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Inside North Dakota's latest fracking problem

Matthew Staver | Bloomberg | Getty Images

From his driveway, Tom Wheeler's view of North Dakota's sprawling grasslands seems endless. Fields of soy, wheat and canola stretch to the horizon in all directions. But as drillers flock to the state to cash in on North Dakota's booming shale play, that horizon has become increasingly marked by natural gas flares.

Wheeler, 59, owns 3,000 acres of farmland in Ray, the heart of the state's oil-rich Bakken Basin, one of the world's largest shale formations. Shale gas is natural gas, which is found trapped within shale formations.

Still farming the land his grandfather homesteaded in 1902, Wheeler can give a first-hand account of the oil industry's boom and bust cycles in North Dakota , sometimes known as the "Roughrider State."

During the area's last boom in the '70s, Wheeler spent his winters working on an oil rig. And while he knows just how much an energy surge can change a community, he's never experienced one that's transformed the landscape quite like the recent boom.

"In the '70s we had so many dry holes that you never noticed the flares," Wheeler said. "But now every well is productive-and the flares are everywhere."

In the Bakken, flaring has become synonymous with drilling.

The prairies-once dotted only with cattle and an occasional lazy oil derrick-are now marked by thousands of flares, open pits or steel pipes burning off excess natural gas, a byproduct of the rapid rise in oil drilling. New wells are coming online so quickly that the pipeline infrastructure for natural gas has not been able to keep pace.

Hydraulic fracturing, or fracking, forces natural gas and crude oil out of shale buried deep below the earth by using highly pressurized and treated water. Drillers seek out valuable crude oil, but natural gas comes out of the ground, too. Flaring is the burning of natural gas that can't be processed or sold.

All those flares, meanwhile, are adding up. They burn so brightly that NASA astronauts have taken pictures of their glow from space.

Credit: NASA Earth Observatory

Many oil drillers are unable to direct the flow of natural gas coming off wells into existing pipelines, which already are at full capacity. They have no choice but to add a flare at each site with a well. The result is nearly a third of the natural gas produced in the region is being burned to secure crude oil, and subsequently creating thousands of flares.

Now regulators are cracking down. North Dakota passed new flaring standards, with the goal of capturing more natural gas. Energy companies are scrambling to meet the rules and curb flaring-some with creative technologies.

For some landowners like Wheeler, it's not the noise or light pollution that gets to them. It's the region's wasted natural resource.

In Ray, Hess (HES) has a gas compression station bordering Wheeler's property. Natural gas is pumped from several surrounding oil wells, before being transported to a larger processing facility in Tioga. A four-burner flare sounds like a jet engine, and the 20-foot flame, sitting atop the 30-foot torch, can be seen for miles.

"It's not just a waste to the landowner or the tax collector, it's a waste of the land's natural product," Wheeler said. "When I was growing up, we were taught not to waste anything."

Every day, drillers in the Bakken burn off about 350 million cubic feet of natural gas. That comes to more than $100 million worth of gas burned off each month-a figure that makes the state's mineral rights holders' unhappy. There are at least 12 class-action law suits filed against the drillers by mineral rights holders seeking lost revenue.

Read More The fuel source that's powering more homes again

Trying to manage the growth of the Bakken, North Dakota in July passed new flaring standards, with the goal of having drillers capture 90 percent of all the gas they release by 2020. Drillers now capture roughly 72 percent. When the new standards come into effect in October, drillers will have to raise that figure to 74 percent, with subsequent gains made leading up to 2020.

While environmentalists say the standards are still too lax when compared to states like Alaska and Texas-where more than 99 percent of all natural gas is collected-regulators say the new North Dakota standards will be strictly enforced. Any wells that are found to be burning too much gas could face drilling curtailments. And the North Dakota Petroleum Council, which supports the local oil and gas industry, says as many as 1,500 wells could face some kind of forced slowdown.

As new regulations begin to take effect, oil producers are finding creative solutions to the the flaring problem.

The industry isn't in denial when it comes to the flaring, says Lance Langford, vice president of the Bakken Asset for Statoil (Oslo Stock Exchange: STL-NO).

"I think we all know we need to reduce flaring. We want to reduce flaring," he said. "It's not just the environmental footprint we have here. There's also value capture for us, for the mineral rights holders and the state. I think it's fair, but it's going to be a challenge."

Langford would know. His Norwegian-based company has been one of the biggest players in the Bakken region, since it purchased Brigham Exploration for $4.4 billion in 2011. With roughly 300,000 net acres, Statoil is making a concerted push to expand its presence in the region. It's also working to cut its flaring.

Statoil last year announced a joint partnership with General Electric (GE) and Ferus Natural Gas Fuels, a Canadian natural gas logistics company. The companies have been piloting GE's "CNG in a Box" technology at a Statoil rig just east Watford City, North Dakota. The unit compresses natural gas and stores it for the final distance of the fuel process. This option is referred to as the "Last Mile" fueling solution.

The unit doesn't look like much-a brown box about the size of a small shed, with pipes running out of it. But the unit holds enough CNG to help power operations for a Statoil rig drilling 11 new wells. By this time next year, Statoil hopes all six of its rigs are partially running on natural gas captured from its wells.

"It's a win on multiple levels," Langford said. "At the site we're reducing flaring, we're also capturing value, and we're lowering our fuel costs."

General Electric and Ferus hope to take the service even further. GE project manager Phil Fusacchia and his team are in talks with all the major drillers in the basin about using the CNG in a box technology.

"We have a backlog of about four times the scale of what we've done with Statoil," he said. "Right now we're even starting to move into Texas."

And while the pilot program has shown drillers can use the technology to lower their flare rates and fuel costs, Statoil and GE are thinking bigger. They hope to create a market for the compressed natural gas, which could fuel everything from commercial drilling fleets to ordinary vehicles. But for CNG to be economically viable, there needs to be a significant investment in infrastructure, Langford said.

"We need the state, federal and local governments to help encourage the use of CNG," he said. "And we also need the private sector to come up with ways to use CNG. It's cheaper, it's cleaner and there are lots of opportunities."

Back in Ray, Wheeler agrees that creating a market for CNG products, along with laying adequate pipe infrastructure, are the best options to reduce wasteful flaring. He's even pushing to see the area's CNG harnessed to develop ammonia-based fertilizers that local farmers could use in their fields.

And for all the wealth drilling has brought to the area, Wheeler says that he and many of his neighbors would give it all up for things to go back to where they were before the drilling boom.

But ultimately, Wheeler knows that that will never happen. "They're not going to stop and we're not going anywhere. We both have to learn to work together better," he said.

-By CNBC's Brad Quick and Morgan Brennan

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