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New gas flaring regulations in North Dakota has procurement implications

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by Beroe Inc.
16 April 2015

Over the last few years, about one-third of natural gas produced in North Dakota has been flared, instead of being sold or consumed on-site.

The swift growth in North Dakota production, which spiked from about 230,000 barrels per day (bbl/d) in January 2010 to more than 1,130,000 bbl/d in August 2014, has resulted in increased volumes of associated gas, or natural gas that stems from oil reservoirs.

The alternative to flaring these excess volumes is to build extra infrastructure to collect, process and transport them to where the demand is.

However, well operators are reluctant to invest in additional infrastructure as it could potentially slow down production.

Considering various complexities involved in the industry, North Dakota Industrial Commission (NDIC) has announced targets to gradually reduce the amount of gas flared over the next few years.

NDIC Additional gas flaring limits,  ADOPTED JULY 1,2014
Deadline Flaring limit (% of gas produced)
October 1 2014 26%
January 1 2015 23%
First Quarter 2016 15%
Fourth Quarter 2020 10 (Potential for 5%)

Source: http:// www. eia .gov/todayinenergy/detail.cfm?id=18451

Owing to price difference between oil and gas, producers prefer to extract more oil from the new wells and the resultant gas is flared.

If numbers are to speak, 33% of the liberated gas, which is 94.6 Billion cubic feet was flared in 2013 in North Dakota Bakken area. In contrast, Texas region flares less than 1% of the gas produced - thanks to the presence of sufficient infrastructure that takes care of excess gas.

Source: http:// www. eia. gov/todayinenergy/detail.cfm?id=18451

The NDIC regulation, which was approved in the third week of March, carries actions against operators who fail to meet gas-capture goals.

In case of violation, the operator receives a verbal notice in the first month and a written notice in the second month. In case of non-compliance after a period of three months, the operator could be penalized up to $12,500 per well per day.

Given this scenario, let us now focus on the procurement impact of this new regulation.

Procurement managers have two choices with regards to setting up of gas-capture infrastructure.

The company can go ahead and build their own infrastructure - this would entail specific set of procurement priorities and KPIs; or, the company can outsource it to a third-party service provider, which, in turn, will entail very different set of procurement priorities when compared to the first option.

For now, owing to the nascent nature of flaring regulations and related technologies, oil and gas firms in the Bakken region are outsourcing this activity to third party service providers.

Third parties such as Ferus Natural Gas Works, TRF Energy, Bakken Express LLC are first movers in this space and are collaborating with large E&P operators for setting up CNG based infrastructure to harness natural gas.

The need of the hour is to cut costs as much as possible rather than cut back on their drilling schedules. And for now, the prolonged drop in oil prices and new environmental regulations compel procurement teams to go with third party service providers.

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