Is Flaring Limiting Shale Drillers' Production Capacity?

U.S. shale production is currently under pressure with natural gas flaring preventing it from reaching its true potential. For example, oil production from the prolific Bakken formation in North Dakota can easily achieve 2 million barrels per day (BPD) of output. However, the producers limited themselves to 1.39 million BPD in May due to flaring. A similar trend can be observed in the oil-rich Permian Basin and Eagle Ford, which are haunted by takeaway capacity constraints.

More on Flaring

Oil producers burn part of their natural gas output, which are by-products of production. This is called flaring. The regulatory authorities capped flaring amount to put a lid on greenhouse emission. However, surging oil production from the shale plays leads to a consequent increase in associated natural gas output and therefore flaring. In several cases, the flare cap has been softened.  

Notably, in the March-quarter alone, the Permian Basin and Eagle Ford drillers flared 740 million cubic feet of natural gas per day (Cf/d) on average. It means that the producers burned $1.8 million per day worth of gas, which is also equivalent to greenhouse gas emissions of 5 million cars, per The Wall Street Journal. In North Dakota, around 536 million Cf/d of natural gas was flared in May. With oil production projected to grow rapidly in the coming days, flaring is bound to surge, primarily due to challenges faced by existing gathering systems in the regions.

Exco vs. Williams

The whole flaring issue witnessed a significant development as pipeline operator The Williams Companies, Inc. WMB started contesting a permit request made by Exco Resources, a producer in the Eagle Ford shale. Notably, Exco intends to burn all the associated natural gas output from a series of wells in South Texas. Although these wells can be linked to existing midstream infrastructure, Exco points out that flaring the gas will be more profitable for the company than putting it in the pipelines. Zacks Rank #3 (Hold) Williams Companies fears this will deal a blow to pipeline operators who are building new pipelines in the shale regions. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.  

Currently, several natural gas pipelines are coming up in the shale plays. The Permian Highway Pipeline project of Kinder Morgan, Inc. KMI and Altus Midstream Company ALTM is expected to transport up to 2.1 billion Cf/d of natural gas through around 430 miles to the markets in Gulf Coast and Mexico. Whistler Pipeline Project of MPLX LP MPLX and Targa Resources Corp. TRGP, with 2 billion Cf/d gas transportation capacity, is expected to come online by the end of 2020. Unchecked flaring could reduce the importance of these pipelines. Drillers may tend to opt for more flaring to improve profits. Thus, the upstream and midstream energy companies in the country are keeping their eyes on the Exco versus Williams case.

Last Words

If regulators opt for easing of flaring limits, it can make midstream companies less willing to take risk in terms of investing in natural gas infrastructure. Conversely, firm regulatory capping of flaring will be favorable for midstream companies. However, it will lead to less than potential oil production from the U.S. shale plays, unless there are adequate pipelines and storage capacity.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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