Water management

One look at the Grand Canyon reminds us of the power of water. Water, or the lack of it, has determined the success or failure of civilizations. Former Soviet President Mikhail Gorbachev said this of the power of water: “Water, like religion and ideology, has the power to move millions of people. Since the very birth of human civilization, people have moved to settle close to it. People move when there is too little of it. People move when there is too much of it. People journey down it. People write, sing and dance about it. People fight over it. And all people, everywhere and every day, need it.” So why is the power of water relevant in the oil field?

Lately I’ve been getting more and more comments questioning the stability of the unconventional oil and gas market. We’ve experienced an oil price that can’t seem to get over $60/bbl, while it hovers just below $60, with people expecting oil prices to remain flat. We are watching private equity money shifting away from drilling and completions. In the Permian, the hotbed of unconventional activity, we are seeing completions activity growth disappear in favor of slight declines, combined with slight drops in rig counts. Major bankruptcy announcements from Halcon Resources and Sanchez Energy contribute to the concerns over instability. Lower CAPEX budgeting for 2019 just adds another element that continues to worry those working in the unconventional oil and gas markets. 

So, how does the power of water play into these concerns? As completion activity might be slowing, produced water keeps flowing. Activity in the Delaware basin is growing, and with it, water cuts are growing. And even though completion activity is slowing, water demand for completion activity has grown. The average well in the Permian is now using 600,000 bbls to complete the well. Sometimes, you just have to “follow the money.”

And the money is shifting from drilling and completions into water deals with water mid-streams. According to the global energy research firm, Wood Mackenzie, in 2019 there have already been $2.5 billion in water-related mergers, acquisitions, private equity investments and other deals. Others will tell you that number is light. Raymond James and Associates recently announced that as much as $9 billion will need to be invested in the Permian, just for salt water disposal capacity. H₂O Midstream recently announced the acquisition of Sabalo’s produced water infrastructure, with whom I am glad to say we are collaborating on the produced water recycling portion.

Gravity announced the acquisition of Permian water assets from Pyote Water Systems, NGL Energy Services acquired Delaware basin assets from Mesquite Services and WaterBridge acquired some of Concho’s water assets. So, the dark cloud starting to emerge over completion activity is raining produced water and fueling the continued growth of the oilfield water management market. As capital for drilling and completions is constrained, more and more operators will consider selling infrastructure to water mid-streams, and the mid-streams will grow, and with growth comes scale, and with scale comes lower cost and higher margins.

So, are things really that bad on the completions side? More and more operators are focused on developing efficiency. The big operators have the scale to survive in a lower-price environment. EOG continues to report more oil production with less capital, using gains in efficiencies and new technologies. Continental Resources reported that with the efficiencies they developed, they will be able to reduce from 19 rigs to 12 rigs. The effects of the Occidental/Anadarko merger have yet to materialize, but both groups, pre-acquisition, projected increased CAPEX budgets for 2019, as did many of the major Permian operators.

The overall decrease in CAPEX spending is more related to the smaller and mid-sized operators having trouble accessing capital and cutting their budgets. So, the big operators, with gains in efficiency, are doing more with less and many are increasing CAPEX spending. So, will this compensate for the decreases from the smaller and mid-sized operators? I think it will. Nobody is projecting a decline in oil production, so you can’t see a decrease in completions with no decrease in production, unless you are seeing a gain in efficiency or larger wells; and we are seeing both.

One of the finer points of the dark cloud hanging over completion activity is the decline rate of oil production. But as analysts discuss this aspect of oil production in the Permian, they forget that some operators are working under the motto “leave no oil behind.” These operators are decreasing well spacing to try to compensate for previous wells that didn’t get to all the oil in their targeted zone. So, as they go back to try to recover that oil, they are reducing well spacing, more and more.

This attempt at optimization has some drawbacks—what people refer to as parent-child interactions or frac hits. The first well is your parent well, and the additional infill wells trying to capture the oil left behind will impact and lower the production of the original or parent well, aggravating decline rates of both parent and child wells. Some operators keep a conservative well spacing goal and avoid these parent-child problems. Others shut in the parent well while completing the infill wells to protect it from frac hits. This experimentation phase may show production and decline rate problems today, but the information collected will help develop more efficiency down the road. Unfortunately, firms trying to develop this efficiency are being punished because of short-term performance. So, its not all bad news.

Things really aren’t so bad on the completion side, but more importantly, the oilfield water management market is still growing, and produced water is still flowing. Oh, the power of water. WO

About the Authors

Mark Patton

Hydrozonix

Mark Patton is president of Hydrozonix and has more than 30 years of experience developing water and waste treatment systems for the oil and gas industry. This includes design, permitting and operation of commercial and private treatment systems, both nationally and internationally. He has seven produced water patents and two patents pending. He earned his B.S. in chemical engineering from the University of Southern California (USC) in 1985.