LONDON North Dakota's oil wells are some of the most expensive in the country, costing more than $8 million each to drill and complete. But the returns are among the highest, thanks partly to the valuable natural gas liquids (NGLs) being recovered alongside the crude and natural gas.
The associated gas bubbling up to the surface from the thousands of crude oil wells being drilled into the Bakken formation is laden with ethane, propane, butane and natural gasoline, that can be stripped out and sold separately from the methane put into the gas pipeline network.
Bakken gas is some of the richest in these liquids anywhere in the country, according to new data on gas quality published this month by the Energy Information Administration (EIA) as part of its triennial survey of capacity at natural gas processing plants.
As a result, Bakken gas is worth far more than the $3.40 per million British thermal units (mmBtu) quoted for dry pipeline quality gas at Henry Hub.
Pipeline-quality natural gas in the interstate transmission network and supplied to residential and industrial consumers had a typical energy content of 1,023 Btu per cubic foot in 2011, according to EIA. Pipeline gas is almost exclusively methane, which has an energy content of 1,011 Btu.
But gas produced from gas fields, or in association with crude from oil wells, also contains heavier molecules with two, three or even four times as much heating value: ethane (1,783 Btu), propane (2,572 Btu), butane (3,225 Btu) and pentane or natural gasoline (3,981 Btu).
Prices for some of these molecules can be much higher than methane, especially for the heavier ones, which tend to be linked more closely to the price of oil.
If well-head gas contains a significant proportion of large molecules, and the price of oil is substantially above gas on a Btu-equivalent basis, it can be cost-effective to separate the NGLs from the pipeline gas and sell them separately.
Pentane and butane are liquid at normal temperatures so separating them from the natural gas stream is relatively inexpensive. Propane and especially ethane can only be separated by deep refrigeration which is energy intensive and therefore more costly.
Shallow cut separation facilities aim to recover most of the butane, pentane and heavier molecules. Deep cut facilities also recover propane and most of the ethane by expensive extra refrigeration.
If propane and particularly ethane prices drop too low, it may be more economical to leave them in the natural gas stream and claim a higher price for the gas.
Natural gas is sold on a Btu basis. Leaving ethane and even some propane in the gas sold into the pipeline network will therefore raise the Btu content and hence the sale price of the gas.
Ethane and propane left with the pipeline gas may be recovered downstream, for example from straddle plants further down the network. Or it can be left in the gas and sold to end customers to raise the heating value.
Small residual amounts of ethane explain why pipeline gas generally has a slightly higher energy content than methane alone.
But pipeline operators impose strict limits on the amount of this "ethane rejection" for safety reasons - to prevent corrosion or clogging up of the pipeline network, and limit the temperature at which gas sold to domestic and industrial customers burns, preventing damage to their equipment.
In recent months, surging production from wet gas plays like Eagle Ford and condensate-rich oilfields like Bakken has resulted in massive oversupply of natural gas liquids, pushing prices sharply lower.
Prices for pentanes and butane have held up because of their use in the booming oil industry (for instance as diluents for Canadian tar sands production or as gasoline blending components). But prices for ethane have collapsed.
Ethane rejection has risen sharply. As ethane rejection nears operational and safety limits, however, the problem with what to do with all the unwanted ethane is becoming acute, and downward pressure on prices has intensified.
Ethane has slid almost continuously this year, from 82 cents per gallon at the beginning of January to just 32 cents in late October, unaffected by the partial recovery in pipeline gas.
Because ethane rejection is nearing absolute limits, ethane has decoupled from natural gas prices and been unable to benefit much from the gas rally.
Notwithstanding problems in the ethane market, and to a lesser extent in propane, the high NGL content of Bakken gas provides a significant uplift to returns from wells in North Dakota.
The EIA's most recent survey (Form EIA 757/A) established there are currently 517 active gas processing plants in the Lower 48 states. Processing plants in North Dakota are fairly small, but they process some of the richest gas in the country according to the study, reflecting the high NGL content of Bakken gas.
North Dakota's Robinson Lake Gas Plant processes 48 million cubic feet of raw gas per day, with an average energy content of 1,550 Btu - 50 percent higher than pure methane. Garden Creek processes 95 million cubic feet with an average Btu content of 1,465. Watford City handles 30 million cubic feet with an average of 1,450 Btu.
These plants process some of the highest Btu gas in the country, according to the EIA survey (Chart 2).
As the state drills more and more oil wells, associated gas production is surging. Many wells are isolated from the gas network, at least at first, and have been forced to flare off gas initially. But the NGL content makes flaring wasteful and provides a strong incentive to build out the network of gas-gathering pipelines and separation plants to maximize value recovery.
It's Bakken's high yield of NGLs that helps make the wells some of the most valuable in the country, and will ensure the state remains an important gas producer even when oil recovery begins to decline.
(John Kemp is a Reuters market analyst. The views expressed are his own)