A group calling itself the “Niger Delta Avengers” has launched numerous attacks on oil infrastructure in Nigeria since February. These attacks have caused the already-vulnerable African economy to spiral further toward a recession. Read more
Recently I wrote about how oil companies are flaring off $100 million worth of gas a month in the Bakken formation and what a huge waste or resources that represents.
Well, it didn’t take long for something to happen. A group of five law firms representing Bakken property owners sued 10 oil companies to end the practice. Their logic? It doesn’t involve environmental pollution or global warming. Instead, they’re arguing that the oil companies are depriving them of hundreds of millions in royalties by flaring off all that gas.
The case makes perfect sense. Gas is a valuable resource and the property owners are being deprived of huge amounts of money by wasting it. The case also avoids the complications that would come if the suit had been brought by the Sierra Club or Natural Resources Defense Council on environmental grounds. That would have involved all kinds of testimony about whether the flaring is really having an impact on the weather and what the level of damages might be. Instead, this is a straightforward case of dollars and cents. The property owners are being deprived of huge royalties. The oil companies have to compensate.
But beyond that, the lawsuit also offers a glittering opportunity to put methanol and its potential role in the transportation economy in the spotlight. So far, nobody’s talking about it much, but the conversion of natural gas into methanol could play a huge part in resolving this case.
The Bakken has developed so fast that the producers have not even been able to build oil pipelines into the area yet. Instead, the oil is being shipped by truck and rail. Burlington Northern has extended its lines into the region and most of the oil is now finding its way into major pipelines. As a result, Bakken production has leaped to 850,000 barrels a day, catapulting North Dakota into the number two position as an oil-producing state, behind Texas.
But the gas is a different thing. It can’t be stored in large quantities and pipelines are a long way from being extended and probably not worth it. Oil is now give times more valuable than gas at the wellhead, which gives drillers an enormous incentive to go after the oil and forget about the gas, hence the flaring. Thanks largely to North Dakota, we have moved into fifth place for flaring, behind Russia, Nigeria, Iran and Iraq, and ahead of Algeria, Saudi Arabia and Venezuela. The amount of gas flared around the world equals 20% of U.S. consumption. When we’ve moved ahead of Hugo Chavez, it’s time to do something about it.
So far, the proposed solutions have involved compressing natural gas or synthesizing it into more complex liquids. “The industry is considering and adopting various plans to flare less gas, including using the gas as fuel for their rigs and compressing gas into tanks that can be transported by truck,” reports The New York Times. “A longer-range possibility would be the development of projects that could produce diesel out of gas at or near well sites.” Hess, which already has a network of pipelines in the area, is rushing to complete a processing plant at Tioga that will turn gas into diesel and other more complex fluids.
But a better solution would be portable, on-site processing plants that can convert methane to liquid methanol, a far simpler process. Gas Technologies, a Michigan company, has just developed a conversion device that sits on the back of a trailer and can be hauled from well to well. “We have a patented process that reduces capital costs up to 70%,” said CEO Walter Breidenstein. “If we’re using free flare gas, we can reduce the cost of producing methanol another 40-5%.” Other companies are working on similar technologies for converting natural gas to methanol on-site.
All this would help bring attention to the role that methanol could play in replacing oil in our transportation economy. California had 15,000 methanol cars on the road in 2000 and found drivers were extremely happy with them. Methanol also fits easily into our current infrastructure for gasoline. But California gave up on the project because gas supplies seemed to be dwindling and the price was too high. Now we are flaring off 25% of the nation’s consumption in one state and methanol could easily be produced for $1.50 a gallon. It’s time to re-evaluate.
Of course, Walter Breidenstein will probably find that flared gas will not be offered for free. Those Bakken property owners still want their royalties. But the North Dakota lawsuit proves a spur for on-site methanol conversion and great opportunity to highlight the role methanol could play in our transportation economy.
You can see them from outer space. The flames from natural gas flares in the Williston Basin of North Dakota now throw off a nighttime glow larger than Minneapolis and almost as big as Chicago. All that energy is going up in smoke.
Ceres, a Boston nonprofit organization, issued a report last week illustrating that the huge surge in oil production in the Bakken Shale has outrun the drilling industry’s ability to cope with the natural gas byproduct. “Almost 30% of North Dakota gas is currently being burned off,” the report said.
The report also states, “Absolute volumes of flared gas have more than doubled between May 2011 and May 2013. In 2012 alone, flaring resulted in the loss of approximately $1 billion in fuel and the greenhouse gas emissions equivalent of adding one millions cars to the road.”
The loss rate has actually been reduced from 36% in 2011, but production has tripled in that time, meaning that an additional 266 billion cubic feet (BCF) a day is going up in smoke.
Moreover, according to the report, North Dakota gas contains other valuable products. “The natural gas from the Bakken formation contains high volumes of valuable natural gas liquids (NGLs), such as propane and natural gasoline, in addition to dry gas consisting mostly of methane. It is potential worth roughly four times that of the dry gas produced elsewhere in the United States.”
“There’s a lot of shareholder value going up in flames,” Ryan Salomon, author of the report, told Reuters.
So why can’t more be done to recover it? Well, unfortunately, according to the North Dakota Industrial Commission, the spread between the value of gas and oil, which has stayed pretty close historically, has now increased to 30 times in favor of oil in the Bakken. Even nudging up gas prices to $4 per thousand cubic feet (MCF) in recent months hasn’t made much difference. Consequently, it isn’t worthwhile trying to collect gas across widely dispersed oil fields.
Encouraging this waste is a North Dakota statute that exempts flared gas from paying any severance taxes and royalties during the first year of production. Since most fracking wells have a short lifespan, gushing forth up to 60% of their output in the first year, this makes it much easier to write off the losses.
Nonetheless, all this adds up to a colossal waste. As of the end of 2011, the amount of gas being flared each year in North Dakota was the equivalent of 25% of annual consumption in the United States and 30% Europe’s. The high burn off has moved the country up to fifth place in the world for flaring, only behind Russia, Nigeria, Iran and Iraq, and ahead of Algeria, Saudi Arabia and Venezuela. Although the World Bank says worldwide flaring has dropped by 20% since 2005, North Dakota is now pushing in the opposite direction. Altogether, 5% of the world’s gas is wasted in this way.
Efforts are being made to improve the situation: with big hitters are doing their part. Whiting Petroleum Corporation says its goal is zero emissions. Hess Corporation, which has a network of pipelines, is spending $325 million to double the capacity at its Tioga processing plant, due to open next year. Continental, the largest operator in the Bakken, says it has reduced flaring to 11% and plans to reduce it further. “Everybody makes money when the product is sold, not flared,” Jeff Hunt, vice chairman for strategic growth at Continental, told Reuters.
But it’s all those little independent companies and wildcatters that are the problem. Storage is impossible and investing in pipeline construction just too expensive. Entrepreneurs are doing their part. Mark Wald, a North Dakota native who had left for the West Coast, has returned to start Blaise Energy Inc., a company that is putting up small gas generators next to oil wells and putting the electricity on the grid. “You see the big flare up there and you say, `Something’s got to be done here,’” he told the Prairie Business.
But the long-term solution is finding new uses for natural gas and firming up the price so that its collection is worthwhile. What about our transport sector? We still import $290 billion worth of oil a year at a time when as much as half of that could be replaced with domestic gas resources. Liquid natural gas, compressed natural gas, conversion to methanol, conversion to ethanol – there are many different ways this could be promoted right now. Ford has just introduced an F-150 truck with a CNG tank and an engine that can run on either gas or gasoline. With natural gas selling at the equivalent of $2.11 a gallon (and even cheaper in some parts of the country), the new model can pay off the additional $9,000 price tag in two to three years. There are now an estimated 12,000 natural gas vehicles on the road and the number is growing rapidly. “This is an emerging technology in a mature industry,” Ford sustainability manager Jon Coleman told USA Today.
But an even better way to harvest this energy might be to design small, transportable methanol converters that could be attached to individual gas wells. Methane can be converted to methanol, the simplest alcohol, by oxidizing it with water at very high temperatures. There are 18 large methanol plants in the United States producing 2.6 billion gallons a year, most of it consumed by industry. But methanol could also substitute for gasoline in cars at lower cost with only a few adjustments to existing engines. The Indianapolis 500 racers have run on methanol for more than 40 years.
The opportunities in the Bakken are tremendous – and the need to end the waste urgent. The U.S. Energy Information Administration estimates that production in the Bakken is due to rise 40%, from 640,000 to 900,000 barrels per day by 2020. North Dakota has already passed Alaska as the second-biggest oil producing state and now stands behind only Texas, where pipeline infrastructure is already built out and less than 1% of gas is flared.
The increased production, matched with the expanding technology for using gas in cars, presents an enormous opportunity.
“And that’s the way it is” was used by my favorite news anchor, Walter Cronkite, to sign off on his highly respected network news show. And that’s the way the content he generally delivered generally was — clear, factual, helpful. I have tried to apply Cronkitism to today’s media analyses and commentary on oil production and oil prices. The new assumed “way it is” regrettably sometimes seems like the way the journalist or his boss — whether print, TV or cable — wants it to be or hopes it will be. Frequently, partial sets of facts are marshaled to ostensibly determine clear cause and effect relationships but end up confusing issues and generating questions as to the author or speakers mastery of content and conclusions.
What’s a Cronkitist to do? I often look to The New York Times for the wisdom grail. Generally, it works. But, I must confess that a recent piece in the Times by outstanding journalist, Clifford Kraus, titled “Is Stability the New Normal?” Oct. 9 bothered me. I found its thesis that a new stability has arrived with respect to oil prices and by implication gas prices at the pump a bit too simple.
The author indicates that “predictions about oil and gas prices are precarious when there are so many political and security hazards. But it is likely that the world has already entered a period of relatively predictable crude prices…there are reasons to believe the inevitable tensions in oil-producing countries will be manageable over at least the next few years, because the world now has sturdier shock absorbers than at any time over at least the past decade.”
What are these absorbers? First, more oil production in the U.S., Canada, Iraq and Saudi Arabia, to balance the loss of exports from countries like Iran, Libya and, I assume, Venezuela and possibly Nigeria. Second, the continued spread of oil shale development throughout the world, including many non-Middle East or OPEC countries. Third, increased auto efficiency, conservation and lower demand for gas in the U.S. Finally, near the end of the article and not really seemingly central to the author’s stability argument natural gas becomes in part a hypothetical “if.” He notes that American demand for gasoline could drop below a half a billion barrels a day from already below peak consumption, if natural cheap gas replaces more oil as a transportation fuel. (At least he mentioned natural gas as a transportation fuel. Most media reports fail to tie natural gas to transportation) break open the champagne! Nirvana is near! Michael Lynch, a senior official at Strategic Energy & Economic Research Inc., is quoted in the article, saying, “Stable oil prices could reduce future inflation rates and particularly curb transportation costs, helping to steady prices of food and construction materials that travel long distances…Lower inflation can also help reduce interest rates. By reducing uncertainty, investor and consumer confidence should both be increased, boosting higher spending and investment and thus economic growth.”
In the words of Oscar Hammerstein II, I want to be a cockeyed optimist…but something tells me to be at least a bit wary of a too-good-to-be-true scenario, one premised on a historically new relatively high price of oil per barrel (bbl.), just under $100 (the price is now about $105) and gas prices likely only modestly lower than they are now (the U.S. average is close to $3.50 a gallon)
So why be wary and worry?
1. The Times accepts the rapid significant growth in oil shale development and production too easily. Maybe they are right! Perhaps the oil shale train has left the station. But the growth of environmental opposition, particularly opposition to fracking, will likely slow it down until regulations perceived as reasonable by the industry and environmentalists are put in the books. Further, the often very early large expectations with respect to new pools of oil in places like the Monterey Shale, featured in media releases, have not panned out after later sophisticated analyses. Finally, the price of hard to get at oil may come in so high as to limit producer enthusiasm for new drilling.
2. The Times correctly suggests that the relationship between oil prices and gasoline costs may be less than thought conventionally. Lower oil costs in the U.S. do not necessarily trigger lower gasoline costs, and higher gasoline costs are not necessarily the result of higher oil costs per barrel
The Times credits the recent visible break in the relationship primarily to an abundance of oil linked to oil shale production in the U.S. and in many other countries and to falling demand for oil throughout the world, including China, to the lack of economic growth and higher efficiency of vehicles.
It’s more complicated. For example, price setting is affected in a major way by speculation in the financial community, and by oil producers and refiners who govern production and distribution availability. Respected analysts and political leaders suggest that companies base their decisions concerning price at least in part on market and profit assumptions. Fair. But, oil’s major derivative gasoline does not function in a free market, rather, it is a market controlled by oil companies. There is little competition from alternative fuels. Unfair and inefficient.
3. The quest for oil independence and the related justification for drilling lead the media to suggest and the public to believe that there is an equivalency between increased production of oil and closing the gap between what we consume and produce as a nation. Yes, we have reduced the gap — both demands have fallen and production has increased. But it is still around 6.0 to 6.5 million barrels per day. Yet, we continue to export nearly half of what we produce every day or nearly 4 million barrels. Our good friends, China and Venezuela, get 4% and 3% respectively. Companies may sing “God Bless America” while extracting, refining, exporting and importing oil, but theologically based patriotism doesn’t govern the oil market. Sorry, but global prices and profits have precedence. Remember the adage — “the business of business is business.”
4. A recently released Fuel Freedom Foundation paper suggests that energy independence is a misnomer. Based on its review of EIA data and projections through 2035, negative energy balances exist that never drop below a $300 billion deficit. If EIA data is to be believed, energy independence, Saudi America and control of our energy future are developments that will not occur anytime soon.
I am disappointed that natural gas as an alternative fuel seems more like an afterthought coming at the end of Kraus’s long piece. I am glad the author mentioned it but it seems at least a bit forced. The commentary was limited to natural gas and not its derivatives, ethanol and methanol, or, for that matter, other alternative fuels. Put another way, it seemed to assume a still very restricted fuel market. Opening up consumer choices at the pump is a key factor in stabilizing oil and gas markets. It also is a key factor achieving reduced prices at the pump for low and moderate income families; the former spending from 14-17% of their limited income on gasoline.