The issue with that, is that here in North Dakota, we don't have the infrastructure in place to take that electricity out of state. We already have a coal plant along with a hydroelectric plant that produce more than the state needs (along with some wind towers in several places).
In September 2012 a Boston-based energy group announced that it expected to complete an 800MW natural gas power plant in Oregon within 4 years at an expected cost of $850 million [1]. Let's use this as our naïve project cost paid up-front in equity. Thus, production begins at t+4 (2017).
Let's use uvdiv's estimate [2] of $220 million of natural gas being flared each year. Let's create a paramater, capture, for the fraction of the flared gas one is able to burn in the plant. I have no idea how to estimate this; it shall be the variable we solve for. Given that from 2008 to 2011 Chesapeake Utilities Corporation (NYSE:CPK), a natural gas distributor (close enough), ran a quck-and-dirty EBITDA margin of about 40% [3] we'll assume our annual cash flows from the operation be around $220 million * capture * 40%.
The State of North Dakota believes the Bakken wells "will take 15-20 years to develop" [4]. Some guy on the internet (in the Oil & Gas Journal) thinks the fields could sustain for 30 years [5]. Thus, we are going to assume a constant quantity of natural gas gets flared each year from now until 2045. Actually, it's worse than that, since we're assuming a constant $220 million of natural gas being flared (you hedged natural gas prices for the next thirty years with IKB Deutsche Industribank).
Chesapeake Utilities pays about 6% YTM on its 2031 non-callable bond [6]; we're going to use that as our discount rate.
Assuming the universe explodes in 2045, i.e. ignoring the salvage value/cost of the plant after thirty years, our hypothetical natural gas power plant breaks even provided you can capture at least 85% of the flared gas.
Let's allow natural gas flaring, and thus our cash flow production, to decline by 3% annually (approximate decline in U.S. petrol production from 1980 to 2000) for 20 years from 2045 through 2065. Given that we built our model around the cost of an 800MW plant, I allowed both the cost of the plant and capture efficiency to vary; here are the results: http://imgur.com/h9yaa. I'd say plausibility is sustained.
∴ Back-of-the envelope it doesn't look like a strikingly profitable proposal, but with proper connections to the national electricity grid and some clever financing it could be a deal. Bakken & Three Forks is only half a decade old.
* The extra flaring is temporary, because gas pipeline which could/would be built isn't there [0]. The issue isn't capturing gas in general, but capturing it right away, this year. Your four-year power plant construction doesn't solve this.
North Dakota even has a shortage of oil pipelines [1]; they are shipping out oil by rail, at a $5-$10/barrel premium, rather than delay.
* The "interesting" part of the cost is the capture/distribution at the well. These wells are small and remote. There are 8,000 of them [2]. The amount of flared gas is just $25,000/year per well (naive average).
Already 70% of the associated gas is captured; presumably, the 30% that is flared is more difficult.
* If they extract shale gas on a large scale, they can build long-distance pipelines cheaply. There is no economic need to site power plants near the gas field -- this is a solution in search of a problem.
* If they extract shale gas on a large scale, the amounts would be much larger than the amount being flared: they will purposefully seek out gas pockets. What they're flaring now is gas they don't want to extract.
* There's incentive to delay shale gas projects: there's an enormous gas glut in the US, which is depressing prices. Things which could be otherwise profitable are temporarily not.
This is not proposing a shale gas project. No pipes. It's best thought of as a waste-to-product project, similar to companies who bake slag into bricks.
There is a supply of gas in search of demand. The infrastructure to move the gas does not exist and is costly to erect. The infrastructure to move electricity is easier to erect (do-able in the 4 years a plant would take to put up). The arbitrage is in converting the natural gas into electricity, which can more easily be exported. Again, no pipes.
Yes, there is good reason to delay shale gas projects. But this is not a shale gas project. The gas is an input. Low gas prices are a plus.
How would you get it from the 8 000 wells to the plant? Initially, probably by truck (they do this in Kazakhstan). Laughing? I recently worked on a deal that transported oil, by truck, from Oklahoma to the Gulf of Mexico, because there was insufficient rail or pipe capacity. The cracking spread was wide enough. The argument here is that the oil companies would be willing to part with the waste gas for a nominal fee, particularly if one could get an environmental agency on one's side. You'd be "buying" natural gas below market and selling electricity at market.
"Back-of-the envelope it doesn't look like a strikingly profitable proposal"
I think this requires more than a look at the bottom line of the gas companies. You've got to include the heath risks and quality of life from the prospective of the residents of the state.
If a gas power plant is more environmentally friendly than flared stacks (I have no idea if it is) then it would be amazing just to break even on this deal because you're profit is the health of the citizens.
Continuing this thought, the gas companies are theoretically losing $200 million a year by not doing anything. That means, if a gas plant is more environmentally friendly, they don't even have to break even on the deal. The gas companies can lose ~$200 million a year on a project like this, have the same financial outcome and still come out ahead environmentally.
Edit: My math was off. I was figuring that they were spending ~$220/year, which they are not. That means my last statement is incorrect though I still feel that losing money on a more environmentally safe solution could be worth it.
"If a gas power plant is more environmentally friendly than flared stacks (I have no idea if it is) then it would be amazing just to break even on this deal because you're profit is the health of the citizens."
If I were proposing this deal, I would approach the State of North Dakota and surrounding localities with a request for tax incentives, etc. to increase the probability of the project going through on precisely those grounds.
