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Water infrastructure booms with shale

The US oilfield water-handling market is growing as shale production continues to rise, with the Permian Basin leading the way

The boom in US shale production is spurring the growth of supporting industries, with water-handling prominent among these. Oilfield water management is nothing new, as conventional oil and gas wells also produce water alongside hydrocarbons.

But the emergence of shale drilling over the past decade has added a new dimension to this—with operators needing to source water for hydraulic fracturing as well as managing their produced water.

The US is producing roughly four barrels of water for every barrel of crude, according to research from investment bank Raymond James. It projects that the amount of waste-water produced in the US will rise from about 50mn bl/d to roughly 55mn bl/d by 2025, and around 60mn bl/d by 2030.

The Permian Basin is forecast to account for 32mn bl/d and 38mn bl/d respectively in those years. And the Permian’s Delaware sub-basin is unusual for its high water-to-oil ratios, according to the bank—more similar to those seen in legacy wells than to the output of wells in other shale regions. With the Delaware Basin among the main drivers of US crude production growth, the water-to-oil ratios will require further water-handling infrastructure development in the region.

One major area regulators will increasingly look at is wastewater recycling

Water-handling in the Permian Basin and beyond is already dominating headlines more than in the past. In one of the most recent examples, in mid-November Gravity, a private equity-backed infrastructure firm, agreed to acquire On Point Oilfield Holdings, which owns water-gathering and disposal operations in the Permian’s Midland sub-basin. The acquisition will create the largest commercially produced water disposal company by injection volumes in the Midland. 

Early days

While this consolidation points to water companies stepping up to meet the needs of shale producers, these efforts are still in their relatively early days and there are a number of challenges to overcome.

“If we take a look at saltwater disposal (SWD) average utilisation, this is usually 30pc and below, which means that the infrastructure is there but it is not interconnected so every operator that needs it can use it,” says Paola Perez Pena, an upstream cost and technology analyst at data provider IHS Markit.

Right now, water-handling infrastructure is largely keeping up with Permian oil and gas production, and Perez Pena notes that disposal capacity constraints have only emerged in localised portions of Texas’ Reeves and Loving counties. But currently rangebound crude prices are making it easier for water infrastructure to keep up with production growth, warns Porter Bennett, co-founder and CEO of B3 Insight, an oilfield water intelligence company.

IHS Markit also anticipates further consolidation in the water-handling industry

“Should prices go up, water production increases pretty dramatically and begins to be a little more of a challenge,” says Bennett. And while there is plenty of capacity to drill new disposal wells, there are questions over where to place them. “There is some evidence that suggests that too much injection of water in too small an area at too fast a rate creates overpressurisation issues locally.”

Some producers are therefore starting to object to SWD wells being drilled too close to their operations. This is something regulators—in both Texas and New Mexico, in the case of the Permian—will need to increasingly take into account as they develop frameworks for managing water permitting. 

Regulatory adaption 

“Regulators have just started to realise that there are multiple things that need to be changed from the permitting process of SWD wells all the way to reporting volumes,” says Perez Pena. “We are not sure if these changes are going to be implemented in a timely matter to keep up with the industry’s evolution.” 

Indeed, she expects the changing regulatory environment to result in a slowing of SWD capacity additions. “With the permitting process getting stricter, I expected that new SWD capacity will be added slowly over the next five years. That means that operators and third-party companies will have to work together to improve currently average utilisation and interconnectivity if they do not want water disposal capacity to affect oil and gas production.”

“The challenge that [regulators] face is that a lot of the science is still being developed right now,” says Kelly Bennett, president and co-founder of B3 Insight.  In Texas, he notes, a new structure for permit approvals has been created whereby a different, more rigorous, kind of review process is triggered in areas where there are, for example, seismicity concerns. “They are trying to mitigate some of the risk of both seismicity and pressure implications in the permitting process as opposed to when they have a whole bunch of new permits operating at full steam ahead,” he says.

One major area regulators will increasingly look at is wastewater recycling, as the practice becomes more popular with producers. “Recycling is not a panacea,” Porter Bennett warns. “You can recycle every drop of water that is used in fracking and you still have a whole lot of produced water you have got to dispose of.”

This is backed up by the findings from Raymond James, which says that recycling of flowback water from fracking is commonplace, albeit still in its infancy in the Permian. Meanwhile, recycling of produced water is often not seen as economic owing to the higher cost of cleaning this ‘dirtier’ water.

“There are some producers that are already—with some of their operations—achieving an incredible recycling rate, 90-95pc in some cases,” says Kelly Bennett. “But the reality is that in most parts of the Permian, even when that is the case, that may amount to 20-30pc even on the highest side of the total amount of water that they produce.” The treatment and recycling component is really important, he adds, but it is just one part of the bigger picture. 

Consolidation

For now, oil and gas producers still own and operate most of their own water-handling infrastructure. But this too is changing. “Currently operators own more than 70pc of the permitted disposal capacity. However, third-party companies are growing at a fast pace, taking market share,” says Perez Pena. “In fact, the newest infrastructure developments have been recently built by third-party companies,” she adds.

“Recycling is not a panacea,” Porter Bennett

Porter Bennett sees a similar balance between upstream operators and specialist midstreamers, with midstream players currently accounting for slightly less than 25pc of the water-handling market. But while producers dominate for now, he believes there are a number of reasons that midstream operators will ultimately account for a larger share. “I think, long-term, it is probably going to be a better economic option,” he says. For producers, monetising water infrastructure could also be an attractive option as it can help fund new drilling or pay down debt.

Among the midstreamers, further consolidation can be expected. Bennett believes consolidation is inevitable—firstly because, for some of the smaller companies, continuing to operate does not make sense economically. Second—and perhaps, he says, more significantly—the notion of a full-service water business that handles not only disposal but also recycling and other ancillary services, is becoming more important to producers.

The greater uptake of water recycling will help drive consolidation as well, he predicts. “Some of the companies really do not compete right now, but they complement.”

IHS Markit also anticipates further consolidation in the water-handling industry. “In our view, consolidation will continue, as more interconnected infrastructure has better utilisation rates and therefore better economics,” says Perez Pena. “We expect to see an active M&A market in 2020 as well.”

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