Creating common standards for large-scale recycling of produced water
The water midstream sector has emerged in the oil and gas industry over the past few years in response to multiple factors, including larger-volume hydraulic-fracturing (fracs) operations, demand for improved capital efficiency and activity in regions with stressed water supplies and limited wastewater disposal options.
A trend that is gathering significant momentum is the recycling of flowback and produced fluid as frac water on an unprecedented scale.
XRI Holdings, a leading full-cycle water management and midstream company, strategically acquired Fountain Quail Water Management (FQWM) in early 2019 in order to meet this recycling challenge.
XRI is establishing commercial waterrecycling operations called water exchange terminals (WETTM) to transport produced water via pipeline networks from surplus areas to locations where there is a frac-water demand. WET operations often involve taking Company A’s produced water in Location X, treating it and delivering it via pipeline to Company B’s frac operation in Location Y. The treatment component of a WET operation is shown in Figure 1.
Frac-fluid volume demand in 2019 is estimated to be 5 billion barrels, half of which will be required by the Permian Basin,1 a region prone to drought in which freshwater sources are continually strained. Furthermore, disposal options in New Mexico and Texas are becoming increasingly limited due to more stringent requirements for permitting disposal wells as a result of induced seismicity and over-pressured disposal zones.
Frac-fluid volume demand in 2019 is estimated to be 5 billion barrels, half of which will be required by the Permian Basin.
As an alternative, recycling flowback and produced fluid (hereafter collectively referred to as “produced water” or “produced fluid”) and repurposing it as frac fluid reduces industry freshwater consumption and saltwater disposal volumes. With the proper treatment and management, produced fluid can be a valuable commodity.
Where there is a product that businesses value, markets will naturally develop. As an industry, we are at the beginning stages of understanding the dynamics of the produced-fluid recycling market. The purpose of this article is to discuss produced water as both a valued commodity and a waste.
PRODUCED WATER AS A COMMODITY
A commodity is defined as “a basic good used in commerce that is interchangeable with other commodities of the same type … The quality of a given commodity may differ slightly, but it is essentially uniform across producers.”2 Commodities must generally meet basic quality standards, which offers the first rich topic of discussion related to recycled produced water as a commodity: quality standards.
The essential properties of recycled produced water that make it usable for frac fluid is that it is (a) incompressible and (b) of the appropriate viscosity and density to serve as a transport medium for proppant in the hydraulic-fracturing process.
Ten years ago, industry experts passionately disagreed about the water quality required for a successful frac. Today, while there is still disagreement, the industry is converging upon a consensus, which will, in time, most likely become a standard.
The standard typically involves the removal or reduction of suspended solids, iron, total petroleum hydrocarbons and bacteria. While salinity needs to be communicated a few weeks ahead of the frac so the stimulation company can use the appropriate frac chemistry, there is still a broad acceptable salinity range.
FQWM, a wholly owned subsidiary of XRI, has participated in several requests for produced-water treatment proposals in 2019. Table 1 shows a summary of the key performance indicators (KPIs) designated by oil and gas producers in such requests for proposals.
ASSET OR LIABILITY?
The most fundamental requirement of a commodity is that it is an asset rather than a liability. Do people value it enough to pay for it? Or is it a waste requiring disposal? Inventory, supply, demand and other factors drive the value of a commodity, so long as it is a commodity for which a consumer will pay.
Produced fluid is fundamentally different from any other product in this way. To date, the industry has largely disposed of produced fluid as a waste product (i.e., a cost rather than a commodity).
Whether produced fluid is a commodity or a waste product depends on the spatial and temporal proximity to where it can serve a purpose. Spatially, or geographically, it must be near enough to be economically transported. Temporally, a frac must be occurring close in time to the availability of the produced fluid.
Treated produced fluid then displaces other sources, such as fresh water or brackish water. If the produced fluid is too far from a frac or available water pipeline infrastructure, or it is generated at a time when it is not needed, produced fluid shifts from being a valued asset to an expensive waste product.
Treated produced water is (ironically) not a liquid commodity. Liquidity requires that a commodity be bought or sold quickly without dramatically changing the price. Liquidity requires the constant availability of willing buyers.
For example, once frac-fluid requirements cease in a given area at a given time, the liquidity of this liquid commodity vanishes, and it becomes a waste product.
Storage can help with temporal misalignment. One frac may require several hundred thousand barrels of fluid (up to a million barrels per well). If produced water is generated within an economic, transportable radius of a future frac, it can be put into storage (inventory) until it is needed.
Unlike most commodities, once in storage, water immediately starts disappearing. A 500,000-barrel pond can lose tens of thousands of barrels per month to evaporation, and because produced water requires treatment before being placed in storage for later use, those are barrels that have been treated.
A common misconception in the industry is that frac chemistry drives our produced-water treatment standards. While frac chemistry influences it, the requirements to maintain the quality of produced water in storage sets the standard for treatment today. The only must-have for any frac fluid, and especially produced water, is bacteria control.
Some still disagree over the importance of removing suspended solids or iron as it relates to frac chemistry and reservoir performance, but most agree that bacteria control is required to prevent reservoir souring. So, while the frac may only require bacteria control in terms of water quality, stored produced water requires a higher standard of treatment.
The reason primarily comes back to bacteria. If you put black produced fluid in a New Mexico pit in August without treatment, weeks or even days later, that pit will turn into a hydrogen-sulfide generating swamp. Additionally, far more solids will deposit at the bottom of the pit, requiring costly and frequent pit cleanouts.
This sludge provides an anaerobic haven for sulfatereducing bacteria. Therefore, many of the KPIs for treatment focus on delivering recycled water that, with simple pit aeration, will stay bright, clear and exhibit minimal bacteria loading.
SPOT MARKET OR A FUTURES MARKET?
If treated produced fluid is a commodity when supply and demand temporally and spatially align, we must start to ask ourselves how prices will be determined based on the nature of the market. In short, it is currently not an efficient market. Supply and demand information needed by both buyer and seller in a spot market is either (a) not readily available or (b) impossible to assemble.
It is not a spot market, such as the New York Stock Exchange, where milliseconds matter in a technologically driven, automated market. While there may be some unexpected shortages filled at the last minute, the frac-fluid market, of which recycled produced fluid is a subset, is a futures market.
Futures markets are auctions wherein commodities are bought and sold for delivery on a specified date for a specified price. A contract to supply water for a frac is a simple futures contract that derives its value from the promise of one entity to buy water from another entity. Historically, frac water has been sold primarily under single-operator contracts. Many of these deals were handshakes and verbal contracts with the nearest landowner.
Now, buyers issue requests for proposals (RFPs) in a competitive process, and the lowest price wins, assuming the buyer has comfort in the seller’s ability to deliver on the contracted volume.\
The WET model creates more liquidity and is evolving toward a market with more pricing transparency and better ability to connect sellers and buyers.
Recommendation #1: A Water Quality Standard.
FQWM is a water-treatment company that has been involved in the evolution of the industry since treating water at the beginning of the Shale Revolution more than 15 years ago. Our first recommendation regarding the recycled produced-water commodity market is for a quality standard.
Let’s revisit water-quality requirements. Storage of produced water generally requires a higher degree of quality than on-the-fly treatment. In terms of acceptable water-quality indicators, such as basic sediment and water (BS&W) for oil, a potential solution may be:
• Oxidation-Reduction Potential
Those parameters make an easy-to-remember acronym: SPOT. They are also quickly and accurately measured with field instruments. With these four parameters, a buyer will understand how to use the water and whether it can be stored. From a seller’s perspective, the key parameters are the turbidity and the oxidation-reduction potential because these are the most expensive to control.
Turbidity is a rapid field measurement that serves as a proxy for the total suspended solids (including oil) in fluid. For example, FQWM treatment operations often involve reducing turbidity from 500 nephelometric turbidity units (NTU) to 25 NTU. This transforms the water from black or dark orange to a product that is bright and clear, as shown in Figure 2.
Oxidation reduction potential (ORP) indicates the presence of bacteria in fluid. A high ORP indicates that there are oxidants (hydrogen peroxide, oxygen, chlorine dioxide, etc.) in the water, and oxidants disrupt the cellular integrity of bacteria, thereby killing them. The higher the ORP, the more hostile the environment for bacteria.
For example, drinking water might have an ORP of 1,200 mV, while untreated produced water is often between -150 mV and 150 mV. FQWM’s experience suggests that water with an ORP of 250 millivolts (mV) would likely have less than 100 colony-forming units of bacteria per milliliter.
Furthermore, oxidants precipitate iron, and iron is a concern for frac chemistry. With a high ORP, and because oxidants love to react with iron, iron is likely not dissolved in water. When iron is oxidized, it adds an orange tint to the water, increasing turbidity.
So, if the ORP is high, iron is likely not in solution. If the turbidity is low, precipitated iron is likely removed. Therefore, the appropriate combination of ORP and turbidity would provide reasonable comfort that iron levels are low enough to make frac fluid.
FQWM recommends the following standard: 25/250. That is, the turbidity is 25 NTU or lower, and the ORP is 250 mV or higher. Water of that quality can be stored (if pit aeration is used to manage bacteria growth) or immediately used for fracs. The pH should likely be between 6 and 8, which is easy to accomplish. The salinity needs to be known and reported, without minimum or maximum thresholds applied.
The most important factor related to salinity for frac chemistry is consistency. 25/250 is easy to remember, easy to achieve with treatment and provides the minimum required quality necessary for storage or immediate use. By setting a treatment-quality standard, we can begin to establish a price expectation and as a result, a tradable commodity.
Recommendation #2: Mind the Tail
When the music stops and the frac crews move away, produced fluid continues. For discussion purposes, we will call this produced fluid the “tail.” While the tail declines in volume over time, it continues for the life of a well. Managing the tail has historically required underground injection for disposal.
This tail cannot be ignored, and companies like XRI plan to address it with some combination of the following:
• system balancing of brackish-water supplies, storage and pipeline capacities
• buying or partnering with disposal wells near its pipelines
• building or renting space in evaporation ponds
• treating the water for beneficial reuse, such as crop irrigation
The good news is that when the frac crews move away, the produced fluid volume rapidly decreases, theoretically leaving disposal capacity more readily available.
Recycling produced fluid as frac water will theoretically disrupt the disposal, brackish water and freshwater markets causing the industry to evolve. As both an environmentalist and a staunch supporter of the petroleum industry, I believe we need to eliminate the use of fresh water as frac fluid in every plausible circumstance. When we do disrupt this market, we have to wonder how the market will respond.
Two possibilities seem too obvious to ignore. Freshwater prices will drop, and disposal prices will drop. For freshwater resources, the bottom can go low in terms of price at the source. Transporting and delivering water will always carry an expense, but much of the water in the Permian Basin comes from groundwater supplies that are relatively cheap to produce.
On the other hand, the freshwater acquisition market has become competitive and the rights-of-way required to move water from place to place even more so. Buyers focus on the delivered cost of the water, and a significant component of that will be pipeline and right-of-way-related expenses. The nature of the Water Exchange TerminalTM model involves produced water that is geographically close by, in some cases, giving it the advantage over fresh water.
It is important to point out that every barrel recycled does not have to be less expensive than fresh water. On the contrary, every barrel recycled must be less expensive than the combined cost to (a) dispose that barrel and (2) source a barrel of fresh water in its stead.
Disposal prices are already competitive. A recent look at saltwater disposal facilities in the Permian Basin suggest a five- to seven-year payback on capital. While that may be suitable if underwritten by long-term contracts, there is little space left to drop prices.
The water midstream market is evolving. Gatherers of wastewater, treatment providers and frac-fluid providers are courting one another, seeking to potentially connect their assets and expertise. Producers generally agree on what quality of water is acceptable for commercial use. Freshwater resources are constrained, and induced seismicity and over-pressured disposal zones are making disposal wells more difficult to permit.
While disposal wells will be a part of the solution for the foreseeable future, recycling flowback and produced fluid as frac fluid when supply and demand align in time and space makes environmental and financial sense. The industry must establish how this water trades, its determination of value and all the other transaction structures that define a commodity’s market.
In the meantime, XRI continues to be a leader in the water midstream market by working with our partners in establishing large-scale water exchange terminals serving multiple oil and gas producers simultaneously by providing produced water takeaway, as well as the redistribution of treated produced water as a sustainable frac-water supply. These terminals will play an important role in solving disposal challenges while providing a more environmentally responsible solution to sourcing water for fracs.
1. Rystad Energy research and analysis
Authored by Aaron D. Horn, Fountain Quail Water Management