West Texas drown­ing in wa­ter from frack­ing

Wa­ter man­age­ment in Per­mian Basin fig­ured at $22 bil­lion in five years

Tulsa World - - Datelines - By David Wethe and Kevin Crow­ley Bloomberg the of­fi­cer

In the dry, dusty plains of West Texas, home to Amer­ica's most pro­lific oil play, the prob­lem isn't too lit­tle wa­ter, it's too much of it.

Just ask Will Hickey, 31-year-old chief ex­ec­u­tive of Col­gate En­ergy.

Stand­ing on a 26-foot high rig plat­form in Texas's Reeves County, Hickey watches as con­trac­tors ma­neu­ver drilling pipe al­most 10,000 feet un­der­ground in search of oil. Just a half-mile away, another rig is equally hard at work. But this one, op­er­ated by WaterBridge Re­sources, isn't seek­ing oil. It's mak­ing a hole to dis­pose of the vast amount of wa­ter gen­er­ated from lo­cal wells.

“If we don't have a wa­ter so­lu­tion we can't pro­duce the well, it's as sim­ple as that,'' Hickey said in an in­ter­view. “It used to be that each op­er­a­tor han­dled wa­ter them­selves. But the sheer vol­ume of what's now be­ing pro­duced has cre­ated an op­por­tu­nity for spe­cial­ized wa­ter com­pa­nies to step in.”

With frack­ing, ex­plor­ers blast wa­ter, sand and chem­i­cals down wells to crack open the oil-bear­ing shale be­low. As oil is pumped up, so is the wa­ter, com­bined with salt-laden wa­ter from un­der­ground reservoirs to cre­ate a toxic mix that would dev­as­tate farm­land if re­leased on the sur­face. With as many as four bar­rels of wa­ter pro­duced for ev­ery bar­rel of oil, it's a dis­posal night­mare that could add as much as $6 a bar­rel to com­pany breakevens by 2025, ac­cord­ing to a re­cent Wood Macken­zie study.

Over­all, the re­gion will pull up enough wa­ter this year alone to cover all of Rhode Is­land nearly a foot deep. Wall Street is well aware of the threats posed by the Per­mian Basin's pipe­line and la­bor short­ages, key side ef­fects from the re­gion's rapid buildup. But in­vestors “aren't as well ap­prised of some of the other risks and chal­lenges that could be just as ma­te­rial, if not more so,” said Gabriel Collins, a fel­low in en­ergy and the en­vi­ron­ment at Rice Univer­sity.

“I'd put wa­ter right at the top of that list,” he said

How ma­te­rial? Spend­ing on wa­ter man­age­ment in the Per­mian Basin is likely to nearly dou­ble to more than $22 bil­lion in just five years, ac­cord­ing to in­dus­try con­sul­tant IHS Markit. The rea­son is twofold. The rig count is ris­ing, and many of the “work­horse” dis­posal for­ma­tions used for decades are start­ing to fill up, said Laura Cap­per, an in­dus­try con­sul­tant. That means ex­plor­ers have to move wa­ter fur­ther to find a home for it.

It's a prob­lem “that's just go­ing to get big­ger and big­ger,” said Wood Macken­zie an­a­lyst Ryan Du­man, “Op­er­a­tors are vic­tims of their own suc­cess.”

Drillers gen­er­ally flush ex­cess wa­ter back into the ground, of­ten af­ter truck­ing it to ar­eas such as the San An­dres, a re­gion of the basin largely drilled-out early on in the shale boom. But now, with the boom hit­ting his­toric lev­els, that sys­tem is run­ning into head­winds.

In the San An­dres, wells sunk to gather oil deeper within the play are col­laps­ing as a re­sult of the in­creased pres­sure from wa­ter in­jec­tions, caus­ing dozens to be closed and the loss of miles of pipe, ac­cord­ing to An­drew Hunter, a drilling engi­neer at Black­stone En­ergy Part­ners­backed Guidon En­ergy.

It's a situation that's “get­ting worse,” Hunter said at a re­cent con­fer­ence on wa­ter held in Hous­ton. “I think peo­ple are afraid to talk about this prob­lem. We're try­ing to get the word out to let ev­ery­one know how se­ri­ous this is.”

At the same time, earth­quakes in parts of West Texas and New Mex­ico that in­clude the Per­mian have more than tripled to 62 with at least a 2.5 mag­ni­tude in the past year, from just six two years ear­lier, ac­cord­ing to the U.S. Ge­o­log­i­cal Sur­vey. That's data en­vi­ron­men­tal­ists are quick to blame on the in­jec­tions, point­ing to stud­ies on sim­i­lar ac­tiv­ity in Ok­la­homa.

In some cases, com­pa­nies are push­ing to solve the prob­lem on their own, set­ting up new units that deal just with wa­ter. In other cases, drillers are turn­ing else­where for help, cre­at­ing an emerg­ing in­dus­try that co­or­di­nates a wide range of ser­vices, from truck­ing to pipe­lines to dis­posal and re­cy­cling.

By this time next year, three to five of the eight large wa­ter man­age­ment com­pa­nies op­er­at­ing in the Per­mian could reach at least $1 bil­lion in mar­ket value, ac­cord­ing to Steve Cof­fee, pres­i­dent of the Pro­duced Wa­ter So­ci­ety.

“There's a need for a new mid­stream mar­ket,” Cof­fee said by tele­phone. “One thing that's clear: they all have dif­fer­ent strate­gies and di­rec­tions and niches.”

The lat­est strat­egy is re­cy­cling the re­cov­ered wa­ter in a way that will al­low it to be used over and over again, ac­cord­ing to Amanda Martin Brock, the chief op­er­at­ing of­fi­cer of So­laris Mid­stream. There's a va­ri­ety of tech­niques now be­ing ex­plored to do this, she said at a wa­ter con­fer­ence last month in Hous­ton, but the ef­forts are “in early days.”

“Ev­ery­body is look­ing for the holy grail,” she said. “It doesn't ex­ist. This is trial and er­ror, this is op­er­a­tor spe­cific.”

In some in­stances, com­pa­nies are blend­ing the re­cov­ered wa­ter with a fresh sup­ply, help­ing to bal­ance out the high salt con­tent of the wa­ter in the reser­voir. Oth­ers are us­ing it with­out hardly any change, a tech­nique be­ing re­ferred to as “frack on the fly.”

“You haven't had a de­fin­i­tive tech­nol­ogy ac­cepted by ev­ery­one,” Robert Rubey, co-founder of Good­night Mid­stream, said at the re­cent wa­ter con­fer­ence. His com­pany chose to stay out of the re­cy­cling busi­ness be­cause it would com­pete with the land own­ers who give him ease­ments for his wa­ter pipe­lines. Those same land own­ers are try­ing to sell fresh wa­ter, he said.

“I'll help you deal with it, mov­ing the wa­ter for re­cy­cling,” he said. “But we have made a strate­gic de­ci­sion not to try to com­pete with the landown­ers, be­cause I can't put them out of busi­ness.”

Ja­son Downie, co-man­ag­ing part­ner for Tail­wa­ter Cap­i­tal, says in­vest­ing in wa­ter man­age­ment is a must if the re­gion wants to ex­pand its pro­duc­tion ca­pac­ity.

“With West Texas rep­re­sent­ing the most sig­nif­i­cant pro­duc­ing area in North Amer­ica, the Per­mian re­quires mas­sive amounts of wa­ter pipe­line in­fra­struc­ture if we aim to meet our oil growth tar­gets,” said Downie, whose pri­vate eq­uity firm backs Good­night Mid­stream.

WaterBridge and So­laris Mid­stream are pur­su­ing both sides of the equa­tion — sup­ply­ing fresh wa­ter up­front, and man­ag­ing waste­water at the back end.

“You've got two things that are just ter­ri­fy­ing,” So­laris's Brock said. “One, you won't have the wa­ter avail­able when the frack crew needs it, and you shut down that frack. The other one: your wells are up and you're hav­ing to choke them back, be­cause there's no where to send the wa­ter.”

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