Wyoming wrestles with gas flares that might not help oil production

— June 11, 2012

Wyoming’s top oil and gas officials today declined a request by SM Energy Co. to continue flaring — or burning — natural gas from two horizontal oil wells in southeast Wyoming at a rate beyond Wyoming’s standard allowable 60 thousand cubic feet (mcf) per day.

SM Energy is flaring at a rate of 120 mcf per day from one well, and 200 mcf per day from the second well, for total of 320 mcf per day. Cutting the flaring rate back down to 60 mcf per well means less oil will flow from the wells, and it may make it more difficult for the operator to sell the properties.

Flaring natural gas associated with oil wells is a standard practice — often a necessity because the volumes of gas do not justify the cost of capturing it, treating it, and transporting it to pipeline networks for commercial sale. The industry flares particularly large volumes of gas when trying to establish a new oil play — such as the one gaining momentum in eastern Wyoming.

But flaring is extremely troublesome when it occurs near homes and neighborhoods, emitting dangerous toxins into the air. There have been several instances of rogue flaring (flaring more gas than allowed) and improper flaring (when the gas isn’t burned completely, emitting more toxins). It’s also extremely troublesome in times of state and county budget cuts. Operators typically pay no royalties or taxes on gas that is flared. That waste of gas and loss in revenue is justified by the larger revenues that come from oil production.

It’s a Catch 22: To market the oil, operators have to crank open the spigot to attract buyers. That means flaring natural gas.

But this week, the case of SM Energy Co. revealed how flaring might not always pave the road to lucrative oil production.

SM Energy investigated the cost of connecting gas gathering lines to the locations for commercial sale, and that was cost prohibitive, according company officials. They also investigated the cost of fixing the wells with controls that would strip the gas of liquids, decreasing the volumes flared and creating revenue from the additional liquids. That, too, was cost prohibitive, said company officials.

“Everything we looked at has been a net loss to us. … We don’t see ourselves going forward with this project,” said Teresa Muhich of SM Energy’s Billings, Mont., office.

She said the company was also unable to strike a deal with neighboring operators to consolidate enough natural gas to create an economy of scale.

Still, SM Energy says it needs to flare beyond the state standard 60 mcf per day in order to maintain oil production and make the wells attractive to potential buyers.

But commissioners decided that that justification doesn’t quite fit the spirit of the “conservation” charge of the Wyoming Oil and Gas Conservation Commission. The 5-member commission — which includes Gov. Matt Mead — was further troubled by SM Energy’s challenge in both marketing the oil and gas, and selling the properties.

Commissioners said if SM Energy does sell the wells, the buyer will face the same marketing challenges, meaning that flaring still might not result in full commercial oil production.

But this is just one case. SM Energy’s two wells are located near the old Silo oilfield north of Cheyenne. The area was the target of a leasing boom a few years ago sparked by excitement over the shale oil potential in the Niobrara and Codell formations. While drilling continues in that area, focus has shifted further north to the Powder River Basin, where flaring gas from shale oil wells has raised concerns among rural homeowners.

Wyoming Oil and Gas commissioner Tom Drean, who also serves as Wyoming’s state geologist, said the SM Energy case reveals a lack of planning among some operators in Wyoming’s larger shale oil play.

“They are not working diligently enough on marketing solutions prior to (drilling). … I think it may save a lot of time and money to alert them to a very challenging marketing (scenario) prior to drilling,” said Drean.

— Dustin Bleizeffer is WyoFile editor-in-chief. He has written about Wyoming’s energy industries for 15 years. You can reach him at (307) 577-6069 or email dustin@wyofile.com. Follow Dustin on Twitter at @DBleizeffer

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