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The EnergyMakers interviews Sourcewater Founder Josh Adler on why operators are going online to cut their largest cost: Water

 

Russ Capper sits down with Josh Adler, Founder and CEO of Sourcewater, the water exchange for the energy ecosystem. They discuss the significant cost of water in the production of unconventionals, and the potential savings offered by using Sourcewater’s online exchange for water sourcing, recycling, hauling and disposal. Click here to watch the full video interview.

 

 

Full Interview Transcription: 

Russ:  Welcome back to The EnergyMakers Show, my guest today Josh Adler, Founder and CEO of Sourcewater; Josh, welcome to The EnergyMakers Show.

Josh:   Thanks Russ.

Russ:  You bet.  Tell us about Sourcewater.

Josh: Sure.  Sourcewater is the first online marketplace for sourcing, recycling, transporting and disposing of water for energy production.

Russ:  Okay and water has played a much more significant role now that we’re into shale and hydraulic fracturing and so forth, correct?

Josh: It really is; it’s a very different landscape today and what’s interesting is a lot of people don’t realize that all oil wells are mostly water wells.  The typical oil well, on average, produces about ten barrels of water for every one barrel of oil; now it can be as low as 1:1 or it can be as high as 30:1 but across North America the average is about 10:1 and that’s called the water cut or the fluid production ratio.  And so that’s always been true; that’s not a fracking or an unconventional thing, all 1.7 million oil wells in the U.S. mostly produce water.

Russ:  Okay.

Josh: What’s really changed is that up until the shale boom, which really got going in 2009, all of the production in the U.S. was from conventional wells – or vertical wells, traditional oil wells – and in those most of that water that comes up – produced water – is re-injected onsite for enhanced oil recovery.  It’s basically re-circulated onsite to pressurize and push more water out – more oil out of the well.

Russ:  Okay.

Josh: And so the cost of that is – is pretty low once you’ve installed that infrastructure.  But in unconventional production, A.K.A. hydraulic fracturing, which was all of the new production starting in 2009, there is no enhanced oil recovery, that’s not a thing; so it’s one way in, one way out.  So for one thing in hydraulic fracturing, it’s hydraulic; you’re using lots of water, you’re bringing it to the site.  So now you’re bringing lots of water in which is a completely new thing and number two, the water you put down comes back up along with all this produced water that was already down there and it’s all gotta go somewhere because you can’t reuse it right onsite in this continuous loop for EOR.  So now you have this massive amount of water logistics that you didn’t have before.

So the thing that’s really taken off in this shale boom period of 2009 to 2014 and beyond is the amount of water that’s gotta get put in a truck or in a pipe.  That went up by something like 5,000% – 7,000% in 5 years in Texas compared to crude oil production which went up by about 3.5 times – about 250%.  Which is a huge increase in 5 years but the water logistics increase was 2 orders of magnitude bigger than that.

And what happened during this 2009 to 2014 period is we had the shale boom – we had this huge increase in hydrocarbon production – but throughout that time period the price of oil was up around $100 a barrel so even though in unconventional it cost a lot more to produce a barrel of oil – it went from something like, the area is all over the place, but maybe $15 or $20 a barrel up to say $40 plus a barrel and most of that increase came from the cost of water logistics being added into the production cost – but since you had oil priced about $100 a barrel whether your cost was $20 or $40, if you were selling at $100 you’re doing great either way, yeah.

And so it really wasn’t until, you know, early to mid 2015 after the commodity price collapse really set in and people said well, it’s not going right back to $100, maybe it’s not going right back to $80, that these companies, you know, that upstream companies looked at this and said if we’re going to survive in a world of $40 to $50 oil we need to get our costs down.  What are we spending all this money on?  You’re spending half of it – more than half of it – on moving water around.

Russ:  Okay, so when you talk about hauling or disposing, I mean some of it has to be disposed but some of it can be reused; do I have that right?

Josh: Yeah.  Well in theory potentially all of it can be reused but it – it’s really an economic decision.  So it is very common now in the Northeast, in Pennsylvania, Ohio, West Virginia – the Marcellus Shale region – very common to recycle most of the produced water that comes out of an oil or gas well; and it’s mostly gas wells up there.  And the reason for that is that in that part of the country there are very few disposal wells for waste water.

To give you some idea, in Pennsylvania there’s maybe 12 disposal wells in the whole state, there are 8,000 in Texas.  And moreover, the disposal well sin Pennsylvania – a good one – maybe takes 1,000 barrels a day of water; a good one in Texas might take 50,000 barrels a day.  So it’s a completely different situation.  And so what happens is in Pennsylvania you’ve got produced water that you need to dispose of, you’ve got to put it in a truck and send it 250, 300 miles to central Ohio and that ends up costing $20 per barrel or even more.

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Note: Access your free tour of Sourcewater’s online marketplace and water intelligence platform. Schedule yourself on our calendar by clicking here.

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Russ: Per barrel of water?

Josh: Per barrel of water, right.  And so that compares to say in West Texas it might be more typical of me spending $2 to $3 a barrel all in on hauling disposal.  So it’s ten times more in Pennsylvania than in Texas.

Russ: Okay, does that mean that Sourcewater is in Pennsylvania?

Josh: Yes, that’s actually where we started because we figured, you know, where the cost is the highest they’re going to be the most motivated, the most willing to try something new and see if it works.  And in fact the original inspiration for Sourcewater was because I was in a program at MIT called MIT Energy Ventures and I had a friend there who was the Completions Manger for the Marcellus for a super major operator.  And he explained to me that operators in Pennsylvania, especially Northeast Pennsylvania, were reusing most of the produced water coming out of their wells because it was so much more economical to re-inject that water than to truck it across state lines.  And what we realized was a lot of times if you’re an operator who just completed a frack, you’ve got all this water coming up, you’re actually done with your hydraulic fracturing, right?  So now you have all this water that you could reuse but actually it might be a few months before you…

Russ: Before you have something to use it on, right?

Josh: drill your next well.  So before you start sending it 250 miles on a truck maybe you’ve got a neighbor, another operator, who’s actually about to have a new completion coming up; wouldn’t it be great to know about that and work something out where you could send your water a short distance to be reused by one of your competitors nominally and pay them a little bit compared to paying a lot to ship to Ohio.  And the other guy, who’s got completion coming up, instead of paying to acquire and consume fresh water, can get paid to reuse produced water.

Russ: Sounds like a win, win, win.

Josh: You know, it is and so we’ve been getting a lot of uptake in the Northeast getting operators to trade with each other.  The first time is always slow but once you’ve got a water sharing agreement established between two operators it gets much easier for them to trade and each time somebody new adds to the network it gets a little bigger, it gets a little more efficient; we get more people on there using it.  So that is definitely – has definitely been picking up and, you know, we’re happy to see how that’s growing.

But we’re like the Expedia for water management, you know?  Where ever you want to – whenever you need water, you can get every kind of source and type for your application on Sourcewater.  Whenever you need to get rid of wastewater you can find all the places where it could go and figure out what’s the best place for you at that time and maybe that’s recycling, maybe it’s disposal, maybe it’s treatment; maybe it’s some alternative use like irrigation.  So we’re just trying to connect all those sources and uses of water and wastewater in the oilfield and then, when you know you’re moving water from point A to point B, how are you going to get it there?  So we’re the place where you find that truck or that pipe that’s going to be your best deal at that moment, on that day to move that water around.

Russ: Okay, it must have been interesting when you started in the Marcellus, how long ago was it that you started and got your first customer?

Josh: Well we started the company about 3 years ago and we launched the first live website about a year and a half ago.  And we got people registering right away; I mean we really I’d say quite quickly got a majority of the top 20, 30 operators in the Marcellus on.  That doesn’t mean that they’re using it.  So they’ll sign up, check it out and then say well, you know, let’s see what happened with this.  And so we’ve been fortunate to have a few top operators who really took the lead in saying, you know, we’re going to help make this happen because we see how it’s going to help us and also help reduce community impact at the same time.

Russ: Cool, do they pay to use it per transaction?

Josh: So that’s a – that’s a trick question.  We started out kind of the real estate broker model of okay let’s charge a commission on trades but actually that has shifted recently where we’ve moved to more of a Google type business model which is free supply chain management platform, really useful, saves you lots of time and money and for the user it’s completely free and then we charge service companies and companies that are selling water, water-related technologies and services, to increase their visibility and promote what they’re doing and what they’re offering on that platform.  Just in the same way that let’s say you go to Google and you search, you know, new – new car reviews and the first one that pops up in a little box says, you know, Ford F150 best selling light truck in America, and you know that Ford paid something to make sure that people who are searching for cars, they are going to hear about us.  And we’re doing the same thing but with water and water services.

Russ: Okay, so the advertisers are people that would be involved in the transaction in moving the water around.

Josh: That’s right, do it’s – it’s haulers, it’s treatment companies including mobile treatment companies, it can be commercial water sources, water sellers, certainly it’s disposal wells and then it’s companies that are more at a sponsor level like water treatment technologies, water equipment sellers, environmental consultants and even actually private equity companies that are looking to buy water infrastructure and water assets who want to increase their visibility to people who manage those assets.

Russ: Okay, so let’s say you have somebody up there that has a lot excess water, wants to get rid of it, I mean do they kind of put it out to bid or how does that actually work?

Josh: It’s – you create a listing of your water resource, whether that’s water or disposal or hauling services, and you can set a price – an ask price basically – or you can keep your price private and then when people search for the thing that you’re offering, again whether that’s water or produced water that can be disposed of or disposal capacity, disposal services or treatment services, they see all the listings and they can rank those listings based on how close they are, what’s the best price, what’s the best combination of transport and price so they can optimize or even what’s the volume or timing that’s maybe – it’s kind of like I need the soonest flight, right?  I need water that’s available right now, it’s an emergency.

Russ: So do you guys see success when it happens?  I mean are you able to keep score or is that kind of private too?

Josh: Well certainly, you know, if somebody completes a transaction we know about it.  Now the details of a given transaction are confidential but we try to observe and we try to – we try to help out too.

Russ: So another interesting aspect that dawned on me, you know, you’re not in Oklahoma but in Oklahoma it’s gotten a little bit controversial on the disposal well side; do you see a place there where your company’s going to play a role?

Josh: Absolutely.  We’re not the whole solution but we can be part of the solution.  Which is first of all we make it much easier to find alternatives to disposal; so that doesn’t get rid of disposal, but it means by making it easier to recycle that water in new completions in an efficient, low cost way we’re going to take some of the pressure off the disposal infrastructure.  Another thing is that we can, as part of the information we display, keep track of individual disposal wells, what volume and pressure are they hitting on that particular day.

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Note: Access your free tour of Sourcewater’s online marketplace and water intelligence platform. Schedule yourself on our calendar by clicking here.

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And in some cases they’ve got a limit, you know, they’ve got a cap on that, and so if they upload to us that I’ve hit my cap for the day on pressure volume we can then alert all the truckers and operators in that area who might have sent a truckload there and wasted their time and wasted money sending a truck to basically a place that’s closed for the day and it’s like well, where do I go now?  We can say don’t go there, you know, they’re full.  Go to this guy who’s still available.

Russ: I, you know, I was prepared to come in for the interview and say well I guess, you know, you’ve ridden the market down with everybody else because of pricing but you’re one of the guys playing a role to reduce the cost of production anyway so it really sounds like it’s the right time for you.

Josh: Yeah, it’s, I mean, the ideal circumstance for us is that energy prices are low enough that companies care about their costs but high enough that they stay in business.

Russ: Right, absolutely, absolutely.

Josh: So, you know, I think we’re in a good place in kind of the, you know, $40 – $60 range because, you know, like we saw in 2009 – 2012 when prices are really high it doesn’t hurt them to be inefficient, you know?  We help bring efficiency to a process and take advantage of better information and information technology to reduce cost of energy production; that’s what we’re trying to do.

Russ: Where do you think you’d like to be I mean covering the United States and all plays in 4 or 5 years?

Josh: Well certainly covering, you know, all of the significant shale plays in the U.S.  I think that there’s also some big opportunities in some regions in the agriculture sector, especially say Central California where you do have a lot of oil and gas production there – big, big production – but the bigger issue there is you’ve got an enormous amount of agriculture and real water shortages and an opportunity to use water more efficiently by trading between these different sources; agricultural users, energy producers, industry land owners who have excess water and non-fresh water.

Russ: Have you even talked about this idea to the agriculture people out in California yet?

Josh: We have some.  I mean honestly we’re, you know, we’re 3 years in, we’re a year and a half into the market and we just don’t have the resources or bandwidth to cover every place at the same time.  We’ve got to make it work one step at a time.  I mean ultimately I think that in the long run most water will be treated as the valuable commodity that it is and that will even impact municipal type users as well as agriculture, as well as energy and industry.

Russ: Okay, well Josh it sounds like a fascinating future ahead for you, I really appreciate you sharing your perspective with us.

Josh: Thank you very much Russ.

Russ: You bet.  And that wraps up my discussion with Josh Adler, the Founder and CEO of Sourcewater and this is The EnergyMakers Show.

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