In a past entry, I showed the photos of The Bakken from space and how gas flaring had altered the night sky. The State of North Dakota reports that approximately 30% of the gas produced in North Dakota is flared. This practice is widely accepted in the State because if gathering lines were required to be constructed sooner, development of the field would most certainly slow down.
In Wyoming, however, the State is getting more involved. The current practice is to allow flaring for up to 15 days after a well is completed. But, like North Dakota, that deadline is usually extended for months without issue. The question then becomes, is a royalty due on the flared gas after the initial 15 day period? The office of State Lands and Investments in Wyoming thinks so. Wyoming, although a conservatively leaning State, does seem to have a few more hurdles in developing oil and gas. For instance, some E&P’s argue the BLM offices in Wyoming are not consistent in their enforcements and that it is increasingly difficult to get things done. The office of State Lands and Investments looks like it is also putting policies in place which will slow Wyoming’s unconventional resource exploration.
So, should an energy company be forced to pay a royalty on flared gas? I guess we’ll find out if the E&P’s think it is economical. If it was economical to gather the gas in the first place, they probably would have built a gathering system before they completed the well. However, if the well is not a producer, the company just wasted capital by putting a small diameter pipe in the ground. The office of State Lands and Investments may see a negative impact. Their leases may not be drilled, may not be renewed, and may sell for less at the next auction due to this increased royalty burden. You hear individuals bashing the oil industry constantly as imperialist entities who have enough money to do anything. But, it all comes down to net present values. If the additional burden the office of State Lands and Investments comes to fruition, this cost of business will be calculated into well economics. If these economics are less favorable than other leases, the State will quickly move to the back of the line for development, oil royalties, and the other benefits. Thank God the regulators in The Bakken understand this.
What do you think will happen if this new policy is enacted on State lands in Wyoming?