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Oil production in North Dakota, driven by hydraulic fracturing in the Bakken shale, has risen from 400,000 barrels a day to over a million over the past three years.  This has elevated the state to second place in oil output, trailing only Texas–and the coastal waters surrounding the US.  At today’s rate, North Dakota accounts for 15% of total national output of crude.

No wonder North Dakota has sailed through the recession without many bumps or bruises.

Part of this expansion has been enabled by the wasteful practice of allowing drillers to “flare,” or burn, associated natural gas at the wellhead.  Last week, the North Dakota legislature took a baby step toward controlling this activity.

what flaring is

Many underground hydrocarbon deposits contain both oil and natural gas.  So output that reaches the surface is a mixture of the two.  Even in a remote area where there are no pipelines, crude can be saved in holding tanks and periodically trucked away.  Not so natural gas, which requires either a pipeline or  complex (and expensive) cryogenic system to get it to market.  This lack of transportability is the main reason natural gas often sells at a steep discount to crude oil based on heating value.  It also makes the gas a liability.

A generation ago, the most common way of dealing with natural gas that came to the surface with crude oil was to divert it to a safe distance from the well and set it on fire.  In today’s world, the accepted practice is to require the driller to pump it back underground.  That way it can be recovered and sold once there’s a transport mechanism in place.

Not so in North Dakota, though, where about 30% of the natural gas brought to the surface is wasted and burned.  Statewide, that’s about $50 million worth a month–four times that in energy value using its crude oil equivalent.  The 30% compares with 5% of gas flared from wells in Texas.

Environmentalists have been squawking about flaring for some time.  Landowners, too, who see potential royalty payments going up in smoke.

So last week, the ND legislature acted.  It is forbidding new wells to flare natural gas–meaning they must have a way to pump gas back underground–but does very little to stop the practice in already-producing wells.

The obvious consequence of this action is to raise the cost of future drilling in North Dakota.  This will gradually lower the profit growth of companies drilling there.  My guess, however, is that it will do little to slow the growth of production, since the new legislation just removes “Free lunch” from the bar.