The Oilfield Services (“OFS”) industry has long been known for its cyclicality, sharp changes in “direction” and demand-driven technological innovation. One segment of the OFS industry that is among those most subject to recent, rapid change is the Oilfield Water segment – including water supply, use, production, infrastructure, recycling and disposal. In this week’s Energy Valuation Insights blog, we look to key areas of the Oilfield Water segment – oilfield water disposal and oilfield water recycling – and address both recent trends and where the segment is going in the near-future.
Oilfield Water Disposal
The oilfield water disposal (saltwater disposal) industry remains dynamic with numerous forces driving change. Key among those forces are volume demand, growth in water recycling and rising seismic activity in key shale basins. With the rebound in oil prices since 2020, demand for oilfield water disposal has rebounded as well. While oilfield water recycling continues to grow rapidly in volume, there remains a very significant imbalance between produced water and recycling volumes. The portion of produced water that is being recycled was estimated at 20%, per Dr. Chris Harich, Chief Operating Officer at XRI during his presentation at the recent Oilfield Water Markets Conference (“OWMC”).
Additional recent factors impacting the saltwater disposal (“SWD”) industry, particularly in prominent U.S. shale plays in Oklahoma, Texas and New Mexico, is the distinct increase in seismic events that are attributed to oilfield production and waste disposal activity. In September 2021, the Texas Railroad Commission initiated added reporting, permitted volume reductions and even cessation of operations of certain SWDs near high seismic activity areas, referred to as seismic response areas (“SRA”). As a result of the rising demand for oilfield water disposal capacity and reduced disposal availability in certain areas, Kelly Bennett, CEO & Co-Founder of B3 Insight, expects (i) disposal capacity to remain far below produced water volume through 2026, (ii) increased demand for additional SWD facilities and a race for development of shallow SWDs, (iii) more produced water being transported outside of production areas for disposal, and (iv) a resulting rise in water management costs to producers.
In regard to the use of shallow SWD wells, one OWMC panel (including Gauri Potdar, SVP Strategy Analytics at H2O Midstream; Laura Capper, President of Energy Makers Advisory; Max Harris, Director at EIV Capital; and Ken Nelson, President & Co-Founder of Blue Delta Energy) noted that shallow depth SWD activity can interfere with production activity in the immediate area, inherently leading area producers to push back against shallow SWD development projects.
Finally, how to finance projects providing additional oilfield water disposal capacity comes with challenges not faced in many other industries. Bennett noted that as a dynamic industry that seems to be becoming even more dynamic, financing considerations are becoming even more complicated in recent years.
Oilfield Water Recycling
On the recycling side of oilfield water management, the complications aren’t any easier to deal with. While demand for oilfield water recycling is certainly on the rise, the headwinds to providing recycling services are many and naturally push upward on the cost of recycling services. However, as with most challenges in the oilfield services industry, new technology and innovation are expected to drive industry participants to overcome the inherent barriers.
Notable among the oilfield water recycling headwinds are cost, lack of detailed information as to needed recycling volumes, the need for disposal of certain by-products of recycling, and landowners that are economically predisposed against recycling. The cost of recycling services likely needs no explanation; however, the logic as to the other headwinds may not be quite as obvious.
The OWMC’s panel on the Mechanics of Recycling at Scale (including Jason Jennaro, CEO of Breakwater Energy Partners; Dr. Chris Harich; David Skodak, SVP Water Treatment at CarboNet; Ryan Hassler, Senior Analyst with Rystad Energy; and Joseph De Almeida, Director Water Strategy & Technology at Occidental Oil and Gas), noted that currently there are no oilfield water recycling reporting requirements. As such, potential recycling project developers have to deal with somewhat rough estimates as to demand volume, rather than a more concrete indication as to the recycled water volume potential in a particular production area. As with any potential investment, less specificity as to the potential market for services is “read” as greater risk, thereby providing greater uncertainty to project investment.
As to byproducts of oilfield water recycling, one only has to go as far as the industry name for the liquid being recycled – saltwater. Yes, by volume, salt is logically one of the primary byproducts of saltwater recycling. In the Permian Basin, already known for its high produced water to oil cuts, salt content is higher than found in other basins resulting in higher recycling costs due to the sheer volume of salt byproduct and driving up the cost of capital for development.
The last headwind referenced is the economic motivation of landowners in the production area. The OWMC’s panel on Engaging Landowners (including Rick McCurdy, VP-Innovation & Sustainability at Select Energy Services; Brian Bohm, Sustainability Manager with Apache Corp; Nate Alleman, HSE and Water Infrastructure Specialist at ALL Consulting; Matthias Bloennigen, Director – Consulting with Wood Mackenzie; and Jason Modglin, President of Texas Alliance of Energy Producers) noted that landowners are often compensated to supply water for oilfield exploration and/or production use, or for use of their property in the disposal of saltwater. As such, these landowners naturally aren’t in favor of the development of water recycling projects that are viewed as cutting into the fees they are being paid under existing contracts.
Despite the abundance of recycling headwinds, expectations are that all will be successfully addressed and overcome by the innovation of industry participants. Costs can be reduced by various means including the extraction of certain rare metals commonly found in produced water, use of flare gas as an inexpensive energy source for recycling operations, the development of recycling equipment that can be readily relocated, and greater cooperation in water management asset “sharing” between basin operators. In addition, increased recycling reporting requirements can assist in reducing some of the risk inherent in recycling projects and landowners can be educated as to recycling being a complementary service to existing water supply and disposal operations, thereby decreasing the natural resistance to recycling projects.
As has always been true of the OFS industry, change brings challenges – and that is no different in the Oilfield Water segment. The dynamics of oilfield water disposal and oilfield water recycling continue to evolve, but the OFS industry has a long history of addressing and conquering its challenges, and there’s no reason to doubt the current challenges will also be conquered.
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