By Ernest Scheyder
NEW YORK - The North American energy industry’s reputation for ironclad secrecy is starting to crack as producers discover a little transparency can help save millions of dollars.
That is what is motivating Continental Resources, the biggest player in North Dakota’s prolific Bakken shale field, to take the unusual step of sharing its long-term drilling plans with pipeline companies.
The company, led by the legendary wildcatter Harold Hamm, hopes the disclosures will speed up the routing of new pipelines that connect to its fields and ultimately reduce the controversial practice known as flaring - the wasteful burning of extracted natural gas that can’t be delivered to processing plants.
Flaring has increased over the last five years as hydraulic fracturing, the process known as fracking, and other technologies revolutionize the U.S. energy industry - with new oil and gas wells popping up beyond the reach of pipeline networks.
While producers can pour crude oil into a tank immediately after it comes out of the ground, they must pipe natural gas to a facility for compression and cooling. If there are no pipes, it must be flared.
For instance, energy companies are spending millions of dollars on new oil and natural gas wells in Montana, Wyoming and North Dakota, yet those states lack adequate pipeline networks. The historically low price of natural gas also discourages some companies from building out pipe networks.
Consequently, natural gas worth more than $100 million is lost - or flared - each month just in North Dakota, where so many wells are topped by what look like burning torches they can be seen at night from space.
Continental, with more than 1.1 million acres of Bakken land, gives Oneok Partners, privately held Hiland Partners and other pipeline companies its drilling plans three to five years in advance under strict confidentiality agreements.
“It’s our goal to have a pipeline waiting for us when we’re done a well,” said Jeff Hume, Continental’s vice chairman. The plans are updated monthly to account for changes in geology and other variables.
By being more transparent in a secretive industry, Continental has reduced its flaring to only 10.2 percent of the gas it produces, below the North Dakota average of 29 percent.
Texas and Alaska, which have a well-developed energy industries, flare less than 1 percent of natural gas extracted.
Still, the strategy saves Continental more than $2 million per quarter, and others are taking notice.
Whiting Petroleum Corp., which jostles with Continental for the spot as the top Bakken producer, and EOG Resources Inc., another large player, also say they are cooperating with pipeline companies, though analysts say Continental is the most forthcoming.
For years, energy companies have been coy to share even the most basic data with one another or Wall Street, fearing that could cause a development rush that would boost costs and endanger their development.
A case in point is Sun Oil Co., now known as Sunoco and controlled by Energy Transfer Partners. It discovered in the late 1980s that horizontal drilling could enable it to extract much more oil from Texan wells than previously thought possible. Executives quickly ordered field workers to live in trailers at well sites, fearing they would gab in local bars and drive up land prices.
Under the veil of secrecy, Sun Oil eventually bought up more than 200,000 acres in east Texas for around $40 an acre, a dirt-cheap price. When Sun Oil announced its production spike to Wall Street thanks to the new technology, investors were ecstatic.
Continental, which jealously guards certain data on production and well performance, said it decided transparency on future well sites was worth the risk in order to cut flaring and reduce costs.
North Dakota’s flaring releases fewer greenhouse gases than direct emission of natural gas. But it is burning a product that could be sold at a profit if there were more pipelines or processing capacity.
Continental’s advanced notice gives pipeline companies time to map out new lines to serve areas with the highest demand, negotiate with landowners for right-of-way access and build more processing plants to convert gas into a form that can be shipped over long distances.
“We’re allocating a lot of capital to North Dakota,” said Derek Gipson, chief financial officer of Hiland, which last year installed more than 630 miles of gathering pipeline, typically a 12-inch polyethylene pipe. “Having advanced information on wells gives us more time to put the system together so the gas doesn’t have to be flared.”
Oneok Partners connected 759 wells to pipelines last year, and aims to connect 1,000 this year.
“Upfront planning is crucial,” said Justin Kringstad, head of the North Dakota Pipeline Authority, a state agency. “The further out companies are able to share their plans with the midstream (pipeline) companies, it’s going to help that much more to get the right people and tools at the right place.”
Not a perfect solution
Transparency alone won’t solve the flaring problem, industry officials admit, as other factors must be addressed.
Companies have an incentive to transport oil first because it is worth much more. Also, some landowners have become wary of more pipelines crossing their land and stories of pipeline crews dumping trash and leaving cattle gates open are common.
In September, a Tesoro Logistics pipeline spilled more than 20,000 barrels of crude oil into a wheat field, highlighting what some believe is lax oversight of pipelines and North Dakota’s energy industry in general.
“If they’re going to continue to lay pipe in North Dakota, they’ve got to be more positive to landowners, entice them more,” said Randy Decker, who arranges contracts for Contract Land Staff, a provider of right-of-way land acquisition services.
Whiting believes transparency is only one issue that can curb flaring.
“It would be easy to say, ‘This is where we’re hoping to be in five years,’” said Jack Ekstrom, Whiting’s vice president of government relations. “But flaring is an extremely complex process that doesn’t lend itself to easy solutions.”
Continental could drive down the percentage of its North Dakota production it flares to about 3 percent from 10.2 percent currently if there were enough processing plants. Hess and Oneok, among others, are building new plants.
By flaring 10.2 percent of its produced natural gas and natural gas liquids, Continental lost out on $1.3 million in potential third-quarter profit, according to quarterly results announced on November 6.
By comparison, if it flared at the industry average of 29 percent, it would have lost out on $3.5 million. The company’s openness helped save roughly $2.2 million in the third quarter.
“By being transparent, we’ve allowed pipeline companies to get ahead of the game,” said Hume, the Continental vice chairman.