A lack of pipelines in McKenzie County, N.D., forced the Orvis State well on the Evanson family farm to flare gas in 2013. Image source: Tim Evanson/Flickr.

The energy boom produced by shale formations across the United States has led to many favorable developments. The United States is the world's top oil producer, gasoline prices have fallen below $3 per gallon across the country, natural gas has pushed dirtier and less-efficient coal power plants out of commission, and top-producing states have added tens of thousands of jobs in a matter of years. But, as with any technology, several glaring negatives must also be considered.

One of the most intriguing problems plaguing producers such as Continental Resources is the lack of infrastructure capable of handling the massive amounts of natural gas rushing out of shale formations. When producers don't want to sacrifice profits from oil drilling to install systems capable of capturing, storing, and transporting associated gas (natural gas from oil reservoirs) or regional infrastructure simply cannot accommodate all of the natural gas pumped from actual natural gas wells, producers simply ignite the excess in a practice known as flaring. And while flaring is a visible downfall of the energy boom, research shows that leaks in installed infrastructure lead to the majority of methane emissions from the oil and gas sector.

Simple solutions are available, including installing the proper equipment at each well to handle excess natural gas or building additional regional infrastructure such as pipelines to boost capacity and shore-up leaky equipment. However, producers aren't incentivized to clean up their act, which would result in more natural gas flowing into the market that would reduce their profits with higher volumes. Worse yet, producers such as Continental Resources can still collect royalties on flared gas "produced" from their wells.

What if there was a way to monetize the costs associated with gas flaring or better infrastructure without flooding the market with cheap natural gas? Thanks to some ancient microbes and some clever engineering by biotech companies such as Intrexon (NASDAQ:XON), that reality could be closer to commercialization than you think.

How bad is flaring?

Economically speaking, flaring is a big problem. The U.S. Energy Information Administration says the United States flared 260,394 million cubic feet of natural gas in 2013 at an average price about $3.71 per mmBTU. After a few conversions we can determine that the nation lost $995 million worth of natural gas due to flaring last year -- and those are only the reported and estimated numbers. North Dakota, home to the Bakken formation, entered 2014 flaring 37.5% of total natural gas production.

Image source: EIA.

Visually speaking, well, flaring is actually pretty cool, although the pretty pictures from space demonstrate the seriousness of the problem. NASA Earth Observatory has published satellite images of shale energy regions taken at night without effects from moonlight. Here's an image from the Bakken region in 2012. Major cities (Minot, Williston, and Bismarck, all in North Dakota) are characterized by bright spots, as are major energy wells operated by Continental Resources, such as those in the triangle drawn between the words "Dickinson", "Bismarck," and "North Dakota" on the map.

Image source: NASA Earth Observatory.

Here's an image from 2013 showing the Eagle Ford shale in Texas compared to some of the state's major cities.

Image source: NASA, found on NPR.

While it may look cool from space, you should come back down to Earth -- where flaring is an environmental problem. Natural gas contains gaseous compounds such as methane and ethane, the former of which is disproportionately more lethal to the Earth's atmosphere than carbon dioxide. So to avoid releasing large amounts of methane into the atmosphere, producers combust excess gas to form the lesser of two evils, carbon dioxide. Producers face a difficult choice, but it should be noted that methane emissions from oil and gas production have fallen 11% since 2008, although oil and gas systems are still responsible for 70% of methane emissions from energy production. Carbon dioxide emissions from oil and gas have only risen by 8% in the same period.

The absolute gains in carbon dioxide emissions from flaring may represent a fraction of our nation's total carbon dioxide emissions, but they have absolutely no economic value compared to those from industrial or agricultural activities. By focusing on monetizing emissions, we find that the highest value opportunities lead directly to substantial reductions. 

How can biotech help?

To better understand the feasibility of a biotech solution to natural gas flaring, we'll have to go back. Waaayyy back, like, 3.8 billion years back.

Many of the first life forms to arise on Earth didn't get energy from consuming sugars (there weren't any) or oxygen (there wasn't much) or sunlight (good luck piercing through the thick atmosphere!) -- metabolisms typically associated with familiar microbes today such as E. coli, yeasts, and algae. Instead, early microbes worked with what was available, which happened to be high concentrations of reduced gases such as carbon dioxide, carbon monoxide, methane, and hydrogen -- the same troublesome gases industrial processes produce today.

Algae get all the press, but acetogens are making an industrial comeback. Image source: LanzaTech.

These organisms still exist, of course, and a handful of companies are working to understand the genetic processes for enhancing and replicating the consumption of methane to produce valuable chemicals. Intrexon is developing industrial methanogens, or methane-consuming microbes, to produce isobutanol and the hydrocarbon farnesene, which is the flagship molecule of synthetic biology pioneer Amyris with applications in fuels, lubricants, polymers, fragrances, cosmetics, and more.

Why choose methane over sugar, especially if economically viable microbes capable of consuming abundant sugar resources already exist? Sugar is among the most volatile and expensive feedstocks on an energy basis, while methane is typically among the least volatile. I'm not sure this is the proper comparison to focus on when it comes to fermentation technologies, but this chart was presented several times (including by Intrexon) at a conference I recently attended. I'll admit I was critical in the past of methane fermentation, but I was likely considering the wrong metrics for comparison and have lately come around on the technology's potential.

Commodity data compiled from Index Mundi. Chart created by author.

It's important to remember that what you see isn't what companies pay. If Intrexon approached an energy producer to commercialize a methanogen and produce valuable chemicals including farnesene, then it's quite possible the company wouldn't pay for waste methane at all after capture and storage costs. Instead, it would share in the economic gains realized from profitable production of bio-based chemicals with an energy producer.

Investors should consider that the size of the potential markets are much, much larger than the nearly $1 billion in annually flared gas. Instead, companies such as Continental Resources could monetize more of their natural gas reserves (including royalties) and tap into various high value chemical markets worth billions of dollars each. For instance, farnesene can be processed into high-value compounds for cosmetics and even fragrances, while isobutanol could target markets worth tens or hundreds of billions of dollars. This is a true win-win scenario for energy producers and next-generation biotech companies developing novel technologies. You can tack on another "win" if you consider the environmental benefits that would come from slashing methane emissions. 

What does it mean for investors?

It's still early, but industrial biotech platforms will inevitably move into direct applications targeting more efficient and sustainable energy production. While Intrexon investors would not reap significant gains from its methanogen portfolio in the near term, the organism company has been given the benefit of the doubt thus far for hopes around commercializing its product portfolios spanning health care, energy, and food applications. A bountiful product pipeline spreads risk and reward for investors.

Meanwhile, energy producers would actually be incentivized to reduce the amount of gas flared if they had some way to monetize the costs, rather than dumping extra capacity into the markets. There are still hurdles to overcome, such as capturing, storing, and transporting gas from distributed oil wells, but a modular bioreactor design could theoretically be deployed to address those issues. Excess natural gas well capacity would be economical if producers knew they could process it into high value chemicals downstream, thus requiring shorter additional pipelines to a local manufacturing facility, not the national energy distribution network. 

However you look at it, the energy industry needs to take action and address the wasteful practice of flaring excess natural gas. Next-generation biotech platforms offer a valuable solution that are worth keeping an eye on.