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Comment by uvdiv | Hacker News Reader

I think the raw numbers speak for themselves.

The amount of gas being flared in North Dakota is about 150 million cubic feet per day [0], worth (at $3.95/thousand cubic feet, at the wellhead [1]) $220 million per year.

The amount of oil being sold is 728,000 barrels per day [2], at $95/barrel, worth $25.3 billion (B) per year.

For the oil producers, this flaring is a financial rounding error (<1%). I think it's credible that $200M/year of gas, distributed over hundreds of oil wells, can be unprofitable to recover.

In various metrics: the natural gas flared / oil produced is

* 0.9% of the value ($$$)

* 3.7% of the raw energy (Joules)

* 2.6% of the raw carbon (-> CO2)

[0] http://www.nytimes.com/2011/09/27/business/energy-environmen...

[1] http://www.eia.gov/dnav/ng/ng_pri_sum_dcu_nus_a.htm

[2] http://online.wsj.com/article/SB1000142412788732429660457817...

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The problem is less capturing the gas profitably as it is shipping it. Natural gas can be transported in pipes or multi-modally as liquefied natural gas (LNG). LNG liquefaction/gasification terminals, however, are , politically volatile multi-billion dollar, multi-year [1] fixed investments.

Localisation is an un-solved problem - natural gas trades at 3.48 USD/MMBtu in the U.S [2]. Japan is importing LNG at 16.49 USD/MMBtu [3] - that's nearly five times the American price.

North Dakota presently lacks the pipeline capacity to export even its crude - lorries are commissioned to truck the stuff to refineries. As mentioned, you can't truck gas. So it's a choice between (a) releasing it into the atmosphere directly, (b) flaring it into the atmosphere, or, (c) delaying American crude production until a natural gas pipeline can be constructed. B is less environmentally harmful than A. C is economically a bad decision (time value of money/resources).

[1] http://www.freeportlng.com/Liquefaction_FAQs.asp#howlong

[2] http://www.bloomberg.com/energy/

[3] http://ycharts.com/indicators/japan_liquefied_natural_gas_im...

Genuine question - Can't a natural gas power plant be built nearby? Assuming access to grid is not far, extra power can be sold to nearby markets.

The issue with that, is that here in North Dakota, we don't have the infrastructure in place to take that electricity out of state. We already have a coal plant along with a hydroelectric plant that produce more than the state needs (along with some wind towers in several places).

Closing the coal plant and building a gas plant is probably the best solution.

The price of LNG liquefaction plants is huge and you want them on the sea so you need pipelines too.

Ingenious idea - let's play with it :).

In September 2012 a Boston-based energy group announced that it expected to complete an 800MW natural gas power plant in Oregon within 4 years at an expected cost of $850 million [1]. Let's use this as our naïve project cost paid up-front in equity. Thus, production begins at t+4 (2017).

Let's use uvdiv's estimate [2] of $220 million of natural gas being flared each year. Let's create a paramater, capture, for the fraction of the flared gas one is able to burn in the plant. I have no idea how to estimate this; it shall be the variable we solve for. Given that from 2008 to 2011 Chesapeake Utilities Corporation (NYSE:CPK), a natural gas distributor (close enough), ran a quck-and-dirty EBITDA margin of about 40% [3] we'll assume our annual cash flows from the operation be around $220 million * capture * 40%.

The State of North Dakota believes the Bakken wells "will take 15-20 years to develop" [4]. Some guy on the internet (in the Oil & Gas Journal) thinks the fields could sustain for 30 years [5]. Thus, we are going to assume a constant quantity of natural gas gets flared each year from now until 2045. Actually, it's worse than that, since we're assuming a constant $220 million of natural gas being flared (you hedged natural gas prices for the next thirty years with IKB Deutsche Industribank).

Chesapeake Utilities pays about 6% YTM on its 2031 non-callable bond [6]; we're going to use that as our discount rate.

Assuming the universe explodes in 2045, i.e. ignoring the salvage value/cost of the plant after thirty years, our hypothetical natural gas power plant breaks even provided you can capture at least 85% of the flared gas.

Let's allow natural gas flaring, and thus our cash flow production, to decline by 3% annually (approximate decline in U.S. petrol production from 1980 to 2000) for 20 years from 2045 through 2065. Given that we built our model around the cost of an 800MW plant, I allowed both the cost of the plant and capture efficiency to vary; here are the results: http://imgur.com/h9yaa. I'd say plausibility is sustained.

∴ Back-of-the envelope it doesn't look like a strikingly profitable proposal, but with proper connections to the national electricity grid and some clever financing it could be a deal. Bakken & Three Forks is only half a decade old.

[1] http://www.toledoblade.com/Energy/2012/09/06/Natural-gas-fir...

[2] http://news.ycombinator.com/item?id=5073583

[3] http://www.google.com/finance?q=NYSE%3ACHK&fstype=ii&...

[4] http://www.nd.gov/ndic/ogrp/info/g-015-033-faq.pdf

[5] http://www.ogj.com/articles/print/vol-110/issue-4/exploratio...

[6] http://reports.finance.yahoo.com/z2?ce=571504915152148601684...

This misses the important stuff:

* The extra flaring is temporary, because gas pipeline which could/would be built isn't there [0]. The issue isn't capturing gas in general, but capturing it right away, this year. Your four-year power plant construction doesn't solve this.

North Dakota even has a shortage of oil pipelines [1]; they are shipping out oil by rail, at a $5-$10/barrel premium, rather than delay.

* The "interesting" part of the cost is the capture/distribution at the well. These wells are small and remote. There are 8,000 of them [2]. The amount of flared gas is just $25,000/year per well (naive average).

Already 70% of the associated gas is captured; presumably, the 30% that is flared is more difficult.

* If they extract shale gas on a large scale, they can build long-distance pipelines cheaply. There is no economic need to site power plants near the gas field -- this is a solution in search of a problem.

* If they extract shale gas on a large scale, the amounts would be much larger than the amount being flared: they will purposefully seek out gas pockets. What they're flaring now is gas they don't want to extract.

* There's incentive to delay shale gas projects: there's an enormous gas glut in the US, which is depressing prices. Things which could be otherwise profitable are temporarily not.

[0] http://www.nytimes.com/2011/09/27/business/energy-environmen...

[1] http://online.wsj.com/article/SB1000142405297020370750457701...

[2] https://www.dmr.nd.gov/oilgas/stats/historicaloilprodstats.p...

This is not proposing a shale gas project. No pipes. It's best thought of as a waste-to-product project, similar to companies who bake slag into bricks.

There is a supply of gas in search of demand. The infrastructure to move the gas does not exist and is costly to erect. The infrastructure to move electricity is easier to erect (do-able in the 4 years a plant would take to put up). The arbitrage is in converting the natural gas into electricity, which can more easily be exported. Again, no pipes.

Yes, there is good reason to delay shale gas projects. But this is not a shale gas project. The gas is an input. Low gas prices are a plus.

How would you get it from the 8 000 wells to the plant? Initially, probably by truck (they do this in Kazakhstan). Laughing? I recently worked on a deal that transported oil, by truck, from Oklahoma to the Gulf of Mexico, because there was insufficient rail or pipe capacity. The cracking spread was wide enough. The argument here is that the oil companies would be willing to part with the waste gas for a nominal fee, particularly if one could get an environmental agency on one's side. You'd be "buying" natural gas below market and selling electricity at market.

"Back-of-the envelope it doesn't look like a strikingly profitable proposal"

I think this requires more than a look at the bottom line of the gas companies. You've got to include the heath risks and quality of life from the prospective of the residents of the state.

If a gas power plant is more environmentally friendly than flared stacks (I have no idea if it is) then it would be amazing just to break even on this deal because you're profit is the health of the citizens.

Continuing this thought, the gas companies are theoretically losing $200 million a year by not doing anything. That means, if a gas plant is more environmentally friendly, they don't even have to break even on the deal. The gas companies can lose ~$200 million a year on a project like this, have the same financial outcome and still come out ahead environmentally.

Edit: My math was off. I was figuring that they were spending ~$220/year, which they are not. That means my last statement is incorrect though I still feel that losing money on a more environmentally safe solution could be worth it.

"If a gas power plant is more environmentally friendly than flared stacks (I have no idea if it is) then it would be amazing just to break even on this deal because you're profit is the health of the citizens."

If I were proposing this deal, I would approach the State of North Dakota and surrounding localities with a request for tax incentives, etc. to increase the probability of the project going through on precisely those grounds.

This is a perfect opportunity for government regulation. Tax the waste so that it becomes something more than a rounding error. Government gets a source of revenue, get the environmental benefits of increased natural gas use, and it's not like the oil companies are going to pack up and leave because of a tax, because the oil isn't going to leave with them.

Tax the waste so that it becomes something more than a rounding error.

So what exactly, an arbitrary 1,000% tax just to make it expensive, because of a subjective emotional reaction that says this particular 3% ineffeciency is pure evil, where 3% ineffeciencies elsewhere are natural and understandable engineering compromises?

The incentives are absolutely correct in my view. The "waste" here is apparently less expensive than the alternative (low-value gas pipelines). Maybe some peoples' guts say gas flares are an "evil" type of waste, whereas the human labor spent installing thousands of miles of unproductive pipelines is a "good" waste. I hope those peoples' guts aren't put in decision-making positions.

The incentives are completely screwed, because flaring off that gas represents a mere opportunity cost to the oil company, yet imposes a heavy externality on the rest of the world. The waste is only "less expensive than the alternative" because the person doing the wasting isn't the one paying the price.

So yes, absolutely: impose a carbon tax, where the person burning any fossil fuel pays a price that actually reflects the externalities of their choice. That's not arbitrary at all. If it still makes financial sense to flare rather than capture, fine. But there's no pretending that everything is all right with the existing equation.

But isn't the point that the externality is in fact not that heavy? That implies that the process is at most 97% efficient, which is actually pretty damn good (of course, there'll be other inefficiencies, but nobody's complaining about those). If the rest were burnt in internal combustion engines to move cars about, it's almost certainly < 30% efficient and very often < 20%, which implies most of the externality comes from people further down the chain.

Just to make sure we're on the same page: I'm talking about the externality of global warming, which at present is completely absent from the oil pricing system.

As a result, I'm not sure it's as simple as a straightforward efficiency calculation, because under a system where the consumer bears the currently externalised costs of burning fossil fuels, both the cost of flaring would go up, and the oil value captured by the drilling company would go down. I have no idea what a sane level for a carbon tax would be, and I'm certainly not economist enough to predict the ramifications for global fuels pricing; like I say, it may well work out that flaring remains cost-effective. But the costs of an action should be borne by the party that benefits, otherwise the incentives are, as I say, totally screwed.

I believe the implication is that the environmental impact of building natural gas pipelines criss-crossing the U.S. so we don't have to see flares in North Dakota may outweigh the marginal impact of the CO2.

It's not entirely subjective. I think the underlying reasoning is that regardless of current prices, gas and oil are non-renewable resources that should not be wasted.

The energy content of methane is a lot more interesting than the methane itself.

It is easy enough to harvest from biological processes and if you really need it, it can easily be synthesized:

http://en.wikipedia.org/wiki/Sabatier_process

That may not be entirely true: using hydrolitic disproportionate of super-critical water and heated crushed coal slurry, dropped 10000 feet down in a closed continuous feed chamber, the coal slurry will break into shorter segments and reform as hydrocarbons using the hydrogen from the super-critical water. The same process may also be applicable to bio-mass, such as plant material.

http://www.hcssllc.com/index.html

Your reasoning would be fine if gas was infinitely available, but it's value will only go up over time.

Punitive tax -> higher oil price -> shipping oil from overseas is more competitive -> more fuel used and environmental impact to get the oil from overseas

You should probably just be advocating a carbon tax since that addresses this externality in a more general way.

A carbon tax makes sense, but probably wouldn't impact this behavior explicitly, since the natural gas is being burned before it even reaches the market.

A carbon tax can apply here as well. In fact, it's probably best to make producers pay carbon tax where possible, since they will be simpler to tax (and the tax will be harder to evade for them).

First, the G.P. discusses the issue that the infrastructure just isn't there yet. Second, from the article:

For a year (with extensions), North Dakota allows drillers to burn gas, just let it flare.

They put a cap on it.

How many millions of gallons of water is North Dakota using now, for all this fracking? And where is the water coming from?

> 2.6% of the raw carbon (-> CO2)

It seems barely anybody is concerned by this. Sure if it's 2.6%, 97.4% will be released in some form at some point, but those 2.6% are lost with a utility/greenhouse ratio of effectively zero. That's 150 million cubic feet per day flared into heat+CO2 for naught. I don't know how this stacks up against other means of getting oil.

FWIW, France could economically benefit from fracking, but it has been decided at the political level to ban the practice until it can be made provably safe and sound.

So what? Since when is French Politics any indicative of good decisions? France has the tradition for like 20-30 years now to ban stuff out of "precautionary principle", meaning that they do not even consider the possibility of doing anything if there is any single risk involved, instead of thinking of how to manage the risks.

Sure if it's 2.6%, 97.4% will be released in some form at some point, but those 2.6% are lost with a utility/greenhouse ratio of effectively zero.

But the marginal utility of capturing that gas is negative: less than zero.

(By the way it's 4.2%, not 2.6%; my post has an error and I can't edit it. There's a mismatch between the gas flaring and oil production figures: one is from 2011 (NYT article), the other 2012 (WSJ). It's a large error because oil production doubled in the space of a few months).

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