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From sourcing to disposal, Permian producers face rising tide of water issues

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Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

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From sourcing to disposal, Permian producers face rising tide of water issues

As oil prices stabilize and takeaway capacity constraints ease, a significant water issue could be the next impediment to production growth in the prolific Permian Basin, industry experts said.

Water used for hydraulic fracturing needs to be sourced and disposed of, and the two processes are expected to be a growing challenge for oil and gas producers. The issue is particularly pressing in the Permian Basin, which is expected to account for nearly half of the 8.59 million barrels per day U.S. shale plays produced in April, according to the latest Drilling Productivity Report from the U.S. Energy Information Administration.

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Water gushes out of a drill pipe as it is pulled up to be replaced with a fresh pipe at a hydraulic fracturing site in Midland, Texas.

Source: Associated Press

Spears & Associates, which focuses its analysis on the oilfield services sector, estimates that 6.9 billion barrels of water was sourced for use for hydraulic fracturing across the U.S. in 2018, up 47% from 2017. That total should approach 12.9 billion barrels in 2022, a 22% compound annual growth rate over 2017-2022, the research firm said.

Exploration and production companies adjust water usage in the hydraulic fracturing process to find the optimum volume that allows for maximum production. Using too much water can cost a producer more money to generate the same level of production, while not using enough water could leave oil in the ground, according to analysts at B3, a data and research company specializing in water.

It takes about 500,000 barrels of water to frack a new well in the Permian Basin, B3 Director of Products Bob Bruant said during an April 22 interview. As a result, water utilization for hydraulic fracturing in the Permian jumped from 2.3 million barrels in 2011 to 630 million barrels in 2016 before surging to 1.5 billion barrels in 2018, he said.

Water scarcity prompts investment, innovative solutions

Amid the growing volume of water needed for hydraulic fracturing, there are mounting concerns around sustainability, particularly in regions where water resources are stressed, according to an August 2018 Duke University study titled "The Intensification of the Water Footprint of Hydraulic Fracturing."

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Up until about five years ago, water was sourced from fresh and brackish water and from water treatment facilities because the industry believed only fresh or near-fresh quality water would ensure that proppant, mostly sand, "behaved as expected," Bruant said. Some "produced" water, or water recovered during the oil extraction process, made up part of the supply mix.

Today, produced water has become a noteworthy source of supply as operators have found "lower-quality" water can be sufficient to meet their needs, Bruant said.

Of the 660 million barrels of contaminated water produced from hydraulic fracturing in 2017, about 14% was treated and reused, researchers with Bluefield Research said in a 2018-2027 forecast published in June 2018.

Companies are now leveraging the tremendous amounts of water being produced to help mitigate operational costs, B3 President Kelly Bennett said in an interview, but "it is pretty hard to see a time when water will not have to be sourced elsewhere."

The increasing need to transport produced water and fresh water to demand areas is generating demand for infrastructure investment because the costs to truck water are prohibitive, Bennett said.

Water pipeline investment has been catalyzed by the underlying economics in comparing truck versus pipe transfer costs, according to Bluefield Research. In the Permian, trucking costs per barrel are approximately $1.97 versus 31 cents by pipeline. As a result, reported cost savings by pipeline utilization range from approximately $1.47 per barrel to $1.85 per barrel.

Bluefield noted five fracking-related water pipeline and transfer projects in the fourth quarter of 2018 including proposals, project commencement, construction, expansions and new developments.

The issue of disposal

While sourcing and transporting water for use in hydraulic fracturing is challenging, in the Permian Basin, less focus is put on providing more water and more focus is put on disposal, Bruant said.

For every barrel of crude oil produced, eight barrels of wastewater are produced, he said. "In 10 years, we will have about 5 billion barrels of wastewater per year for disposal, assuming 100% of producers' needs are being met by produced water."

While there are limited restrictions on how the oil and gas industry sources water, disposal is more highly regulated amid a speculative correlation between subsurface injections and an increase in seismic activity.

The vast majority of produced water is disposed of via subsurface injection. "Subsurface injections have been known to create some seismic activity," Bruant said, noting more research is needed and that Texas has not seen increases in seismic activity akin to places like Oklahoma.

In the Permian Basin, injected water volumes, including water for disposal and enhanced oil recovery, totaled 4.6 billion barrels in 2011, with about 75% of it used for enhanced oil recovery. Volumes jumped to 5.9 billion barrels by 2016 with about 60% used for enhanced oil recovery, before climbing to an estimated 6.7 billion barrels in 2018, with about 50% for enhanced oil recovery, Bruant said, citing data from the Texas Railroad Commission.

The Texas Railroad Commission looks at capacity, gross volume and surface pressure and has increased its scrutiny on water disposal applications for the Permian Basin and across Texas, Bruant said. Oil is a legacy industry in Texas and although he sees restrictions, Bruant does not anticipate a significant crackdown on fracking activity.

The rising demand for water management services

As sourcing and disposal challenges mount, demand and cost for water management services are climbing.

In 2017, demand for water management services including acquisition, transport, transfer, storage, flowback, treatment and disposal in the U.S. increased 44% to $18.9 billion in response to increased horizontal drilling activity, increased per-well frack job size and increased recycling/treatment activity, according to Spears & Associates.

Bluefield Research said in its Feb. 14 Quarterly Insights report, based on its 2018 reference case assumption of total water volume use exceeding 40 billion barrels at 42-gallons each, or 5 billion barrels, by 2027, total water management spend could surpass $170 billion through the period, with transport for water supply — produced and flowback — representing more than 49% of the total water management spend, or $84 billion, through the period.

With 441 active rigs in the Permian Basin at the close of the fourth quarter 2018, total spend of almost $95 billion is expected for water management in Texas and New Mexico through 2027, according to the Bluefield Research study.

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As a result, to manage water sourcing and disposal, some E&P companies have water management groups, while many others are getting involved with backing by private equity, Bruant said.

Oilfield services majors Schlumberger Ltd. and Houston-based Halliburton Co., as well as equipment provider Houston-based National Oilwell Varco Inc., each offer water management services.