With pipeline capacity fully exploited and natural gas prices squarely in the red, Permian drillers today are faced with three lousy choices: burn off the natural gas, pay to have the gas removed, or slow oil drilling activities to staunch the flow of natural gas.
Crude oil and natural gas are like two peas in a pod: when you find oil, you often find gas.
Crude oil is pumped out of the well, and a small amount of natural gas comes almost inevitably comes with it.
But over time, this ratio changes: less oil, more natural gas.
Now, there is simply too much natural gas, and drillers in the American shale patch must face the not-so-pleasant music, with only one question remaining: which shale drillers can hold on until more pipeline capacity comes online?
Burn, Baby, Burn
The first option for drillers trying to weather the natural gas storm is to burn it off.
This is flaring--and it's a rather unpopular method, publicly speaking, due to the negative impact on the environment. For drillers, though, it's a cost-effective way of dealing with the glut, and since they all must answer to shareholders and lenders, flaring is the first choice when it comes to watching the bottom line.