Why Europe’s gas-supplying countries have some of the largest opportunities to create value by monetising flared gas

25 November 2019

Europe’s nearest gas-supplying countries have not only some of the highest absolute volumes, but also some of the highest “flaring intensity” rates.

Several countries therefore have potential market risk (due to growing environmental concerns), but also a huge opportunity to create value.

Flare capture solutions represent an easy-to-implement economic and environmental win-win, with a large negative abatement cost.

A thought piece by Capterio | 1200 words | Reading time: 6 minutes

Few would dispute that, apart from when it is safety-related, gas flaring is a waste of a valuable energy resource. A single 5 mmscf/d flare, for example, not only wastes some $7.5 million per year (at a conservative price of $4/mmbtu), but also increases emissions by 400 thousand tonnes CO2-equivalent tonnes per year (assuming 10% combustion efficiency, see our article). Flares of this size (and lower) are key targets for flare capture with proven commercial solutions.

Where do the opportunities exist?

Capterio has compared flare volumes (from the World Bank GGFR) to oil production volumes (from BP’s Statistical Review of World Energy) to derive a “heat map” of absolute flare volume versus “flare intensity” by country. The resulting matrix divides into four quadrants (high absolute flare volume, high flare intensity is dark orange; low absolute flare volume, low flare intensity is light grey, etc., see Figure 1). The analysis, which shows a large span of performance between countries, is already of keen interest to the EU+ member states.

Figure 1: World map outlining countries by flare volume and flare intensity per barrel of oil. Countries surrounding Europe have both high flare rates per barrel and high total flare volumes (white indicates countries that are immaterial for flaring). The countries in the darker colours have the most opportunity to improve revenue whilst decarbonising. Data commentary: The World Bank study reports flares that are observed from satellites 1-2 times per day. The volume estimate is based on the observed thermal anomaly, and the estimates have been calibrated with low variances versus actual (metered) measurements.

Whilst 2018’s global average “flare intensity” was c. 140 scf/barrel (flaring of 13,900 million scf per day divided by oil production of 99 million barrels per day), several countries relevant to Europe (e.g. Algeria, Libya and potentially Iraq) have a flaring intensity some 300-400% higher, up to 560 scf/barrel (see Figure 2). In contrast, several leading countries (e.g. Norway and Azerbaijan) have a flare intensity 10-20% of the global average, as low as 15-30 scf/barrel. If the high intensity countries that supply Europe by pipeline were, for example, to lower their intensity to the global average, their increased annual revenue opportunity could be up to $8.2 billion, plus it could lead to a reduction of CO2-equivalent emissions of up to 380 million tonnes per year. Note our figures assuming an average gas price in Europe around $8/mmbtu, and 90% flare combustion efficiency (see our article on the importance of our assumed 10% of “methane slip”).

Figure 2: An alternative view of the same data in Figure 1, showing the absolute level of flaring (left-hand chart) and the relative (to oil production) level of flaring (right hand chart). The global average is ~140 scf per barrel, but there is a very large span of performance.

What drives flaring intensity?

“Flaring intensity” is driven by 3 factors, namely: (1) the intrinsic gas/oil ratio of the resource base (a function of source rock type and its maturation history), (2) the approach taken by the operator to positively deal with any produced gas (using it for EOR, power generation, liquids conversion, or simply gas to pipeline, etc.), and; (3) the form of any residual waste (i.e. the relative bias for flaring versus the alternative of venting, see Figure 3). Going forward, operators can focus on optimising factors 2 and 3. Factor 2 is the core offer of Capterio (we focus on innovative ways to monetise wasted gas, see flyer), and factor 3 can be addressed by improving the efficiency of flare combustion.

Figure 3: Formulaic description of the total flaring, broken down by its principal drivers. Let’s work an example: Suppose a country produces 1.5 million barrels of oil per day with an average gas-oil ratio of 300 scf per barrel of oil … then the associated gas would be 450 million scf/d gas. If the operator utilised two thirds of this associated gas productively (e.g. in pipeline sales, for EOR, for power generation etc.), then the “waste” would be some 150 million scf/d. If 80% of this waste were to be flared (and 20% vented, as uncombusted methane), then observable flaring would be 120 million scf/d. The calculated “flare intensity” is 80 scf/bbl (which is the flare volume divided by the oil production: 120 million scf/d divided by 1.5 million bbl/d oil production).

What’s the key insight from the data?

A key insight, especially for European consumers, is that the countries with the highest absolute volumes and highest “flaring intensity” are also, for the most part, Europe’s most proximal hydrocarbon suppliers (Russia, Iraq, Egypt, Libya, Algeria). To Europe and the countries highlighted, this situation represents not only a potential market risk, but also an attractive investment opportunity.

The risk is that flaring may contribute to a disconnect between European hydrocarbon demand and its proximal supply, due to greenhouse gas considerations

The EU is continuing to think seriously about enshrining 2050 net-zero carbon emissions into law and member states are becoming increasingly sensitive to greenhouse gas intensity of their energy supply chains. In the coming years, greenhouse gas reporting standards, both internal and external to the bloc are likely to be strengthened. This will provide data to suppliers, consumers and investors which can be used to drive lower emissions (through the emissions trading scheme, ‘green’ certification schemes etc.). There is support for this from European energy players. As a senior energy executive recently remarked, “Europe needs a certification market – it will not be possible to achieve low emissions without support from regulation”.

As Europe decarbonises, demand – in addition to price premiums – will likely be greater for products with lower greenhouse gas intensity. Without tackling the flaring problem, especially given an abundance of supply sources to the region, Europe’s proximal hydrocarbon suppliers may lose some of their natural advantages to more remote suppliers (e.g. LNG) due to higher greenhouse gas intensity. That would potentially result in a loss or market share for the more proximal suppliers and maybe also even drive up prices for European consumers.

But the opportunity is to tackle flaring, creating value whilst decarbonising supplies

Capterio analysis indicates that flare abatement projects have a negative abatement cost around $15-50 per tonne CO2e (i.e. the investments make money, whilst also decarbonising). This compares, for example, to a positive abatement cost (i.e. a net cost) of some $2+ per tonne of CO2e for planting a tree.

Flare capture therefore makes not only economic, but environmental sense. Flare abatement for countries with significant flaring volumes and rates (Russia, Iraq, Egypt, Libya, Algeria) creates an easy-to-implement economic and environmental win-win which decarbonises oil and gas supply chains.

The race is now on for Europe’s proximal suppliers to show decarbonisation leadership. Now, that’s an exciting investment proposition.

Capterio can provide big data analytics on flaring and gas wastage to empower energy providers to create a more sustainable, profitable solution for their consumers, investors and staff. Our data enables actionable insights into smarter, cleaner and more affordable energy choices that can improve people’s lives and enhance sustainability.

Capterio is a project developer focussed on monetising waste gas in oil & gas energy systems. We build solutions to capture waste gas and utilise it, taking it to pipelines, injecting it (for storage, enhanced recovery or disposal), converting it to power, liquids (e.g. CNG, LPG, GTL, LNG, etc) or other creative solutions. We screen and source opportunities, we select and procure technology, we negotiate commercial contracts, we provide project financing – and oversee construction and operations. We bring together assets together with technologies, know-how and financing to deliver on-the-ground, real-world, safe and reliable solutions.

We are grateful for colleagues at the IEA, McKinsey & Company and the Rocky Mountain Institute for lively discussions on this topic.