Bakken's next phase: Natural gas

Even as it fills the railroads of the Upper Midwest with oil tank cars, the Bakken has allowed its natural gas riches to languish.

Less profitable than oil and more difficult to transport, natural gas has been so secondary in North Dakota that drillers still burn off more than a fourth of what rises from the ground. In satellite pictures, the flames sprawl across the Williston basin, lighting it up like a giant suburb.

A quiet transformation is underway, however, as the state bids to turn natural gas into a native business and drive down flaring.

A growing network of pipelines and processing plants has made North Dakota a recent target for billions of dollars of investment toward factories that convert natural gas into other products like fertilizer and plastic.

"It's the natural progression of OK, now we're pretty fully developing on the drilling side of things, and now comes the next component, which is the value add," said Cullen Goenner, an economist at the University of North Dakota. "That's where you really get the biggest bang for the buck, in terms of the employment and all those supplemental jobs, is in the value-added industries, more so than in just the extractive industries."

A group called Badlands NGL announced in a news conference with Gov. Jack Dalrymple two weeks ago that it wants to convert cheap, abundant ethane into polyethylene, the raw material of plastic bags and bottles. The $4 billion factory would churn out rail car loads of the tiny, milk-white plastic beads.

A month earlier, Inver Grove Heights-based agriculture giant CHS Inc. said it will build a $3 billion fertilizer plant 90 miles west of Fargo. Another group with board members from the North Dakota Corn Growers Association, called Northern Plains Nitrogen, is trying to raise money for a $2 billion fertilizer plant just north of Grand Forks.

But a shift into the chemical industry in North Dakota could create new markets for the state's natural gas, and would signal a new chapter in the oil boom.

"When the field first started going, there was a lack of gathering systems and we did a lot of flaring, and that's not abnormal for immature fields," Andy Peterson, president of the North Dakota Chamber of Commerce, said. "You start capturing some of the stuff and using everything. That's what industry wants — they want to use every little bit of the raw product that they can."

North Dakota natural gas contains high levels of ethane, propane and butane — the natural gas liquids — which helps explain the industry's delay in building the infrastructure, said Justin Kringstad, director of the North Dakota Pipeline Authority.

"The Bakken gas is incredibly rich," he said. "It's a very high-density, high BTU gas, so much so that a lot of the plants being constructed here, they've taken some very special engineering and expertise to get them to work properly."

The high-BTU gas is what attracted Bill Gilliam, CEO of Badlands NGL, the firm raising money for a petrochemical plant in northeast, south central or southwest North Dakota. The factory will need ethane, which accounts for up to roughly 6 percent of raw natural gas. By conservative estimates North Dakota is producing enough gas to make 150,000 barrels per day, enough to fill 10 Olympic swimming pools.

Such a plant in North Dakota would enjoy not just an abundance of the necessary raw material — Gilliam believes key pipelines passing through North Dakota are close to taking on dangerous levels of ethane — but also easier shipping to key industrial centers than polyethylene plants on the Gulf of Mexico.

"Let's look at the markets that actually buy polyethylene in the United States. They're in the industrial Midwest, which by rail is closer to North Dakota than it is to the Gulf Coast," Gilliam said. "Taking finished polyethylene by rail to Vancouver or to Seattle, or even to Duluth on the St. Lawrence Seaway are all things that are easy to do in North Dakota, and easier than going through the Panama Canal."

But ethane production is not at capacity in North Dakota, and Gilliam has a lot of money to raise.

Most North Dakota processing plants can't separate ethane from methane and the other components of natural gas. Only one — the Hess Corporation plant in Tioga, northeast of Williston — is doing so now. At full capacity, Tioga could churn out 30,000 barrels of ethane per day, but it just started in July. Daily output is 15,000 barrels, and all of it travels north to Alberta in the ethane-specific Vantage Pipeline.

Badlands is banking on some combination of a phased purification process and partnerships with pipelines and processors to gather the ethane and ship it to the site of the proposed petrochemical plant.

Gilliam, a native of New York, and Badlands must also raise $4.2 billion — about $3 billion in loans and $1.2 billion in ownership investment.

The company has hired the Spanish engineering firm Tecnicas Reunidas and other European contractors and plans to borrow money guaranteed by export credit agencies in Spain, Italy, Germany, and perhaps the European Union. Tecnicas Reunidas has secured sovereign guarantees for projects in Turkey and Bolivia, Gilliam said, so "it's our opinion that getting export credit guarantees for our project in North Dakota is a walk in the park."

Badlands also wants to raise $1.2 billion in equity from individuals and institutional investors. Gilliam says the plant is not a tough sell, and many people are interested.

"We have multiple ways of getting all the investment funds we need," Gilliam said. "It is not something that's seriously making us spend a lot of time or wring our hands or anything."

Gilliam expects to announce a location by early 2015 and wants the plant up and running by 2017. CHS says its fertilizer plant will be running in 2018.

As a share of all natural gas production, flaring has dropped from 38 percent three years ago to 28 percent in August. The state's goal is 26 percent by the end of the year, and 10 percent by 2020.

With the expansion of the Hess Tioga plant and ONEOK's Garden Creek II in McKenzie County, natural gas processing capacity rose this year from 1 billion cubic feet to 1.3 billion cubic feet — a 30 percent increase. By the end of 2015, capacity will have doubled since 2011, mostly because of 300 million cubic feet per day of new processing capacity built by Oklahoma-based ONEOK Partners.

Since 2010, ONEOK has either built or is building eight new natural gas processing plants in the Williston basin, where the firm's capacity in the region is expected to increase by more than 11 times by the end of 2016, compared with 2010.

ONEOK pipes all of its natural gas liquids south to Oklahoma which means, for now at least, it will be no help to Bill Gilliam and Badlands.

But projects like the Badlands proposal wouldn't even be under discussion without this growing infrastructure.

"I think that was the milestone that everyone went, huh, we can do that," Peterson said. "It really is a reflection of this oil industry starting to mature and become more than just pumping oil out of the ground."