As I was flying into Midland looking at the checkerboard pattern of well pads, an old Doobie Brothers song pops up on my playlist, “Black Water.” As I stare out the plane window, “Old Black Water, Keep on Rollin’,” brings a smile to my face. You see, that’s what produced water is all about, it just keeps on flowing.
A recent article in the Houston Chronicle states that billions will go into recycling produced water. Another article says $9 billion will be invested in saltwater disposal wells, or SWDs as we like to refer to them. All this comes with service companies on the decline and cutting staff.
Welcome to the conundrum of the Unconventional Oil and Gas. Feast and famine at the same time? So how do we get feast and famine? Well, with completion budgets starting to tighten and capital markets for drilling and completions tightening over talks of declining production from Permian wells and how this decline may be greater than previously reported, the capital for drilling and completions has tightened.
But guess what, old produced water keeps on flowin’. That’s right. While all this talk of completion activity slowing or at least not growing, produced water volumes keep growing. In some areas of the Delaware Basin of the Permian, there are water-to-oil ratios of 5-10:1. You basically have produced water wells that generate some oil.
So, for everybody in the oil-field water-management space, you’re in a hot market. IHS Markit, Wood Mackenzie, Rystad Energy all predict big growth in managing produced water.
It’s not just produced water recycling, it’s SWDs. It’s the whole management of produced water. I think there has always been this misconception that recycling and SWDs are somehow competing ideas, but they are not. They are kind of like the Ying and Yang, the idea that opposing forces can be complementary. You can’t have an effective produced water management program without SWDs and recycling.
When completions are slowing or stopping, you need an SWD, or you’re going to have problems. There is actually a synergy between recycling and SWDs. They are brothers in arms, tied to each other indefinitely. Why? you might ask.
When you start developing your infrastructure for produced water management, it starts with tank batteries, gathering systems, gun barrels and SWDs. More and more operators have learned that they can use this infrastructure to support their recycling efforts. From this, the concept of shared facilities has grown.
A shared facility is an SWD with produced water pits for a recycling program. The recycling program uses the SWD surface equipment to manage oil and solids. All that’s left is managing bacteria, iron and sulfides. This is typically managed using an oxidizer. Then your treated water is stored in pits for reuse, and you add aeration in your pits. You maintain your water quality, allowing you to aggregate large volumes of produced water for reuse. By leveraging your SWD surface equipment, you can develop a low-cost recycling program.
Operator Changes SWD
Setup One specific operator our company works with explained to me that the typical setup at their SWDs included a 1-million bbl pit for freshwater storage. They converted this concept to two large pits of 750,000 bbls each, one for fresh water and one for treated produced water with aeration in it. Then, they added two smaller pits to treat raw produced water and settle solids.
The conversion, including the purchase of the oxidation systems, pumps, pipe, valves, cost them less than $1.5 million. Combining capital cost with operating costs, their all-in costs ranged from about $0.09-$0.12/bbl. This was significantly less than the allin cost for their SWD. Ultimately, they built four of these shared facilities.
This is true synergy. Without the disposal well infrastructure, they could not have developed this lowcost recycling program. This idea of a shared facility also addresses the problem with recycling, and that is low-cost recycling requires an outlet for the treated brine and that is well completions. So, when takeaway capacity stops or slows, your completions or low oil price stops or slows your completions, you need that SWD.
Let’s take it a step further. If you have SWDs in the southern Delaware Basin and you’re worried that seismicity is going to affect your disposal capacity, you need some extra capacity. Well, that’s where a shared facility lets you put some volume into recycling. Like I said, Ying and Yang, complementary, not competing services.
Adding Recycling Capacity
Now, when you read about water midstream companies adding recycling capacity, you understand why. It’s hard to keep the permitting and development of SWDs moving with the growing capacity of produced water. Recycling can offset some of the disposal capacity stress we are seeing in the Delaware Basin, where permitting is getting delayed and permits are getting restricted.
And if you don’t think there is a stress on disposal capacity in parts of the Delaware Basin, consider this. Companies are building pipeline capacity to move produced water from the Delaware Basin to the Central Basin were seismicity isn’t affecting disposal well permitting or capacity. People don’t spend that kind of money for no reason.
So, as I get into my rental car at the Midland Airport, I’m still thinking about the conundrum that is the Permian Basin. Completion activity has people worried, and the water sector is booming. And like always, my rental is “Permian Basin clean,” washed and vacuumed, but a layer of dust in every crack and crevice and then the taste of dust when you turn on the car and the air starts. Welcome to the Permian Basin, where a Hampton Inn room costs more than a room at the Intercontinental in Manhattan. And that tune still in my head “Old Black Water, Keep on Rollin’.”
I mentioned earlier how capital is tightening up for drilling and completions, and yet produced water management is booming. Well, this is fueling more water midstream growth. You see smaller E&Ps struggling more than most, looking for capital for their drilling and completions. They are much more likely and have been selling their produced water infrastructure and SWDs to water midstream to raise money to fund their drilling and completion efforts.
With tons of private equity (PE) money backing water midstream, there’s almost an incentive to tighten up their investment in drilling and completions to help grow the water midstream sector. PE firms have an incentive to move money from drilling and completions into buying produced-water disposal capacity.
Not only is the lack of capital for drilling and completions helping grow water midstreams through acquisitions, there are some water midstreams approaching neighboring operators to help fill their growing capacity of SWDs by providing capital for drilling and completions in exchange for longterm disposal contracts.
Did anybody in the oil-field water management industry ever expect that produced water management contracts could fund drilling and completions contracts? Expect the PE guys to continue to exploit these types of arrangements.
Some of you may be asking, wait, if oil production is declining and less money is going into drilling and completions, shouldn’t we expect the produced water market to decline? Good observation, but for every smaller operator struggling, there is a self-funded major operator growing his drilling and completion program. What will likely happen is more merger and acquisition (M&A) activity.
The underlying issue is what about declining production? Keeping it simple here, when you frac a well, not all fractures have the height you want, and you end up leaving pockets of oil in the shale. This means operators are coming back and doing infill drilling to try and get the remaining oil, because no oil shall be left behind.
These infill wells are also referred to as child wells. Sometimes, you put these child wells too close to the parent wells, and they affect their production. So, there is a lot of attention being paid to parent and child well interaction. As we go through this experimentation phase, some operators are going to identify the best placement of child or infill wells. We are seeing inefficiency developing and production being impacted.
Some people are figuring this out by closing a parent well while completing child wells or even pressuring up parent wells with fluid while completing child wells. But in time, they will get this straightened out, and the children will learn to behave.
You see, unconventional oil and gas is all about good old American innovation and drive. People are coming from all over the world to see how we do it. Another part of me thinks that the capital markets know the declining production issue will get solved and is a little overstated. But that’s OK, they want the capital for drilling and completions to dry up so they can force more M&A activity and leverage their capital to grow water midstream businesses. But maybe I shouldn’t be so cynical.
Does Tightening Money Matter?
As an oil-field water management guy, does it matter that money is tightening up as long as the produced water management business is growing? Well, yes and no. We’re in a growing industry, and that’s the good news. But if completion activity does wane, there are less opportunities to recycle. Completion activity is like the pulse of the produced water recycling market, and you better be watching your pulse.
Another view is I’m on a wave. Let me ride this wave, and as much as this makes sense. Waves decline and then what? Personally, I see a sustained wave. I don’t really think we will see significant declines in completion activity, and with produced water volumes growing, the need to continue managing produced water will always be there. You see, Old Black Water, keep[s] on Rollin’.
Authored by Mark Patton
Mark Patton is president of Hydrozonix. He has more than 25 years’ experience in the development, design, implementation and operation of treatment technologies. Mr. Patton’s oil and gas background includes treatment systems for waters, wastewaters, drilling muds, tank bottoms and process residuals. He holds one produced-water patent with two additional patents pending.
Mr. Patton earned his B.S. in chemical engineering from the University of Southern California in 1985.