Several companies are now looking into opening sites in the center of the largest oil patch in the U.S. It is not for oil, but for handling wastewater. With miles of pipelines and rows of steel tanks, sites like this in Big Springs, Texas is just one of the dozens own by companies who are turning to invest in water management.
The decade long shale revolution has enabled U.S. oil production to reach record high levels. By the year 2023, the oil production in the Permian basin which extends from West Texas to southeastern New Mexico is predicted to increase to 35% or 5.4 million barrels per day.
However, most of the supporting infrastructures have been left behind by this development. They are falling short on ways to haul huge amounts of water that were used in the hydraulic fracturing process along with produced water from oil and gas wells.
Bigger oil production will require even more supply and disposal of water. Firms from two New Mexico counties were able to produce 505 million barrels of oil and five times of that in water, from the years 2016 through 2018.
On their own, energy producers face the rising cost to supply, acquire, and dispose of water. But for investors like Blackstone Energy Partners LP, Ares Management Corporation, and TGP Capital among others, the wastewater management is a lucrative business opportunity that raises $34 billion in the U.S each year.
James Lee, from Riveron Consulting, cited that it is not possible to bring production online without a plan of solution for water. Morgan Stanley reported an estimate of 115 billion gallons or 2.75 billion barrels is required for drilling 5,500 Permian wells.
Most of the water from the Permian is being transported by trucks. The problem in this is that it is expensive and causes traffic congestion to which will only get worse in the areas around the production sites. Midstream companies, on the other hand, use pipelines which they constructed and energy producers pay them for its use.
The On Point Oilfield Holdings owns a water disposal network expects to take up a total of 375 thousand barrels per day of wastewater just for this year. A part of the water is going to be recycled, while the rest, which is equivalent to millions of gallons, will be sunk underground in West Texas. The company’s owner Mike Christensen remarks that water is the last thing on the minds of oil producers. But for his company, it has become their business plan.
There has also been a trend with some producers are also looking into cashing in on water projects as the oil industry comes under pressure to hold back on expenditure and increase their returns.
WaterBridge Resources LLC gave $200 million, and another $125 million to Halcon Resources in over five years for their water infrastructure assets. Hess Corporation received $225 million for their water handling assets in a joint venture with Global Partners in December.
Water Bills Soaring to $14 Billion Attracts Investors
According to the Permian producer’s data reported to FracFocus.org, the 13 million gallons consumed now by the average frack job will rise to 40% in two years. The consultancy HIS Markit interprets this to a 17% rise in water bills in the Permian basin to $14 billion. It is three times more than the amount North American producers paid for sand that they required to frack their wells last year.
These numbers definitely made more investors, who valued oil and gas, pay more attention to water management. Last week, TGP granted Goodnight Midstream $930 million for a majority stake for their water pipeline network. It is spans more than 420 miles or 670 km over three U.S. shale basins.
Global Water Intelligence reported that other firms like Ares Management Corporation and ARM Energy Holdings had a $4 billion agreement to purchase or build water management firms in four years. Jim Summers, the chief executive of H20 Midstream a water company based in Houston, says that even though water management is still at its early stages when compared against the pipeline business for moving oil and gas, the number of private equity firms looking to invest is still growing.
Shifting Gears and Controlling Costs
Costs of collecting and disposing of water will vary depending on whether it’s transported via pipeline or expensive trucks. It ranges from 50 cents to $4 per barrel, which can be too expensive for producers if the oils drop to $40 per barrel which they did last year in the Permian. This cost forced companies to decide to shift gears.
The shade producer Lilis Energy, Inc. anticipates their $2 per barrel cost of water disposal to fall to 48.5 cents after hiring Salt Creek Midstream. Initially, ARM Energy formed Salt Creek to gather oil and gas, but they swiftly shifted to offer water management instead.
Diamondback Energy Inc. wanted to pursue another path to retain the control of their subsidiary. The company is reflecting on accomplishing this by selling shares to its subsidiaries which manage its oil, gas, and water transport.
Parsley Energy Inc. developed their own $150 million water system to cut their wastewater costs. Matt Gallagher, CEO of Parsley Energy stated that their system which can take up to 1 million barrels per day helped to cut their costs to two-thirds to 50 cents per barrel. He also emphasized the importance of being great at water sourcing and management to become a good shale operator.