North Dakota regulators seek balance in flaring plan

June 10, 2014
North Dakota state regulators, industry members, and mineral owners all dislike seeing natural gas go up in flames in the Bakken shale.

Rachael Seeley, Editor

BISMARCK, ND—North Dakota state regulators, industry members, and mineral owners all dislike seeing natural gas go up in flames in the Bakken shale. Unfortunately, the complex nature of planning, funding, and building the infrastructure needed to monetize this resource means there is no easy solution to the problem.

Stakeholders recently shared their thoughts on a statewide flaring-reduction plan, set to go into effect on June 1, 2014, at a public hearing of the North Dakota Industrial Commission (NDIC) in Bismarck. The plan seeks to reduce flaring to 5% of gas production by 2020.

Testimony presented at the Apr. 22 meeting was lrgely supportive of the plan, but producers and midstream operators voiced reservations about penalties for those that fail to meet reduction targets. Several companies called for enforcement policies that take into consideration the unique circumstances of each well and each company.

"We strongly support the reduction of flared gas volumes in the Bakken," Ralph Castille, principal facilities engineer for ConocoPhillips, told the hearing. "We actually want to sell every molecule of gas...we are losing money when we flare." ConocoPhillips flares 20-30% of its Bakken gas production, Castille said, and would like to reduce that amount.

Statewide, about 36% of the nearly 1 bcfd of natural gas produced in the North Dakota Bakken was flared in March as production growth continued to outstrip processing and pipeline capacity (Fig.1). The percentage of flared gas is considerably higher than the national average, with the US Energy Information Administration reporting less than 1% of total US gas p roduction was flared in 2009.

Lynn Helms, director of the NDIC's Department of Mineral Resources, said the lynchpin of the new policy is the Gas Capture Plan (GCP). Producers will be required to submit a GCP detailing how they will handle associated gas when they apply for permission to drill a well.

Included in the GCP will be information on area gathering system connections and processing plants; the rate and duration of planned flowback; current system capacity; a timeline for connecting the well; and a signed affidavit verifying that the plan has been shared with area midstream companies.

Ron Ness, president of the North Dakota Petroleum Council (NDPC), told UOGR that the GCP compels producers and midstream companies to cooperate. The NDPC led the coalition of industry representatives that drafted the flaring reduction plan.

But the devil is in the details. Although testimony delivered by producers and midstream companies to the NDIC overwhelmingly supported the goals of the flaring reduction plan, opinions ranged widely on the penalties for failure to comply with the new rules or meet reduction targets.

"I think what I heard in all of the comments was that we needed to build a system [of enforcement] with a lot more flexibility in it," Helms told UOGR. "The way it stands right now, we've got this one-size-fits-all, standard rule and we grant exceptions to it. Whereas, we need something that allows for operational problems, allows for initial well flowback, allows for the difference between wells that are connected versus wells that aren't connected."

Helms said about 10% of the Bakken is still in the early stages of development with limited access to midstream infrastructure—a fact that highlights the need for individualized enforcement plans.

Enforcement options under consideration include production curtailments, a slowdown in the approval of permits to drill new wells, and mandated use of remote gas capture and/or NGL capture technology at wellsites. Several producers voiced concern that these measures could interrupt investment plans, leading to lost revenues, and a decreased ability to invest in future wells and infrastructure—some even suggested lost revenues could prompt their companies to direct investment elsewhere.

Regardless, Helms said the NDIC needs an enforcement mechanism to make the plan work.

"[The GCP] doesn't really work as a tool unless the industrial commission enforces the operators providing their Gas Capture Plans to the midstream companies, and the midstream companies meeting with the commission and explaining how they're going to adjust their plans around that, and then the industrial commission coming around on the back side and saying: 'If you're not meeting your gas capture plan, we're going to limit your permits or restrict your production to get you into compliance with your plan,'" Helms told UOGR.

Less valuable gas

Further expansion of gas gathering, pipeline, and midstream infrastructure is the key to reducing flaring. The GCP addresses the planning aspect of this dilemma but not the capital investment side. Revenue generated by new wells—and primarily the oil these wells produce—is needed to fund operations and infrastructure expansions.

Ness said oil accounts for the majority of the value of a well. "On a scale of economic valuation of that well, you're getting 95% of the value out of that well with your oil. So your gas has to attract the investment to build that massive infrastructure," he said. In late April, Bakken crude was valued at roughly $90/bbl and Bakken gas was selling for about $4.75/Mcf—a value that could rise to $7-9/Mcf if NGL is extracted.

Investment has already been made in North Dakota's natural gas gathering and pipeline infrastructure. Ness said roughly $6 billion was invested in the state in the past 6 years, and a further $1.5 billion in projects have been announced for the next 18 months.

North Dakota is a rural state in the northern US far removed from major metropolitan centers. The population is 720,000, and little oil and gas infrastructure existed when Bakken development commenced. Only one rig was active in North Dakota when Ness joined the NDPC 15 years ago; now there are nearly 190 active rigs (Fig. 2).

NDPC figures show that, since 2006, nearly 9,650 miles of gas gathering pipeline and 1.3 bcfd of gas processing capacity have been installed—or enough pipeline to span the distance from Seattle, Wash., to Washington DC and back twice. This feat is more impressive considering the annual window for below ground construction work is 6 months long—commencing after the spring thaw in early May and ending in October.

Western North Dakota ihas 18 gas processing facilities, with six new plants or additions to existing plants slated to come online through 2015.

All of this added pipeline and processing capacity is still is not enough to meet the needs of the Bakken. About half of statewide flaring occurs at wells already connected to pipelines because, according to Ness, unanticipated technological advances have caused production to exceed earlier expectations.

Natural gas infrastructure was not built with multiwell pads in mind. Ness said: "We raced in, we built gas infrastructure in some of these areas for one to two wells per spacing unit. Today we're talking four, eight, twelve, fourteen [wells per spacing unit]. Well, that infrastructure is not capable of handling that gas," he said.

Right-of-way delays

Obtaining right-of-way is another factor that can complicate a pipeline project after a final investment decision has been made. The time needed to obtain a pipeline easement from a landowner can slow down a pipeline project and, if permission is not granted, send it back to the drawing board.

Castille told the NDIC that right-of-way is a pressing issue, and some of ConocoPhillips' Bakken wells have not come online because midstream companies and landowners are at an impasse.

Tom Wheeler, a mineral rights owner and representative of the Northwest Landowners Association, said right-of-way approval could be expedited if the NDIC drafted a standard pipeline easement contract that is fair to landowners and midstream companies. As it stands, he said, a landowner who receives an agreement from a pipeline company must then hire a lawyer to go over the contract in a process that takes at least a month. Meanwhile, pipeline companies are eager to break ground.

"It's our land; we want to be treated fairly," Wheeler said. "We are prepared to help, but we want the industry to know that landowners cannot be blamed for flaring and for wanting to protect their land."

A right-of-way task force has been formed to address this issue. Ness said the group was preparing for its third meeting in late April. A sample easement template was set to be considered, along with a fact sheet for landowners that describes the rules governing pipeline easements, their rights, and key company contact information in the event that a question arises or a problem is detected. "The landowner is the best eyes and ears and source for any problems that might appear on that pipeline …We're going to try and get that pipeline owner to ensure that landowner has a key contact," Ness said.

Establishing pipeline easements is a critical part of extending infrastructure to stranded wells and. Ness said installing pipelines will ultimately have the biggest impact on reducing flaring and truck traffic.

"The critical role of pipelines in this whole Bakken cannot be understated," Ness said.

Gov. Dalrymple plants seed for industry-led task force

BISMARCK, ND—North Dakota Gov. Jack Dalrymple planted the seed for North Dakota's flaring task force last September at a North Dakota Petroleum Council (NDPC) meeting held on the MDU Resources Group Inc. campus in Bismarck.

Dalrymple told NDPC members they needed to find a solution to the flaring problem. From the governor's point of view, "it was pretty simple. Either you fix it or I will," said NDPC President Ron Ness.

The flaring task force was formed with a roster that included a number of Bakken producers and midstream providers, among them: SM Energy Co.; Statoil North America Inc.; Enerplus Resources (USA) Corp.; WBI Energy Inc., the midstream subsidiary of MDU Resources; and ConocoPhillips Inc.

Nearly 40 meetings took place, and the NDIC formally adopted the task force's flaring-reduction recommendations in March. The rules are set to become effective on June 1.

One of the biggest challenges facing the task force was the need to get companies that are ordinarily fierce competitors to work together. "I think the biggest thing was to get the competitors over that competitive spirit—because you're still competing to get in that gas line first—and recognizing that these are statewide industry targets. If we all don't work together and find a solution then we're all going to be in the penalty box," Ness said.

Ness feels that asking the industry to propose a solution was the right choice, and the product avoids legal battles and eliminates process delays that would likely accompany state-imposed regulations.

"If you can come up with a common-sense solution that fixes the problem and doesn't have the unintended conse quence of creating a big, long, 2-year fight about implementation you're much better off," Ness told UOGR.

Lynn Helms, director of the Department of Mineral Resources, a division of the North Dakota Industrial Commission (NDIC), complimented the task force on its efforts. "I think they did a really excellent job of analyzing the size of the problem and the barriers to gas gathering and gas processing," he said.

Now it is up to the NDIC to come up with a system for enforcing the flaring reduction plan and the penalties for companies that fail to comply.

Helms said the Department of Mineral Resources hopes to present recommendations to the NDIC at its meeting at the end of June. The schedule gives the department time to gauge how compliance shapes up in the first few weeks after the rules go into effect and to consider nearly 300 pages of public comments.