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Austin firms see opportunity in North Dakota’s flaring gas

Dan Zehr | The Austin American-Statesman, Texas

Back in 2008, in the early days of the drilling boom that has transformed the Bakken Shale of North Dakota, Lance Langford found it hard to believe that transporting oil out of the field would remain so expensive.

Industry analysts and other oil producers said it would cost $35 a barrel to transfer oil out of the basin. But Langford, then an executive at Austin-based Brigham Exploration, one of the pioneers in the Bakken’s development, couldn’t see how those rates could last.

“In the U.S., if it’s an opportunity, people will take advantage of it,” said Langford, now vice president in charge of Bakken operations for Statoil, the Norwegian oil-and-gas company that acquired Brigham in 2011.

Turned out those rates lasted about a year, at most, he said, and then innovative minds started to figure out ways to move the oil out more efficiently.

Unfortunately, that same ingenuity didn’t immediately apply to the natural gas produced as a byproduct of the region’s booming oil production. Today, producers in North Dakota burn away almost a third of all the gas produced from wells in the state.

Those flares — the iconic symbol of both the profits and the costs of fossil fuels — have become a source of tension among landowners, lawmakers, regulators and the industry itself. But they’ve also come to symbolize a growing opportunity, one that several Austin companies are taking advantage of now or hope to access in the coming years.

“The ingenuity that came up with a way to get the oil out of the shale,” Langford said, “that same ingenuity is at work to reduce flaring.”

A growing market

In the Austin metro area, no company is more closely associated with flaring than Aereon International, which until earlier this year was known as Flare Industries. The company, which employs 300 workers worldwide, 200 of them at its North Austin factory and headquarters, designs and produces high-end flaring equipment.

Aereon has reaped the benefit of both the oil-and-gas boom and the heightened environmental concerns that have come along with that growth. It built a solid Bakken business on the strength of its flaring equipment, and the increasing attention on reducing emissions and recapturing potentially saleable gasses has sparked new growth for the company.

Since acquiring Kentucky-based Jordan Technologies in 2012, Aereon has filled out a portfolio of gas-capture and recovery systems to complement its flaring technologies. The combined company has built a solid Bakken business with its flaring equipment, but its vapor-recovery technology has started to boom in the area–even though it’s not geared for the large amounts of gas being flared off the wells.

Related: ND implements new flaring laws

For all the gas produced at these wells, oil drives the vast majority of the profit from the Bakken. Aereon’s gas-recovery systems are designed to recapture the heavier gasses that build up in a well site’s oil-storage tanks, pumping them back into the stored oil supply, said Mark Zyskowski, the company’s vice president for global sales and marketing.

Last year, Aereon generated nearly $5 million in sales across the extended Bakken region. The company expects to quadruple that this year as it ramps up more of its gas-recovery business there, Zyskowski said.

While Aereon’s systems don’t capture the large amount of natural gas directly from the well, its rising sales in the region tie back to concerns about all the flaring. Spurred in part by rising pressure from landowners and neighbors, he said, North Dakota regulators and lawmakers are considering a hard cap on annual emissions for production sites.

Hit that cap, he said, and the well could be shut down for the year.

“If you can take that vapor that in the past you might just burn off … people are now finding it more economically attractive to recover it because they can sell it,” Zyskowski said. “And if you’re recovering it there are no emissions, so you’re not adding toward the cap level you have.”

Building the infrastructure

The primary problem underlying the high levels of flaring in North Dakota can be summed up in a word — pipelines. The relative youth of the Bakken play means the gas pipeline infrastructure has yet to fully develop, industry officials say.

Compare the 30 percent of gasses flared off in North Dakota to Texas, which has an extensive gas-pipeline and processing network — and flares just 1 percent of its gas output.

“Even down in Eagle Ford, flaring is very unusual,” said Bill Holland, editor of Platts Gas Daily. “They have the gas pipelines there. They can just hook up, take the oil away and process it to take the gas out.”

Holland said exploration and production companies flare about 400 million cubic feet of gas a month in the Bakken. At current prices of roughly $4 apiece, those lost cubic feet equate to roughly $1.6 billion in potential revenue, burning off into the ether on a monthly basis.

“Flaring gas basically makes everybody angry,” Holland said. “The leaseholder doesn’t get royalties. The state doesn’t get tax revenue. Environmentalists get more damage to greenhouse gas layer. Nobody’s happy.”

That has created an unusual alignment of interests, one that is fueling the same kinds of ingenuity that Langford saw when the oil transportation prices plummeted during the early days of the Bakken’s development.

In those earlier days, Brigham Exploration invested $130 million on oil, water and gas gathering and distribution systems, said Bud Brigham, who sold the company to Statoil in 2011 for $4.4 billion. Long before state regulators started raising concerns about flaring, Brigham said, he and Langford worked with midstream gas providers to get more pipelines and processing infrastructure in place.

“My view is that the market will optimally stimulate build out of infrastructure to reduce flaring,” Brigham said. “To the degree regulators limit activity, they constrain revenue and present value for all those constituents.”

Regulatory pros and cons

Like most in the oil and gas industry, Brigham and Langford said they prefer a lighter regulatory hand, but they also stressed that a smaller environmental footprint benefits everyone, including the producers. Langford said North Dakota took a smart approach, establishing clear goals but working with the industry on ways to reach those marks. However, the state’s regulators currently appear to be shifting away from a fast growth philosophy to one that considers more sustainable development.

“They let the economic tail wag the dog a little bit more,” said Eric Long, president and CEO of Austin-based USA Compression Partners.

Long and his company could gain from North Dakota’s growing concerns about flaring. While market forces will spur some pipeline construction, he said, developing a mature infrastructure will likely require regulatory intervention.

Texas has a more balanced regulatory approach, Long said. But it also has an older industry and a much higher density of wells, Long said, making the construction of any new pipeline more feasible.

When wells are miles apart, as they tend to be in the Bakken, he said, “you don’t have the critical mass needed to justify the economics of laying millions of dollars of pipe to pick up gas from just one or two or three wells.”

Tighter regulations could help spur needed pipeline development, but at present the system is not extensive enough to draw USA Compression. The company currently deploys its fleets in Texas, Ohio and Pennsylvania, where they can serve as the heart that compresses and pumps natural gas through an existing infrastructure.

The Bakken “is an area, longer term, where we want to be,” Long said, “if they get that pipeline infrastructure built.” ___

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