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Water: The Next Great Investment in the Oil Patch

The next Big Thing in oil and gas is… water.

It’s one of the industry’s biggest threats, and one of investors’ biggest opportunities.  It’s an emotional issue for everybody, and has the potential to be THE galvanizing political force in the North American oil patch in 2012.

Consider these statistics: each horizontal well in North America that uses hydraulic fracturing, or fracking, uses 2-6 MILLION gallons of sweet fresh water. And the entire North American industry will use an estimated 72 BILLION gallons in 2012.

I think the cost involved in handling that water will be in the billions of dollars within a couple years.  That’s a lot of revenue–and  some companies will be smart enough to profit from that.

The single largest profit gain in 2011 for the OGIB subscriber portfolio was WATER.  In a loosely-related three-part series, I’ll examine how the energy complex is tackling this issue as new, but committed, stakeholders join the debate.

PART 1 — Fracking’s Growing Water Problems

Oil and gas producers in Texas will have to disclose how much water they use on each well, starting February 1.  It will be a huge step in shedding light on how the fracking industry affects the water supply.

Last June, a study from the Texas Water Development Board showed that less than 1 percent of the water in the state goes towards fracking.

However, The Texas Tribune reports that this study used data that was several years old. Since then, fracking has increased a lot now that the state’s EagleFord shale play is the nation’s hottest liquid rich gas play — exacerbating the demand on Texas’ water supply.

Indeed, shale gas production in the EagleFord has increased more than tenfold in less than three years, according to numbers from the Texas Railroad Commission which compiles data on production in the EagleFord.

In all of 2009 “only” 19 billion cubic feet of EagleFord shale gas was produced.  That jumped more than five times in 2010 to 110 billion cubic feet, and then it will almost certainly double again in 2011, as just from January through October of last year, 212 billion cubic feet of shale gas was produced in the play.

The same increases are happening with shale oil in the play. The EagleFord produced more than 13.83 million barrels of shale oil in the first 10 months of 2011, compared to less than 4.4 million in all of 2010.

Further, 2,828 Eagle Ford drilling permits were issued in 2011, compared to 1,010 in 2010, according to the Railroad Commission.

From a water standpoint, it gets worse. The Wall Street Journal reports that the play’s geology requires fracking operations to use twice as much water as those in North Texas’ Barnett shale. Additionally, very little of the water used in the Eagle Ford is recycled because it is absorbed into the earth.

Despite the large increases, Dan Hardin, the resource planning director for the Texas Water Board, suggested that water used by the fracking industry is not expected to exceed 2%.

Still, those are state-wide figures. The numbers for specific areas can be… alarming. By 2020, Hardin says that 40% of the water in the EagleFord’s La Salle County will go towards “mining,” a technical designation that for all intents and purposes means fracking.

The big thing holding researchers back from determining more accurate figures, they say, is the amount of data they receive. Geologist Mark Engle with the U.S. Geological Survey’s Eastern Energy Resources Science Center, said that Texas has historically lagged behind other areas in such reporting.

“Texas ranks pretty much dead-last of any state I’ve worked with for keeping track of that sort of data,” he told the Tribune.

And all this is happening as Texas is experiencing devastating droughts.

Reuters reports that the drought has killed as many as half a billion trees, according to the Texas Forest Service.

In fact, some people are saying that this is a drought of historic proportions.

“We are now in the worst drought in the history of Texas,” Joe Joplin, a representative on the board of the North Texas Municipal Water District, told the ACN Papers. “All you have to do is drive on Highway 380 over Lake Lavon and see that we have a very serious problem.”

Texas isn’t the only area that has bumped into concerns over the fracking industry’s water use. Louisiana recently passed a law regulating the sector’s water use, describing the uptick as “unprecedented” and said that if nothing was done about it, there was the “potential for chaos and conflicts,” reports the Journal.

In northern British Columbia, Canada, oil and gas companies must have equipment to recycle the water, in response to public outcry.

The issue has also cropped up in Colorado, which contains a portion of the Niobrara formation. Concerns in the state have arisen over the potential for the fracking community’s use of water to endanger the local agriculture sector.

“This area was called the Great American Desert for a reason,” Sean Conway, a Weld County commissioner who helped start a “Niobrara Working Group,” told the Denver Post. “Long term, we’re going to have to have serious discussions about new water storage.”

In response, Colorado, like Texas, will require operators to report on exactly what goes into their fracking solution and this will also potentially require them to reveal how much water they are using.

While oil and water don’t mix, for the fracking industry, the two go hand-in-hand.

P.S.  I’ll be co-hosting — along with HRA Advisories and Resource Opportunities — the inaugural Toronto Subscriber Investment Summit 2012, on Saturday, March 3.  We’ll be talking about some of the best investment opportunities in the energy and resource markets today — and the summit is free to all paid-up subscribers of the Oil & Gas Investments Bulletin, or HRA Advisories, or Resource Opportunities. Follow this link to learn more.

Part 2:  The Multi-billion Dollar Water Services Industry

Part 3: The ‘Holy Grail’ Business Model for Water

by +Keith Schaefer



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