The Other F-Word of Shale Drilling

If you think fracking is a deal-breaker, then you have not thought much about “flaring.” Both controversies could undo the shale gas industry, although the burning off of natural gas found alongside oil discoveries is something that oil drillers and green groups alike would prefer to minimize. But how?

Shale gas derived from sedimentary rocks deep underground needs to be captured, piped and processed before it is consumed. That requires the development of an infrastructure, or the pipelines necessary to carry the fuel to the utilities that would burn it to make electricity. Beside piping it, the energy companies are considering liquefying the gas and creating LNG that would be globally shipped.

In the absence of either option, the gas is flared, meaning it literally goes up in smoke — in the form of all types of types emissions. That inflames not just the environmentalists who are concerned about greenhouse gases but also investors who furthermore say that such fuels are valuable assets that must be monetized.

“A lack of aggressive industry action also invites potentially inhibiting regulatory responses,” says a letter written by stockholder activists at CERES to all chief executives of companies with shale gas operations. Any actions that would restrict drilling would affect supplies, and the subsequent ability of the industry to fulfill demands.

In the United States, flaring is most prevalent in North Dakota’s Bakken field, the investors say. But they add that concerns are escalating elsewhere around the country, including the Eagle Ford shale region in Texas as well as in Colorado’s Niobrara and Ohio’s Utica shale repositories.

In North Dakota alone, the investment group says that 30 percent of natural gas discoveries are flared, or 100 million cubic feet per day. That amounts to the forsaking of $110 million in revenues per year. The state is working hard to build out its pipeline network, but CERES adds that such development is occurring at a slower pace than the drilling taking place.

The Interstate Natural Gas Association of America commissioned ICF International to review the country’s anticipated pipeline requirements in a world where unconventional forms of gas such as shale gas are expected to make up two-thirds of the total natural gas mix by 2035. It makes a few assumptions that range from a price of $4-$7 per million Btus as well as an increase of 1.3 percent in the expected electricity demand per year for at least a decade.

To get there, the United States and Canada will require an average yearly investment of $8.2 billion, or $205 billion over the next quarter century. The trade group notes that the industry has invested $8 billion during a three year period from 2006 to 2010 — a “strong indication” that it will continue to make the necessary capital allocations if the regulatory environment permits.

By 2030, the U.S. and Canada will need approximately 29,000 to 62,000 miles of additional natural gas pipelines as well as 370 billion to 600 billion cubic feet of additional storage capacity, says the study. If the country does not to rise to the challenge, it would create supply disruptions and price volatility would increase.

Globally, meanwhile, flaring remains prominent. New data released by the World Bank this past summer shows that flaring rose from 138 billion cubic meters to 140 billion cubic meters. That is mainly because of increased activity in Russia and the United States, specifically North Dakota. Iraq, Kazakhstan and Venezuela are also major contributors.

“The small increase underlines the importance for countries and companies to sustain and even accelerate efforts to reduce flaring of gas associated with oil production,” says Bent Svensson, manager of the World Bank-led gas flaring project. “It is a warning sign that major gains over the past few years could be lost if oil-producing countries and companies don’t step up their efforts.”

If producers could harness and sell the gas, they would do so. That’s why they are investing billions throughout the LNG value chain — everything from liquefying stations, to transport ships to re-gasification ports to pipelines.

ExxonMobil, for instance, is spending $3.5 billion to prevent flaring in Nigeria. To that end, it has built LNG facilities that will process about 950 million cubic feet of natural gas per day, or enough to make 50,000 barrels of natural gas liquids. Meantime, Royal Dutch Shell and Mitsubishi are now working in Iraq to build an LNG infrastructure that will take 700 million cubic feet of natural gas that is typically burned off every day there. Shell is further expected to invest $3 billion over the next several years in Nigeria and all to collect stranded natural gas.

While capital intensive, more LNG projects will get built to accommodate the stranded gas. The host governments, meanwhile, will reap millions in new tax revenues. High global demand for natural gas will furthermore ensure it.

Environmentalists, meantime, would prefer less drilling and fewer emissions. But they must now reconcile their concerns over flaring with those of producers, who are trying to expand their pipeline and LNG networks. The situation has long lurked but if the two sides can bridge their differences, the natural gas at issue could be processed and consumed instead of burned off and wasted.

Originally pubished at Forbes. Photo credit: © Leonidikan | Dreamstime.com.