By Jim Magill – Houston Chronicle – Permian Basin oil producers, under increasing pressure to reduce the amount of natural gas that are flaring during drilling operations, may have found a solution to convert waste gas into a super-cool product.
The answer could be small-scale liquefied natural gas plants, which chill the gas to minus 260 degrees Fahrenheit and convert it to a liquid that is easier to transport to power plants and other markets. These small-scale plants produce no more than 100,000 gallons of LNG per day, compared to millions of gallons produced at massive LNG processing and export facilities along the Gulf and East coasts.
The technology has been used for decades across to service niche natural gas markets — such as Northeast, where small-scale plants provide natural gas to power plants during high-demand winter months, or along Florida’s Atlantic coast, where the plants fuel oceangoing vessels.
In recent years, a new generation of even smaller LNG units, known as micro-scale plants, have been developed. These units, which produce no more than 10,000 gallons of LNG per day, are small enough to be hauled by trucks to well sites to process natural gas.
The small-scale LNG industry has bypassed the Permian, which stretches from West Texas into New Mexico, but that could change as the volumes of natural gas that are burned away remain at or near record levels in the Permian. The practice, known as flaring, has come under increasing scrutiny and criticism, not only for the greenhouse gases and other pollutants spewed into the atmosphere, but also because its wastes a valuable resource.
Natural gas is a byproduct of oil drilling. In the Permian, the largest oil-producing basin the world, the combination of sustained low natural gas prices, inadequate pipeline capacity and relatively high transportation costs has led many oil producers to simply burn the gas.
Between April 2019 and April 2020, oil companies in the Texas portions of the Permian burned away 146 billion cubic feet of natural gas — equivalent to the consumption of two-thirds of Texas households — according to the Railroad Commission, which regulates the state’s oil and gas industry.
The Railroad Commission has done little to rein in flaring — it did not deny a single flaring request of more than 27,000 made over seven years, according to the advocacy group Environmental Defense Fund — but that appears to be changing. The commission has rejected eight flaring permits since February, a spokesman said.
The commission also is considering tighter faring rules, relying heavily on a report by the Texas Methane and Flaring Coalition, a group comprising oil and gas companies and industry associations. The group recommended that small-scale LNG production be considered as an alternative, a proposal that could be aided by the Trump administration’s recent decision to allow the transport of LNG by rail.
Finding customers the key
Small-scale LNG plants operate on the same principles as huge liquefaction and export facilities: natural gas is compressed then piped through a cold-box surrounded by liquid nitrogen, which brings the temperature to minus 260 degrees Fahrenheit and converts it to a liquefied. That allows the gas to be more easily transported; the case of the small-scale plants, by tanker truck, and large plants, by ocean-going vessel.
Size and cost are the mains differences between the two classes of LNG plants said Jim Reddinger, CEO of Stabilis Energy, which operates a 100,000-gallon-per-day LNG plant in the South Texas town of George West. The Stabilis plant cost $40 million to $45 million to build, Reddinger said.
An LNG export facility along the Gulf Coast can cost some $8 billion and produce as much as 10 million gallons of LNG per day.
The key to establishing a robust small-scale industry in the Permian lies in first finding customers for the final product, said Ken Kelley, owner of Amarillo-based Kelley GTM Manufacturing. Kelley’s family-owned group of companies has been in the specialty gas transportation business since 1946 and formerly owned a small-scale LNG facility in Willis.
In 2004, Kelley sold the Willis plant to Clean Energy, a company part-owned by legendary wildcatter T. Boone Pickens.
Kelley said the Permian Basin is a great untapped market for LNG, which when vaporized gas can fuel drilling rigs and hydraulic fracturing pumps, displacing more expensive and less environmentally friendly diesel. LNG can also run generators at remote sites far from the electric grid.
“You’re going to save money,” said Kelley.
From small- to micro-scale
If LNG finds a market in the Permian Basin, it most likely will start with micro-liquefaction units that can be hauled to a well pad by tractor-trailer. One company seeking to establish a beachhead in the Permian is Edge LNG, which operates 42-foot-by-12-foot LNG processing plants — about one-third the size of an average mobile home — known as Cryoboxes.
Each Cryobox unit can process up to 1 million cubic feet of gas per day, which yields about 10,000 gallons of LNG.
Edge LNG already operates in the Marcellus shale in the Northeast and the Bakken in North Dakota. In the Bakken, Edge’s customers are able to transport the LNG to well site and use cleaner-burning fuel to replace about half diesel powers rigs, fracking fleets, and other equipment, said Edge CEO Mark Casaday.
Although Edge has not signed up any Permian producers, Casaday said that once the company lands a customer and starts producing LNG in the Permian, other contracts should follow.
“Famous last words,” he said. “We’re very close to a number of deals, both in the Midland the Delaware basins.”
The Midland is the eastern section of the Permian, the Delaware the western part.
The economics of operating in the Permian would be somewhat different than in the Bakken. Because the Permian gas is very rich in natural gas liquids, such as propane and butane, the gas will have to be run through a separate gas processing plant to strip out the liquids, before going tp the liquefaction unit to convert the gas to a liquid, Casaday said.
On any given day, Casaday estimated, 50 to 70 to rigs are running in the Permian, enough to provide healthy demand for locally produced LNG.
“To make the economics work,” he said, “you need drilling rigs and you need the frack crews, that’s what really burns the gas” as fuel.
Game-changer: LNG by rail
A decision by the Trump administration to allow the transport of LNG by rail — announced by President Donald Trump last year in Crosby —could be a game-changer for the small-scale LNG. In June, regulators issued the final rule, which would allow each rail car to carry about 30,000 gallons of LNG.
Kelley said the new regulations will make it economical to export Permian LNG to Mexico, where natural gas fetches a price of $8 per 1,000 cubic feet, far above U.S. gas prices, which for many months have averaged around $2 per 1,000 cubic foot. The differential between domestic and Mexican prices could provide further incentive for Permian producers to capture natural gas rather than flaring it.
“I think you can stick a couple of 100,000-, 200,000-gallons-per-day plants in the Permian,” Kelley said, “and you can ship the heck out of that into Mexico.”