solutions to reduce natural-gas flaring in North Dakota is ONEOK Partners (OKS). The company is investing upward of $2.5 billion on natural-gas gathering and processing infrastructure in the Williston Basin. One key project is its Divide County Gathering System, which is expected to be complete by the end of this year. When combined with the rest of the company's gas gathering infrastructure, it will enable ONEOK Partners to move the gas from wells to the processing plants it operates and those still under construction. The following slide notes the projects that ONEOK Partners plans to complete in the basin by the end of next year.
Source: ONEOK Partners Investor Presentation (link opens a PDF).
A third company that could emerge as a big winner from reduced flaring in the Bakken shale is Targa Resources Partners (NYSE: NGLS). The company is doubling the processing capacity of its Badlands system from 38 MMcf/d to 78 MMcf/d this year. Targa has also proposed to build a number of new natural-gas gathering pipelines that would give producers an outlet for removing the gas, rather than requiring flaring. Given the state's push to reduce flaring, these pipelines are likely to be built, which should earn additional profits for Targa Resources Partners.
Investor takeaway
North Dakota is finally getting serious about curbing its flaring problem. While that could force some energy companies to curb production, it will have a much more positive impact on the environment, as well as landowners who will now get paid royalties on that gas. It will also fuel winning investments for Hess, ONEOK Partners, Targa Resources Partners, and other companies that will be piping and processing that gas.
