By Bill Malarkey, Managing Partner North America

Earlier this month I attended the Produced Water Society’s Permian Basin conference held in Midland, Texas.  The two-day event drew 350 attendees, nearly double the previous year’s attendance, which is a testament to the increasing importance of water management in the US oil and gas industry.

While water plays a key role in all oil and gas production, it is nowhere more pressing than in the Permian Basin, the largest “oil play” in the US with about 50% of all the rigs in the country.  To put that in context, if the Permian Basin were an independent country, it would currently be the 8th largest oil producer in the world, with experts predicting that its production will pass that of China and Iran to move to 6th place over the next five years.

Since handling water can amount to up to 25% of the total operating expense for an oil well, this oil story is also a major water story.

Below are a couple of takeaways from the conference that may be of interest to companies looking to play in this segment (or those already playing), as well as investors who may also have an interest:

1. The amount of water involved here is huge – and growing.

A single oil well can produce more than 1 million barrels (bbl) of oil over its lifetime, and up to 6x that in water, while some Permian wells may have a water-to-oil ration as high as 10x.  The US market will have estimated volumes of 4.7 billion bbl of frac water and 14.7 billion bbl of produced water in 2018, with the Permian making up 44% and 35% of those figures, respectively.  At current production levels, there are approximately 3 million bbl of oil per day and 16 million bbl/d of produced water being produced in the Permian, with the production of both oil and water increasing in synch.

With West Texas Intermediate (WTI) crude oil currently trading at around $67 per barrel, all major US oil plays are currently profitable, and this is well above the ~$50/barrel level needed for profitable production in the Permian. Experts therefore expect oil production to continue to grow, and it is projected that the Permian volumes could be more than 50% above recent peaks within five years.  This will lead to considerable increases in both water demand and water offtake requirements.

2. The focus for treatment technologies is shifting from advanced treatment to treatment for reuse

The early years of the fracking era saw a big focus on advanced water treatment technologies such as membrane treatment, reverse osmosis (RO) or evaporation/crystallization, in the expectation that flowback and produced water would need to be treated to freshwater levels for reuse or discharge.  However, with demand for frac water already outstripping groundwater availability in stressed aquifers, new oil production techniques now allow higher salinity water to be reused in the fracking of new wells.

As demand continues to grow, and the availability of salt water disposal (SWD) wells declines over time due to increased regulation and fears of seismic activity, the expected incremental barrels of flowback and produced water will need to be treated at least to a reuse standard. A Rystad study sees volumes of treated water increasing by 150% from 2016 to 2021.  Those companies focused on providing treatment equipment and services are responding, and a series of presentations detailed the ongoing improvements in cost and performance, especially in terms of treating water to a specified standard for E&P reuse clients.

3. The biggest story is the emergence of the “Midstream” water companies

As the volume of water continues to grow, so does the cost and complexity of the services and infrastructure needed to move and manage it.  Truck traffic has already become a considerable burden to both the roads and the residents of the Basin. Throw in a growing shortage of available drivers, and it becomes clear that trucking alone will never handle the volumes of water projected in the coming years.  Coupled with the increased demand for water recycling, this has led to a wave of investment into Midstream water companies that are focused on the logistics of water management, buying up existing assets like SWD wells while also building new infrastructure such as pipelines and treatment and storage facilities. Some players are focused solely on water sourcing, with others concentrating on the wastewater side and others then looking to be one-stop-shop providers.  Their common selling point:  we take the infrastructure and the logistical headaches off the E&P companies’ plate, will store the water until it is needed and then convey it to where it is needed, in the right quantity and quality.

The growing level of interest in this emerging sector was confirmed by a major Wall Street Journal article that landed on my desk this morning as I was writing this piece. It reports that private equity firms have already invested over $500 million into companies such as Solaris Water Midstream or WaterBridge Resources.  Some of the biggest names in the business such as KKR and Blackstone are now involved, and dozens more midstream companies are in various stages of development.

4. The E&P companies remain big players in water management

While the E&P companies are the target market for the Midstream companies, they also remain the biggest risk to their success.  While some of the oil companies have sold off their water assets to companies such as Solaris or WaterBridge, Permian operators still control substantial water system capacity, and during a panel discussion at the conference several indicated that they plan to keep it, usually as a means of maintaining flexibility and control for their own unpredictable drilling needs.  Many E&P companies will also continue to use SWDs for the foreseeable future, as they own the access rights.

It will be interesting to see whether other E&P players will eventually follow the same approach being taken by Diamondback Energy.  On Day 2 of the conference, Diamondback announced an IPO of its in-house water management company, Rattler Midstream Partners, as “the only publicly traded, pure-play Permian midstream operator.”  Rattler’s IPO filing stated an EBITDA margin of 73% on revenues of $39.3 million.  However, Diamondback is currently the only client for the new company, whose assets include wells, frac’ pits, pipelines and treatment facilities to treat and distribute aquifer water to drilling and completion sites.  The offering will certainly be closely watched by observers and investors across the sector.