The oilfield water industry (OFW, or midstream water) continues to grow in importance within the general upstream energy industry.  So much so that while historically considered part of the Oilfield Services Industry (OFS), midstream water is now considered its own industry within the upstream space, separate from the more general OFS.  In this week’s Energy Valuation Insights blog, we explore the current status, trends, and expectations for the future of midstream water.

In the midstream water industry, the topics of the times are pressure, M&A/consolidation, and collaboration.  All three topics were touched on at Oilfield Water Connection LLC’s recent 4th Annual Oilfield Water Markets Conference (the OWM Conference) in Irving, Texas.

Pressure

Pressure and related seismic activity remain significant factors in the midstream water industry.  The 2016-2017 emergence of shallow injection-induced pressure concerns in the Midland Basin led to a material shift to deep zone injection.  However, deep injection led to 2020 production pressure concerns in the Midland basin, resulting in a shift back to shallow zone injection.  Currently, both the Delaware and Midland basins are dealing with pressure issues that result in (i) the loss of injection capacity, (ii) drilling and production operational hazards (leading to higher production costs), and (iii) injection permitting restrictions (limited produced water disposal availability).

New Mexico has imposed certain injection regulatory limits, leading to large, produced water volumes being sent across the state line into Texas for disposal.  This shifting of produced water volumes from New Mexico to Texas has added to the saltwater disposal challenges in the Texas basins.  The ramifications of these events include a strain on Texas SWD’s ability to handle disposal volumes, the potential for regulatory limitations causing SWDs to reach pressure limits significantly earlier than expected volume limits, and possible disposal expenses rising as capacity (pressure or volume-based) drops below disposal demand.

Recycling operations are still being scaled up to commercial application in many areas

While recycling of produced water can provide some relief from disposal demand, recycling operations are still being scaled up to commercial application in many areas.  While transporting produced water to areas with greater disposal capacity is growing, that entails additional costs.   As such, disposal is viewed as continuing in its role as the “balancing mechanism” in midstream water management.  Based on these factors, additional disposal permitting will be needed, along with new investment in disposal and water transport infrastructure.

An additional outlet for the high volume of produced water is reuse at non-oilfield endpoints.  However, such endpoints are largely yet to be developed, with the anticipated initial endpoint being agricultural in the form of non-food crops.  Follow-on endpoints would likely include crops for animal feed and, lastly, crops for human consumption.

M&A and Consolidation

M&A activity in the Permian hit a record level in 2023 –even if excluding the ExxonMobil/Pioneer transaction.  Steven Jones, Co-CEO and CFO at WaterBridge Resources noted that the capital markets have been slow to adapt to the midstream water business, as evidenced by the fact that there are only two public pure-play participants in Aris Water Solutions and NGL Energy Partners.  Jones noted that capital markets are increasingly receptive to midstream water investments.  Regarding consolidation, he noted that there have been some midstream water deals and that deal activity is likely to pick up.  Jones’s perspective is that consolidation is needed due to acreage being too spread out to achieve available efficiencies.  He also commented that two areas of headwinds to more rapid consolidation were the industry’s relatively short history, coupled with midstream contracts having little standardization.

Some demand for consolidation was fueled by the desire for options in dealing with produced water

Other commentary on M&A/consolidation activity in the midstream water markets was offered by OWM Conference panelists Michael Anderson (Layne Water Midstream) and Gauri Potdar (H2O Midstream).  The panelists offered that some demand for consolidation was fueled by the desire for options in dealing with produced water in light of the varying constraints of pressure/seismic issues, and regulatory and capacity limits on produced water disposal.  They noted that having multiple choices for managing produced water — SWD facilities, pipeline for transporting water outside the production area, and recycling/reuse — provides producers with much-desired options.  As a likely factor limiting consolidation activity, the panelists offered that midstream water margins are still reasonable, thereby allowing for an attractive return on investment without obtaining the greater efficiencies that could be captured via consolidations.

Collaboration

A final theme addressed multiple times during the OWM Conference was collaboration.  This collaboration manifests in cooperation between operators and regulators, and collaboration between competing operators.  In regard to operator/regulator collaboration, it was noted that such collaboration has helped allow for a coordinated effort to deal with the challenge of pressure impacts on disposal and production activities.  In particular, it was indicated that in areas where seismicity in Texas is being closely monitored, companies have gravitated toward planning their operations more carefully and working more proactively with the Railroad Commission of Texas (RRC) to avoid unexpected regulatory issues.

Collaboration has helped allow for a coordinated effort to deal with the challenge of pressure impacts

Regarding collaboration between operators, it was noted that coordinated efforts between SWD operators and drilling/production operators and between “neighboring” SWD operators have successfully avoided undesirable pressure-related impacts on disposal and production activities.  Although further coordination is certainly feasible, several OWM Conference participants indicated that substantial progress has already been achieved toward more effectively managing pressure and seismicity issues.

In Summary

It has long been true in the OFS industry that challenges will bring change and that change will bring challenges.  Fortunately, the industry has always managed to rise to its challenges and adapt as needed to meet energy needs.  Currently, the industry is facing a number of challenges in the midstream water arena, particularly in terms of pressure and seismicity.  Consolidation and collaboration are two facets of the industry’s rising to the challenge.  While more is yet to be accomplished in those areas, progress is most certainly being made.

Mercer Capital has assisted many clients with various valuation needs in the oil and gas industry in North America and globally.  In addition to our corporate valuation services, Mercer Capital provides investment banking and transaction advisory services to a broad range of public and private companies and financial institutions.  We have relevant experience working with companies in the oil and gas space and can leverage our historical valuation and investment banking experience to help you navigate a critical transaction, providing timely, accurate, and reliable results.  Contact a Mercer Capital professional to discuss your needs in confidence.