The Natural Gas Opportunity for Oil Producers
Natural gas is lighter than oil and water. In areas with large amounts of natural gas in the ground, a well can produce close to 100% natural gas (my family's land in West Virginia in the Marcellus Shale is a good example). Historically natural gas has been produced with coal and oil but not always welcomed. The gaseous nature and high heat content of natural gas requires special consideration for miners and oil producers.
In 2008 when natural gas prices were high, oil producers welcomed the additional cash flow from natural gas captured at oil wells. As the market for natural gas collapsed, producers aimed for more lucrative natural gas liquids and oil in their production mix. Oilier companies managed the downturn with declining gas prices well, those that focused on natural gas struggled.
Oil and gas producers who had a choice, no longer wanted to be natural gas companies. Texas companies like my former employer Pioneer Natural Resources used the new technologies that were successful with natural gas production to increase oil production. Hydraulic fracturing and horizontal wells efficiently increased oil production.
If you review investor presentations for oil producers you will see this clearly in pie charts throughout their presentations. In Texas the top oil producers in 2015 were EOG Resources, Devon and Pioneer Natural Resources according to the Texas Railroad Commission. These companies are the best at what they do. If they could have produced 100% oil their boards and shareholders would have applauded. The reality is that even in the oiliest areas natural gas is produced with oil. In 2011 and 2012, more than 50% of new wells produced both oil and natural gas. As the number of natural gas only wells decreased, the number of natural gas wells that produced oil and natural gas increased.
For reporting purposes all hydrocarbon in the liquid state is treated as oil and all unprocessed gas at the well before any flaring, refining, or gas processing is treated as natural gas. Storing and transporting a liquid requires different planning and infrastructure than storing and transporting a gas. In new areas of exploration, pipeline connections are not typically constructed until after a well is completed and a determination is made about the well's productive capability. The Texas Railroad Commission allows an operator to flare gas while drilling a well and for up to 10 days after a well’s completion for operators to conduct well potential testing, but this may be extended if the well is in a new exploration areas.
In a low oil price environment, producers with the best intentions are challenged to construct pipelines in a timeline that allows for maximum natural gas capture. The best solution would be an economic environment that promotes additional planning and infrastructure to include the necessary pipelines earlier in the process.
The natural gas that is captured earlier can be sold or used to fuel operations including drilling rigs, hydraulic fracturing, electric generation and trucking. With a high heat content, clean-burning low cost natural gas that is produced with oil provides a wide range of opportunities for Texas.
Vice President of Marketing and Business Development, Director of Marketing, International Business Development
8 年Lynn Lyon Thanks for sharing!!