Flared gas garnering scrutiny in Texas

Mike Zaccardi, CFA, CMT

Relatively expensive crude oil and cheap natural gas led energy producers to drill for oil and flare gas. What does it mean to ‘flare’ natural gas? Basically, the cost to transport and/or store natural gas that comes alongside the production of crude oil is higher than what the gas can be sold for. So, producers literally burn the gas into the atmosphere to get rid of it.

Just how much of this was going on? In 2018, the amount of gas flared surged across Texas to more than 200 Bcf. For perspective, current storage of NG across the country is near 3,000 Bcf. This practice is still being done today. But why do they even drill for natural gas if the exploration & production firms will just waste it?

It’s called ‘associated’ gas - meaning it is essentially a byproduct of what comes with drilling for oil. The Texas Railroad Commission, a powerhouse regulator in the region, feels more of that associated gas should be used for consumption versus just burning it.

The optics of burning gas into the air, wasting it, is obviously not good from a climate change perspective. The industry is growing more sensitive to environmental concerns as exemplified by BP’s recent push away from oil & gas and more toward renewables.

What does the added regulation and scrutiny of flared gas mean for the broader natural gas market? If the flared gas is required to be used for consumption, then it could mean an increase in effective supply, leading to lower prices. Also consider that oil producers may have to sell at a loss in that event – leading to further declines in energy drilling plans.

Oil companies have already announced massive cuts to production initiatives across the shale regions of the country. So over the longer-term it could be more bullish as producers exit the game.

Read the full story by Bloomberg

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