Key Takeaways

1. Water as a Core Strategic Asset
   The oilfield water sector has evolved into a significant driver of production economics and infrastructure strategy, with rising water-to-oil ratios pushing operators to treat water management as a core upstream investment rather than a peripheral service.

2. Capacity and Cost Pressures Ahead
   Data indicates that the Delaware Basin could hit functional disposal capacity by 2032 without major infrastructure expansion. Rising disposal costs, from roughly $0.75 to potentially $2.00 per barrel, are tightening breakevens and accelerating interest in out-of-basin disposal and reuse technologies.

3. Convergence of Energy, Water, and Technology
   Emerging synergies between produced water management and AI infrastructure, where hyperscale data centers may use treated produced water for cooling, highlight a new circular energy-water economy.

4. Deal Activity and Investor Interest
   Renewed M&A and IPO activity signals growing investor confidence in the water midstream as a strategic area for investment.

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The oilfield water sector continues to mature as one of the more strategically significant and rapidly changing segments of the energy value chain. At the recent 7th Annual Oilfield Water Industry Update, executives and analysts from across the industry discussed how water management is no longer a secondary operational consideration but a primary driver of production economics, infrastructure planning, and even cross-industry innovation.  In particular, the conference speakers and panelists highlighted how capital, technology, and strategy are converging to redefine what water means in the energy business, including (i) rising cost pressures, (ii) projections of basin capacity limits, (iii) the emerging synergy between oilfield water and artificial intelligence infrastructure, and (iv) shifting investor dynamics within the water midstream space.

Water Economics and Strategic Imperatives

In his keynote address, Robert Crain, Executive Vice President of Texas Pacific Water Resources, described a structural turning point for the Permian Basin where produced-water volumes are growing faster than oil output as operators move from top-tier rock to secondary benches. Crain noted that the average four-to-one water-to-oil ratio seen today is heading to a six-to-one ratio by 2031 or 2032.  Crain emphasized that even if crude production levels off, total water volumes will continue to rise.  That imbalance carries economic weight, with expected disposal costs now around $0.75 per barrel, which could exceed $1.20 to $2.00 over the next decade, significantly adding to Permian breakeven costs.

Two primary avenues for managing the rising costs are out-of-basin disposal and beneficial reuse.  Out-of-basin projects, such as development in Andrews County pore space, offer near-term relief for pressure buildup, while longer-term progress depends on desalination and reuse technologies.  However, such projects require scale, regulatory clarity, and capital partnerships.

Quantifying the Water Capacity Crunch

While Crain provided the strategic framework, Kelly Bennett, CEO and Co-Founder of B3 Insight, supplied the data-driven foundation, translating the industry’s broad concerns into specific metrics and timelines.

According to B3’s basin-wide modeling, current Delaware Basin water production is roughly 13.5 million barrels per day. Without additional infrastructure, the functional disposal capacity will intersect with production by 2032, effectively capping drilling activity. Benett explained that out-of-basin projects totaling 2.5 million barrels per day of capacity could postpone that limit and provide a lifeline for the Delaware Basin.  However, regulation is a key input in B3’s analysis. Texas and New Mexico follow markedly different pressure standards.  Texas is at 0.5 psi per foot, versus 0.2 psi per foot in New Mexico, and pressure “bleed” across the state line is already visible. These cross-border dynamics mean that formation pressure is now the dominant determinant of where new water investments make economic sense.

On the cost side, B3’s data show disposal economics tightening rapidly. High-pressure areas that once required $0.90 per barrel to achieve a 20% return now demand $1.20 or more, with treatment and discharge technologies still carrying a roughly $1.50-per-barrel gap to reach parity.  According to the data, to sustain basin productivity, the sector must expand disposal capacity, accelerate the adoption of reuse technology, and treat water infrastructure as core upstream capital rather than an ancillary service.

The Produced Water/AI Connection

One of the energy industry’s newer developments is how the oilfield water resource challenge may soon become the technology sector’s solution.

A single one-gigawatt hyperscale data center can consume up to 125,000 barrels of water per day for cooling.  Combined with power generation needs, total regional demand could exceed 300,000 barrels per day, a scale coincidentally matched by the Permian’s abundant supply of non-potable produced water.  These factors create the very real potential for a circular energy-water loop: natural-gas-fired power plants and AI data centers generate heat; desalination processes need heat to produce ultra-clean water; and that same water can return to the data center for chip cooling.  Notably, both generation and consumption require heat management, and management of produced water can close that loop.

The macro forces in play are immense. Major cloud providers are budgeting $350 billion in 2026 capital expenditure, while $64 billion in planned projects have already been delayed or canceled due to grid bottlenecks and community opposition. To maintain speed-to-market, hyperscalers are increasingly embracing co-located power generation and water sourcing. It’s noted that the Permian sits on a vast amount of water, yet remains power-constrained.  This combination positions the basin as both an energy and water hub for digital infrastructure.

Reliability expectations in this new market rival aerospace standards. Data center operators demand 99.99% uptime across 15- to 20-year contracts. Every link in the chain, from gas supply to water delivery, has to prove that 99.99% reliability. Few industries have more experience modeling such continuity than oil and gas midstream operators, a point that could soon translate into new partnerships between traditional energy companies and global technology firms.

Capital Flows and Valuation Shifts

Despite the many shifting dynamics within the sector, the water midstream M&A market remains as active as it was in 2017–2018.  Two recent IPOs, Landbridge (June 2024) and WaterBridge (September 2024), seem to have reopened public investor interest in the sector.  For the first time in many years, investors are looking for exposure to the oilfield water sector. Infrastructure funds, traditional energy companies, and family offices are all competing for positions in the space.

Family offices, in particular, now represent 20% to 25% of deal bids, up from almost none just three years ago. Their longer investment horizons support higher valuations and less pressure for near-term exits.  Correspondingly, private-market multiples have climbed from roughly six times to nine times EBITDA, aligning with public comparables.

Importantly, valuation frameworks are shifting from cash-flow multiples to capacity and location premiums. Bentsen Falb, Managing Director at Raymond James, described this as a move toward a “real-estate or zip-code model,” where assets in constrained or strategically situated basins command higher prices regardless of near-term throughput. Louisiana assets, for example, now trade at notable premiums due to the state’s tight permitting environment.

Falb’s advice to would-be sellers was direct: “If you’re considering an exit in the next five years, now is the time to move.” With fresh IPO benchmarks and an influx of long-duration capital, the current window offers attractive optionality for water infrastructure owners.

Conclusion

Water management has become both a cost center and an opportunity platform for the U.S. energy industry.  Rising water-to-oil ratios and pressure constraints are reshaping breakeven economics. Data-driven modeling is quantifying the limits of existing systems, while cross-sector collaboration is unlocking new demand from power and technology users. Investors are also recognizing water infrastructure as a long-term, strategic segment for energy investment.

As market participants adapt, valuation professionals will play a key role in interpreting how these operational and financial dynamics translate into enterprise value.

Mercer Capital continues to monitor developments in oilfield water management and related infrastructure markets. For more information on how these trends may impact valuations in the energy sector, contact a Mercer Capital professional to discuss your needs in confidence.