Burning Money: Natural Gas Flaring Costs Millions in Lost Revenue

Nighttime satellite imagery makes it seem like a new metropolis has sprung up in the prairies of western North Dakota. But the large cluster of lights actually comes from natural gas flaring in the Bakken oil field. Flaring – or the burning of natural gas released in oil fracking – creates pollution and costs the state millions of dollars in lost taxes and royalties.

An Earthworks report explored gas flaring in North Dakota’s Bakken and in Texas’s Eagle Ford shale plays. Both plays are primarily drilled for oil. However, fracking for oil also releases methane (natural gas), a greenhouse gas with several times the global warming potential as carbon dioxide. The majority of this methane is captured and either sold or used on site. But significant quantities in both states is simply burnt on site to avoid methane pollution.

Flaring converts methane to carbon dioxide, meaning the process still contributes to climate change. Earthworks estimated that in 2013, flaring in Texas and North Dakota produced as much carbon dioxide as one and a half million cars on the road. Thus, flaring is hardly a viable option for reducing greenhouse gases. Flaring also pollutes the air with toxins like benzene, a known carcinogen.

Moreover, burning natural gas is a waste of a nonrenewable resource. It seems illogical to burn off natural gas in Texas and North Dakota when other parts of the country are fracking for it. In fact, North Dakota flared 96 million cubic feet of natural gas in 2013 – nearly as much as was drilled in Michigan in 2012. So why aren’t companies trying to capture all of this gas?

Much of the issue boils down to economics. Natural gas, on an energy equivalent basis, is worth about a third of the price of oil. This reduces the incentive for drilling companies to invest in the infrastructure to capture and transport natural gas.

But rather than seek to correct this market failure, state policies often further encourage the practice. For instance, in North Dakota, wells are permitted to flare tax free during the first year. This encourages flaring and resulted in $17 million in lost tax revenue between 2009 and 2012. After the first year, operators can seek an exemption by arguing gas capture is economically infeasible. Otherwise, they begin paying royalties to lease owners and taxes to the state on flared gas. However, the state does not track flaring taxes nor investigate whether companies are complying.

In Texas, wells may only flare in the first 10 days of operation. Afterwards, operators may apply for a permit allowing them to flare up to an additional 180 days. The number of permits has risen dramatically over the past five years, with over 3,000 issued in 2013. Moreover, Texas does not have a flare tax, preventing the state from gaining any revenue from wasted natural gas.    

Taxing flared gas makes it more expensive for companies to simply waste this non-renewable energy.  Without the option to just cheaply burn the gas onsite, more companies would invest in the equipment to capture and use it.  But if states do not tax flaring, they are essentially telling companies that they approve of wasting the natural gas.

New rules in North Dakota are aiming to reduce flaring. Beginning May 2014, new well permits must include a plan for capturing methane and connecting to local pipelines. And beginning in October, operators must meet reduction targets in order to drill at maximum levels. These are certainly steps forward. However, the rules do not apply to wells that have already gained exemptions from flare taxes. Moreover, without proper monitoring and enforcement, they can become one more regulation for companies to bypass.

Both states should improve enforcement of flaring regulations. Moreover, Texas should follow North Dakota by requiring a gas capture plan and implementing flaring taxes. Both states must track and enforce these taxes. Finally, flaring taxes should equal market value of natural gas. This would create an economic incentive to reduce flaring and compensate states for the loss of this natural resource.

Visit Earthworks’ interactive maps depicting flaring in these regions. You can also view the entire Global Flaring Visualizations, created by SkyTruth, to see where flaring is occurring around the globe.