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Flaring, Infrastructure and Embracing the Dual Challenge

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Flaring, Infrastructure and Embracing the Dual Challenge

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(Bloomberg) -- An unusual split vote by Texas regulators over the flaring of natural gas shows that the days of giving a free pass to the controversial practice in the Lone Star state may be numbered.

The chairman of the Texas Railroad Commission, which oversees the oil and gas industry in the state, dissented during a recent hearing over a flaring permit. Wayne Christian said there’s too much gas being burned off out of convenience rather than necessity, and he’s concerned about the “frequency and ease” with which companies are being allowed to continue with the practice.

While his comments didn’t alter commission policy, they indicate a change may be coming. Texas is widely regarded as the most oil-and-gas-friendly state, and the commission has never turned down a request to burn excess gas. But the volume now being flared -- more than residential gas demand for the whole of Texas -- has attracted criticism for both its wastefulness and the carbon-dioxide emissions that come with it.

Flaring is a common sight in places like the oilfields of the Permian Basin in West Texas, where companies increasingly resort to burning off the fuel because of a lack of pipeline capacity. The phenomenon has intensified as the oil boom in the Permian brings with it a glut of associated gas. Permian flaring rose about 85% last year, according to data from Oslo-based consultant Rystad Energy.

Josh Price, an analyst at Height Capital Markets, said he doesn’t believe regulators will clamp down on flaring until new pipelines are completed and substantially relieve the oversupply, which could come next year, but the chairman’s comments show how the commission is shifting on the issue and that concerns over flaring in Texas are growing.

The commission decided to “make a political statement saying ‘We are hearing people. We understand that this is becoming an issue and we’re going to do something about it,’” Price said in an interview. “That, coming from the chairman, has the most impact.”

The commission grants flaring permits for up to 180 days. Without that, the only alternative for some producers is the so-called shut-in of oil or gas wells to curb output. Special extensions to permits can be granted, usually for up to two years, Price said.

Christian made his comments Tuesday during a commission meeting in Austin to hear an attempt by pipeline operator Williams Co. to block the request for a flaring permit made by EXCO Resources Inc. It was the first time a driller has asked for a permit for all of the gas coming out of wells that are already connected to pipelines, and also the first time a midstream company has lodged a protest.

2-1 Vote

Williams argued that because EXCO’s wells in the Eagle Ford shale play in southern Texas are already connected to its pipelines, the driller shouldn’t be allowed to burn off the fuel. EXCO said contracting with Williams would result in a $146 million loss.

Because the pipeline contract was uneconomic, Commissioner Ryan Sitton argued it would be unreasonable to deny the permit under current policy, and EXCO won approval to flare until March 2020 with a 2-1 vote.

Such decisions are usually unanimous, according to Price. Christian also ordered staff to find out how many wells that are connected to pipelines have received permits that exceed the 180-day time frame.

“I’m concerned about whether the current level of flaring is in the long-term best interest of the state of Texas, the industry and the Railroad Commission,” Christian said.

Christian, Sitton, and EXCO didn’t immediately respond to requests for comment on the vote. “We are disappointed with the Railroad Commission’s ruling, however, we do appreciate the agency’s attention to the matter,” Williams spokesman Christopher Stockton said in an emailed statement.

Sitton said the EXCO case “is possibly going to set some precedent.” By reiterating drillers can flare for economic reasons even with pipe connections, the commission’s decision may lead to a short-term increase in the act, said Gabriel Collins, Baker Botts fellow in energy and environmental regulatory affairs at Rice University’s Baker Institute, said in an interview.

“If this is the start to them hammering down then they certainly wrapped the hammer in an awful lot of velvet,” Collins said.

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Finding A Use For Flared Gas

System turns associated gas into electricity for data centers.




With little to no available capacity in pipelines and low natural gas prices, particularly in the Permian Basin where gas often is traded for below zero, operators are either choosing to or have no choice but to flare off greater amounts of associated gas. According to The World Bank, gas flaring rose about 48% in the U.S. from 2017 to 2018. In 2018 global gas flaring amounted to 145 Bcm (5 Tcf), equivalent to the total annual gas consumption of Central and South America, The World Bank reported.

Meanwhile, Denver’s Crusoe Energy Systems is looking to put the associated gas that would otherwise be flared to good use. The company has created its Digital Flare Mitigation (DFM) service that converts natural gas into electricity, which subsequently powers containerized data center units.

“We take raw gas—we can also take lean gas—and we run it into generators that generate electricity,” said Cully Cavness, president and co founder at Crusoe. “We set up a situation where we take the gas that was being flared and we do something beneficial with it right on site.” The DFM service is set up downstream of the separator, treatment devices and heaters where a manifold is installed into the gas line, diverting the stream to Crusoe’s electricity generation system.

That electricity then powers onsite data centers that house customized electrical networking, telecommunications equipment and wellsite digital operations. According to the company, the U.S. Environmental Protection Agency-certified DFM system’s electricity generation process comes with built-in emissions control technology and catalytic converters that can reduce NOx, carbon monoxide and methane emissions compared to flare exhaust streams. The company stated in a press release that compared to flaring, Crusoe’s process achieves more than 99% reductions in emissions of volatile organic compounds.

“Crusoe’s technology harnesses otherwise wasted energy for growing industries that require energy-intensive computing, such as blockchain and artificial intelligence,” Crusoe co-founder and CEO Chase Lochmiller stated in a press release.

To date, the company has received more than $5 million in venture capital. The investor group includes Bain Capital Ventures and Founders Fund Pathfinder as well as Wicklow Capital, Winklevoss Capital and Dragonfly Capital.

Deploying the system
Cavness said the DFM systems have been deployed in the Bakken and Powder River basins and will soon be operating in the Denver Julesburg Basin. He explained that installing the system does not require permitting for pipeline or power lines.

“There’s no heavy negotiation, no right-of-way process [and] no financing process like you would have with a big pipeline project,” Cavness said. “These deploy very quickly.”

He said that for a recent project in the Bakken, Crusoe’s DFM system was set up on a Monday and was in operation the following Thursday.

Crusoe’s DFM system has been deployed in the Powder River Basin and the Bakken. (Source: Crusoe Energy Systems)

“So it’s just a few days to get one of these systems up and running,” he said. “They were designed to be really portable and modular.”

Cavness said the units could scale up to handle large amounts of natural gas, or small amounts, depending on the needs of the operator.

“We have built units capable of handling more than 1 million cubic feet per day [28,316 cu. m/d],” he said. “We have made proposals on systems that can handle multiple millions of cubic feet per day. We have a goal internally of being at 30 million cubic feet per day [849,505 cu. m/d] within two years, and it could be much more than that.”

The Crusoe system could process “most or almost all of the gas away from the flare,” Cavness said.

“We’ve got sites now that are at multiwell pads where the system will take basically all of the flare gas and reduce flaring as much as is practically possible,” he said.

In addition to a challenging market and limited takeaway capacity for natural gas, regulatory statutes also can limit how much associated gas companies can flare. Many companies with an eye on environmental issues also have established internal policies designed to mitigate natural gas flaring. Cavness explained that addressing these challenges is part of where Crusoe’s DFM system provides value creation.

“We’ve worked with a lot of specialists to educate us on what our clients are facing so that we can best help them solve their needs,” Cavness said. “In every state, there’s a rule in place that limits the amount of gas that can be flared, and there are penalties for exceeding that. In order to not exceed those limits, the well might be choked back to a couple of hundred barrels per day, or even 100 barrels per day, or in some cases completely shut off.”

The DFM service helps ensure operators do not run the risk of curtailing their oil production to meet flaring regulations, he said.

In addition to addressing the challenge of flared gas, Crusoe’s DFM also provides power generation to meet the increasing need of electricity for computing power.

“We can address this huge ballooning demand for computing power, which is coming out of all the different areas of tech innovation, whether it is for cryptocurrency and blockchain or artificial intelligence and machine learning, which are incredibly energy-intensive,” Cavness said.

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