The flaring of natural gas in North Dakota's Bakken shale poses a major environmental risk. Roughly a third of the gas produced in the Bakken is burned as waste, largely because it cannot be processed or sold due to a paucity of marketing options.
But North Dakota state regulators are finally taking serious steps to curb this harmful practice. Last month, the state's Industrial Commission adopted new rules that require Bakken operators to submit gas-capture plans before they can receive new drilling permits.
While the new, more stringent regulations spell opportunity for midstream firms such as ONEOK Partners, they could hurt upstream producers by forcing them to spend more money on gas-capture equipment and less on drilling and completing wells, which could potentially suppress production.
But two Bakken producers -- Hess and Statoil -- should escape relatively unscathed from the new rules as they are already well on their way to meeting the requirements. Let's take a closer look at the different strategies they are pursuing to curb gas flaring.
Hess is solving the gas flaring challenge by expanding its Tioga gas plant, which will effectively triple its gas-processing capacity. Not only will this substantially reduce the volume of natural gas the company flares, but it will also significantly boost its production of valuable byproducts such as ethane, propane, methane, butane and natural gasoline.
The recently expanded Tioga Gas plant, which went into service in May, is now processing about 120 million cubic feet of gas per day, or MMcf/d, with output expected to ramp up to 250 MMcf/d in the coming quarters and eventually to more than 300 MMcf/d. By contrast, it could process only 100 MMcf/d before the expansion.
Hess estimates that the revamped plant will reduce the percentage of gas flared at its operations from roughly 25% of production currently to around 15%-20%. This puts the company in a comfortable position to comply with the new gas flaring rules, which is important because it expects the Bakken to be the single biggest contributor to its production growth over the next five years.
Luckily, Hess is one of the more efficient producers in the region, with industry-leading low production costs. As its Bakken output ramps up to an average of 80,000-90,000 barrels of oil equivalent per day this year, it should provide a significant boost to margins and cash flows and help the company begin to generate free cash flow by next year.
Statoil's innovative solution
While Hess has found a way to cut flaring through new infrastructure, Statoil is approaching the problem in an entirely different way: using gas that would otherwise be flared to fuel its Bakken operations.
Through a partnership with General Electric and Ferus Natural Gas Fuels, the Norwegian oil giant is capturing gas at the wellhead, stripping out valuable liquids like propane and butane from it, and then compressing the remaining gas into CNG using GE's "CNG-in-a-Box" system. It can then use the CNG to power its hydraulic fracturing rigs, trucks, and other equipment.
Statoil has already converted 10 of its Bakken rigs to run on a mixture of diesel and CNG. Not only does this help the company reduce gas flaring, but it also reduces operating costs since gas is considerably cheaper than diesel. Statoil reckons that its innovative method could eventually reduce its total gas flaring by about 20%.
The bottom line
While the new gas flaring rules could potentially suppress the Bakken's growth potential, they're a welcome development for the environment. Hess, with its recently expanded gas processing plant, and Statoil, with its innovative solution to capture gas that would otherwise be flared and use it to power its Bakken operations, already have a leg up on peers in complying with the new requirements.
Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Oneok Partners and Statoil and owns shares of General Electric. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.