Dear OGIB reader,
A 21st century wild-west scenario is developing in Texas.
It all has to do with the fast-rising use of water in the Lone Star state’s energy patch.
There are two “Sheriffs” – state and national regulators – each with conflicting ideas.
And that means the townsfolk—all the oil and gas producers—are spending money like crazy to make sure they’re protected against any future dust-ups.
That’s great news for the growing cottage industry of water disposal, treatment and recycling service providers—and their investors.
“In my mind, we’ve seen this as the Wild West. And it’s probably similar to the early days of the internet, and the technology boom of the mid-to-late 1990s,” says Michael Dunkel, Director of Sustainable Development for Pioneer Resources [PXD: US].
“There were thousands of little companies just starting off. Now this is not the same trend, but it is the same process. But there are plenty of companies out there right now trying to cash in on this big opportunity to treat water.”
Expected to be the #3 driller of oil and gas wells in the United States this year—almost all of which are in Texas—Pioneer needs a lot of water.
“Water is the gold of the future,” says Keith White, Director of Environmental, Health and Safety for Chaparral Energy, a private company focused in Oklahoma and Texas. “The commodity of oil and gas, and energy production in general, is impossible to produce without an adequate supply of water.”
“So as long as you’re able to recycle it to the best of your ability, and have a good business model free of environmental issues, then it’s a long time growth possibility.”
Says Dunkel: “We’re going to need a whole lot of water for completions, frac jobs, and even some in the drilling process itself. We get a large percentage of that from ground water, while some is supplied from surface water… but not a whole lot.”
The issue over who owns the rights to Texan surface water is still ongoing. One recent court ruling stated that a landowner can do whatever they want with their surface water; while another government body claims a goal of trying to plan the entire state’s water use for the next 50 years.
No matter who is in charge of it, the water business in the oilpatch will continue to grow—and fast. The water treatment companies are the ones who stand to benefit the most, says White.
“In Oklahoma, Texas and the rest of the southwestern United States, almost every one of the service providers who can provide water supplies from treated water, you can call ‘alchemists’ ” — alluding to the mythical practice of turning everyday materials into gold.
“These are the people that will try to produce units that will take produced water and clean it up to a level that can be reused for fracking.”
These alchemists are indeed spinning water into gold.
THE WATER ALCHEMISTS
“Texas and New Mexico are very ready for us, very open for business,” says Tony Ker, CEO of Ridgeline Energy Services (RLE-TSXv; RGDEF-PINK), which uses an electro-catalytic technology to treat water that has been used in fracking.
“The key thing they (the public) don’t like is the fracking chemicals, and that’s the easiest thing for us to treat.”
Ker says “flowback” water—water that has been used for fracking—is a potentialwater supply source. The industry presently pays to send all of it down a well called a Saltwater Disposal Well (SWD). Now, companies like Ridgeline can treat that water and and sell it back for reuse to the industry.
“If the patch pays 80 cents a barrel to dispose of water, we’ll do that. We get can get paid to take water in, and get paid to send water out—and we’re a one stop shop. That’s what we’re going to do for of the Kerr Energy facilities. Our goal is they won’t have to spend any more than what they are now spending, be environmentally friendly (by recycling water), and allow E&P companies to get water so they can drill.
“We can recover up to 80-90% of the water—so only 10=20% goes down the well.”
Charles Vinick is CEO and Chairman of Ecosphere Technologies (ESPH-OTCBB), is one of the largest water recyclers in the oilpatch, with revenue growing from $1.76 million in 2009 to $8.96 million in 2010 to $21.09 million in 2011 and the company is providing guidance for $28 million in 2012.
He says Texas is the place to be.
“We are mostly in Permian basin. The demand (for their services) has been in Texas since our first unit.”
Vinick says economics are driving the burgeoning water industry as well as the regulatory side.
“The pressure on the entire industry is to reduce overall costs per well—trucking, chemicals, increase the mixture of recycled flowback water into future wells—to keep costs as efficient or low as possible.
“We really see an advantage in drastically reducing or eliminating disposal costs. We allow for the lifecycle of water to be extended and used over and over again in operation, as opposed to using that water resource only once—we provide customer with both a cost and environmental benefit.
“It’s the economics of things that drive decisions — regulations are likely to be made on a regional basis and water use may be a part of some regulations going forward, but at this point we find that operators are making decisions primarily on cost and efficiency metrics. Saving and reusing water is one of the metrics we increasingly see them considering.”
But there is concern on future regulatory issues.”
Dunkel isn’t totally convinced: “No company will save enough money by recycling for it to be an economic driver. If they can save a little money, it’ll ultimately be insignificant to their bottom line.”
EVEN TRADITIONAL WATER SERVICES WILL SEE INCREASES
But it sure adds to the bottom line of the water service companies—even the traditional companies that operate SWDs. SWDS must be licensed, and with all the controversy surrounding SWDs causing earthquakes, it will be more difficult for the industry to license more wells—and therefore make current SWDs more profitable for the SWD owner. New SWDs have been banned in some areas of the southwest.
“Salt water disposal (SWD) is how we get into a new market,” says Jonathan Hoopes, President and Chief Operating Officer of Greenhunter (GRH-AMEX). “Often the biggest barrier to entry into a new location is owning your own SWD wells. We like to market our SWD services first, and then add the other services we provide on top of that as a value-add for our customers.”
Depending on the area, the price for water services can differ. For instance, Greenhunter was fetching $2.50-$3.50 per barrel of water injected in Appalachia, over near the east coast of the US, while in the Eagle Ford of Texas it’s between $0.60-$1 per barrel.
But the scale of the Eagle Ford is much larger. The top end for pricing in Ohio for some disposal wells get $4-$5 per barrel, but can only handle 2,000-3,000 barrels a day capacity. A West Texan counterpart can take on upwards of 10,000-20,000 barrels a day.
Greenhunter’s latest SWD injection facility cost approximately $2 million. At an average of $0.80 per barrel, and 10,000 barrels a day, it’ll only take 250 days to pay off with gross earnings, which would nudge the overall payoff period to be just under a year.
OIL AND GAS PRODUCERS WANT TO DO IT RIGHT (even if they don’t save any money)
Even if the economics are marginal for the producer, they see that doing the right thing allows them to avoid the gunfire of overzealous government agents.
It’s a mistake learned from the previous aggressive drilling of the Barnett Shale in years past, which saw companies brazenly drilling right up against people’s back yards in the Dallas/Ft Worth area, and made local residents uncomfortable.
Says Dunkel: “I think it’s because of the learning experience of what happened in the Barnett, that industry now realizes that it can’t just do whatever the regulations say is admissible; but that they need to go beyond that, in order to make sure that they have the support of the community for their operations,” referring to the aggressive drilling near residential zones, despite being well within the bounds of the law.
“One of things I think is worth putting into context is that all of this has happened so fast, if you think about a legal regulatory front. They went from whatever normal was 10 years ago to now where there’s shale everywhere that’s getting developed. It’s going to take a while for the more prudent regulations to come into place. That said, it’s not like we’re not regulated enough now as it is.”
Mixed signals from water regulators, combined with a need to keep production affordable has left an open range for water service companies to shine. There is a lot of land still left to drill, and a lot of thirsty rigs and frackers that will need water to get the job done.
“Even though today there is not a lot of water treated in Texas, there will be. There’s a whole lot of opportunity out there. You have a whole lot of companies that see that, and are going for it,” says Dunkel.
“There will be a process where some of them win and develop great mechanisms and a great product, along with a great reputation. Twenty years from now, you’ll end up having a handful providing 90% of the water treatment, probably.”
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