Every time I hear about Nigeria’s fossil fuel industry, I’m reminded of the Wild West.
Recent examples have been devastating. Oil workers and assets are raided by various militant groups and pirates on what seems like a regular basis.
Adding to the injuries is an incompetent government that’s unable to police its shores where the oil drilling in Nigeria takes place. Often enough, militants seize oil, or money that the government raises from crude production simply “goes missing.”
Last year, Nigeria’s central bank said that $20 billion in oil money was misplaced.
Among the more overt stories about lost funds and violent oil theft is another problem, the effects of which have been going on for decades.
What’s more, this part of Nigeria’s Wild West oil persona is trickling into the United States, too.
In 1984, Nigeria “outlawed” burning the gas that results from oil production.
But as the map below shows, the nation flares more gas than any other country in the world with the exception of Russia.
However, in November, the country announced it would develop a system to better enforce flaring regulations on companies openly disobeying the law. The plan is to use satellite tracking to determine where and how much flaring is happening, as well as who does it.
That way, the government can better levy fines against violators, which, the environment minister says, are worth more than $1.1 billion per year.
Whether satellites will have any effect, I don’t know, but the U.S. is also trying to cull its own flaring problem…
Bakken Flaring is Hard to Regulate
Flaring, in case you were wondering, happens during oil production. Oil — especially shale oil — has a high level of methane (natural gas) content.
When companies drill for the oil, they are forced to siphon off most of the gas and store it for sale. But as shale production has ramped up in the U.S., oil producers have flared off natural gas because they were drilling so much oil that they didn’t have room to store it.
The most notoriously flared formation is the Bakken, where regulators and oil companies are having a tough time capturing and selling the excess natural gas that comes with oil production.
As this graphic shows, over 35% of the state’s natural gas production was flared off in 2010 alone:
Royalty owners in North Dakota felt that companies were being irresponsible by flaring away valuable natural gas in favor of oil, and, as a result, the industry attempted to regulate itself.
Now, as the chart below will show, this self-regulation has worked to an extent…
As of August 2014, less than 30% of natural gas produced was flared off. That’s some progress.
But with oil prices so low and companies feeling the pinch, many are already looking for amnesty from the flaring rules. The North Dakota Industrial Commission just granted its first exception last week…
It allowed Hess Corp. (NYSE: HES) to avoid a fine because, according to the Bismarck Tribune, “unexpected delays occurred” for the company.
If that’s not vague, I don’t know what is.
Now the Industrial Commission is worried other companies will follow Hess and claim delays or mishaps. Because of such lapses, the Obama administration is going to crack down on companies that flare too much.
As you’d expect, the method for the federal government’s crackdown isn’t going to be incentive-based. No, we’re going to see some regulations this year.
Luckily, they hold opportunities for investors.
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Coming Soon: Obama Rules
Back in January, the White House and the EPA announced they would release rules on gas flaring sometime this year. These rules were lambasted by the fossil fuel industry.
Producers are upset not only because oil is low and profits will be down, but also because the flaring rules could lower production rates when oil prices return to normal.
With shale wells, this is damaging because fracking needs to be done as quickly as possible. These wells see the majority of their production in the first few months.
If companies have to slow down to avoid burning off too much gas, they are going to miss out on profits.
But there’s one possible way for them to avoid this, and it could be a boon for investors…
See, instead of waiting for regulations to force production to slow down, companies are feverishly making deals to capture and process flared gas in larger quantities.
According to the White House, regulations could save enough gas to heat at least 2 million homes every year. That’s no small chunk of change, and it doesn’t even account for wells that are already leaking gas.
So oil producers are forking over large sums of money to companies that can help them harvest the gas. My colleague Keith Kohl recently recommended one of these companies.
Keith says this company will be a big player in the coming months as regulations are announced and companies try to stop the bleeding. Get his full report here.
Good Investing,
Alex Martinelli
With an eye squarely focused on the long-term, Alex Martinelli takes the art of income investing to a higher level within the energy sector. His research has helped hundreds of thousands of individual investors identify well established companies that have a long history of paying out dividends to their shareholders. For more info on Alex, check out his editor’s page.
