Energy Market Commentary · February 15, 2018
As oil prices have strengthened, a common question is how much higher can US oil production go? While $60/bbl is not necessarily the new $100/bbl, it’s certainly not far off, and high enough to spur a growth in drilling activity outside of the Permian. The Bakken and Eagle Ford have both seen a resurgence in activity. However, rebounding activity does not come without its own set of challenges. In the Bakken for example, tighter gas flaring regulations and a lack of new gas processing infrastructure has emerged as a potential constraint for Bakken operators and Bakken oil production growth in 2018 and 2019.
Flaring in the Bakken has come to the forefront of potential constraints due to rising gas to oil ratios (GORs) and increased investment, sending gross gas production to new highs. Simultaneously, state regulations are increasingly tightening on the volumes allowed to be flared. In October 2014, the North Dakota Oil and Gas Commission instituted gas capture goals at 74% of all produced gas at the state, county, and operator levels. Those limits have continued to ratchet tighter, and now through October 31, 2018, operators in ND have an incentive to capture 85% of produced natural gas volume. The gas capture goals continue to tighten and increase to 88% in November 2018 before setting a final gas capture target of 91% in November 2020. Using a production outlook based on current drilling activity and flaring regulations, gas capacity doesn’t appear to be an immediate constraint on growing production at a regional level.
The chart below shows Bakken gas processing capacity relative to the amount of gas the maximum gas volumes allowed to be flared and gas production required to be processed. This production projection is based on current rig activity and does not reflect BTU Analytics’ actual production forecast.
However, the flaring regulations are not just applied at the state or basin level, they are applied at a county level and to individual operators.
Diving one level deeper to the county level, the map below highlights the average percent of gas production flared by county between January and November 2017 (colors) and horizontal wells drilled in 2017 (#s). The distribution of flaring is not evenly disbursed and it stands to reason that the flaring distribution among operators is also not evenly distributed. This suggests that if we were to take this analysis down to the operator level, in high activity counties like McKenzie and Dunn, which are close to current gas capture targets, some operators may be reaching max flaring constraints.
For more in-depth analysis on operator-level flaring constraints and other constraints to overall US oil production growth, check out our upcoming conference in Houston next Thursday, February 22.