News

Predicting the Future: Why the Upstream Water Management Industry Needs a Water Marketplace

Benjamin Reed | Sourcewater

February 25, 2017

 

As the Shale Boom took full swing in 2009, U.S. hydrocarbon production doubled, and Texas crude production jumped 250%.

 

U.S. oil and gas producers rushed to drill and frac as many wells as possible in hopes of capitalizing on the $100+ price of oil. The world marveled as U.S. onshore oil production boomed.

 

But the real boom was going unnoticed. The simple, important truth was this: for every barrel of oil that comes out of the ground from the average onshore producing well, ten barrels of water come along for the ride (give or take).

 

This is worth repeating…10x the amount of water comes out of the ground compared to oil from your average producing well.

 

So, for the record, the real boom was never oil or gas production. Rather, it was water production as a result of oil and gas production!

 

The explosion of new wells across North America from 2009 to 2014 caused water production to exponentially increase alongside oil and gas production. U.S. oil and gas wells now produce over one trillion gallons of water per year with a third of the water coming from Texas, far more than in any other state.

 

Where does one trillion gallons of water go when it comes to the surface?

 

Where are they disposed of?

 

Are they recycled?

 

And if so, where?

 

Not to mention, how do oil and gas producers transport this water from the producing well locations to disposal or treatment destinations?

 

As you will see, these questions are the ones that keep upstream energy producers awake at night.

 

And here’s the reason why…

 

To transport, dispose of, and treat produced water is expensive.

In fact, the majority (at least 55%) of a well’s operating expense can be attributed to water management.

 

In hard numbers, the market size for water management across the major plays (Eagleford, Permian, Marcellus/Utica, Anadarko, Bakken, Haynesville, DJ Basin, Barnett) in 2016 was more than $20 billion.

 

You might ask, “What are the line items, the individual cost centers, that comprise this $20 billion dollar water management market?”

 

Without being too dramatic, the real boom wasn’t even in water…

 

The “real real boom” was in water transportation or “water logistics.” A majority of the $20 billion dollar water management market is water hauling, which was over $15 billion as of 2016.

 

Across America, energy production might have doubled, but water logistic volumes (i.e. barrels of water being transported) exploded by at least 25 times. In Texas, as much as 70 times.

 

These costs are especially troubling in the state of Pennsylvania where only seven commercial disposal wells are active. Operators have no choice but to haul their water 200+ miles to the disposal-rich state of Ohio.

 

Such hauling distances cost energy operators in the Northeastern part of Pennsylvania an arm and a leg. Both legs, actually.

 

In an attempt to reduce costs, companies such as Anadarko (prior to their recent sale of Marcellus assets) had searched for alternative transportation options such as using rail cars to transport their water to Ohio.

 

Other operators, like Shell, turned to Sourcewater.com to find alternative recycling options among other operators. Shell, for example, was able to reduce costs considerably by trading its water with neighboring operators like Chief who were only a few miles away, rather than the hundreds of miles trek to Ohio.

 

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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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Nevertheless, water logistics remains a massive problem despite such alternative water transportation, sharing and recycling solutions.

Here’s the bottom line…

The introduction of massive water logistics doubled the cost to produce a barrel of oil. Spending $2 per barrel to haul and dispose of 10 barrels of water adds $20 of cost to each barrel of oil.

The image below depicts the high cost of water management for upstream oil and gas production in 2015.

 

But the problem is not just in “oil or gas production.” Water production from producing wells is only part of the problem.

 

Remember, producing wells only refer to wells that have already been drilled and completed. It does not refer to wells that are in the process of being drilled and completed. So the other part of the water equation comes from the drilling and completion of new wells.

 

Hydraulic fracturing uses far more water than conventional drilling. By the early 2010s, some producers were using 100,000+ barrels to frac a single well.

 

But now in 2017, some major producers like Pioneer use up to 1,000,000 barrels of water in a single frac. The reason for this increase is simple: Operators have become far more technologically advanced in recent years.

 

Longer laterals (the horizontal length of the well underground) are growing constantly, and new techniques such as zipper fracing, completing multiple wells simultaneously, demand even more water.

 

Ironically, not only do many operators have too much water to dispose of, but they also often lack water where they need it most: at the well pad for a new frac.

 

Although operators sometimes can reuse some of their flow back or produced water for upcoming fracs, many times these frac locations are not close enough to producing wells or recently completed wells for the water to be economically transported to the new location.

 

In addition, even if a recently completed well is close enough to an upcoming frac location, sometimes the length of time between the last completion and the upcoming completion is too long to store the flow back water on site.

Once again, the issue of water logistics rears its head.

 

So operators must find new water sources for their upcoming fracs within a close enough proximity to the well pad.

 

Yet, water sources are sparse in desert-like regions such as West Texas and the Permian Basin. Finding water for new frac sites has proven to be just as difficult as disposing of produced water.

Given the absence of a centralized database for water pricing, water owner contact details, and water availability data, operators are left to go door-to-door.

That is, operators literally knock on local landowners’ doors to prospect potential water right deals for their upcoming fracs. More recently, large water brokers or “water management companies” have begun to consolidate the market. Nonetheless, the market is highly nascent with little transparency or liquidity.

 

And just when you thought it could not become more difficult for upstream energy producers, you realize that there is another problem with hydraulic fracturing…one that was not experienced prior to the shale boom.

 

Before the shale boom, most oil wells were vertical (i.e. conventional) wells. Water produced from these conventional wells was recycled or re-injected on-site for Enhanced Oil Recovery (EOR).

 

This process meant that when water came out of a newly completed conventional well or producing well, it could be injected back into the ground to help stimulate the well to produce more oil.

 

This recycling process meant that there is and was far less water transported away from conventional, vertical well pads and batteries compared with their unconventional, horizontal counterparts in the present day. You see, horizontal hydraulically fractured wells do not use EOR. Water goes in one way and comes back out the same way.

Unlike conventional wells, all that produced water has to go somewhere for disposal, treatment, or reuse. Again, all that water going to and from the well pad requires logistics.

Are you starting to see a trend?

 

Here’s the kicker…

 

Despite the massive water boom and water logistics boom, many unconventional drillers were blind to the cost of water management or simply did not care during the good times of the shale boom. With $100 oil, oil and gas producers were hyper-focused on one thing: drilling and completing new wells and producing more oil and gas as quickly as possible.

 

This meant that little concern was shown to the cost of water management. The industry got by on old, inefficient management systems from the days when water was just a sideshow, long before the advent of hydraulic fracturing technology. In the old days, a simple call to the “good old boy” network sufficed for finding the good-enough hauling company, disposal well, water source, or frankly most upstream energy services.

 

The apathy toward water cost, and really all operating costs, came to a screeching halt after the collapse of oil and gas prices in 2015. Overnight, costs mattered, and water wasn’t a sideshow anymore. Suddenly, water was the main event.

So how did upstream energy producers respond?

Within a year of the bust, oil and gas producers scrambled to form special “SWAT teams,” sometimes called “water management groups,” to deal with exploding water costs, their newfound number one operating expense.

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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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In addition, although treatment and recycling options caught the eye of many producers, such options couldn’t beat good old-fashioned water disposal wells in terms of cost.

 

Operators like Shell and Pioneer, among many others, chose to “vertically integrate” or own their own disposals, pipelines, and, in some cases, even their own hauling company. Operators moved to replace trucking with pipes or transfer wherever it was feasible to do so, investing in gathering systems and water midstream infrastructure.The goal was to micromanage and control water management cost.

 

Following the oil bust, and amidst the recession, a wary oil and gas industry shuffled to conferences countrywide filled with keynote speakers echoing the vertical integration sentiment. The mood about water had changed as several top-ranking executives from top 50 onshore producers made statements like, “Our company is not an oil and gas company…it is a water company.”

 

Indeed, water was no longer a sideshow.

 

Yet, despite these efforts, there was and still is a gaping problem in the water management market in the present day. Unlike oil and gas, water is not treated as a commodity. Nor is water disposal, hauling, treatment, or frankly, any water service. But let’s go with the example of water to make the point…

 

Water is not traded on the open market…

 

There has never been a sophisticated water market offline or online. Where highly skilled oil and gas marketers, traders, and investors vie for cents on the dollar savings on Wall Street or trading platforms like ICE, water, on the other hand, has not been traded on a similar type of platform.

 

As a result, water pricing and information is not widely known.

 

Certainly, an experienced water manager might feel that he has a good sense of the going price of water in his area, but no one knows the real price and price trend and availability of water in any area at any given moment, unlike, say, a public stock price, or commodity like gold, or pork bellies, or…oil.

 

In addition, in the current water management paradigm, the price is not set in real time in response to supply and demand, or bid and ask, but rather it is set by operators and service companies or landmen and land owners haggling in a contract negotiation.

 

In fact, the only way to find water prices is to call the owner of a given water source and ask them the price. Yes, that means literally calling, emailing, or knocking on the owner’s door. And this is exactly what oil and gas operators do. This is what the water managers or their landmen do.

 

Over time, and with enough effort, water managers or whoever is charged with the responsibility of vetting the market for water pricing, locations, volumes, availability, and water quality will build up a network of water sources (or services) that they can rely upon for future deals.

 

It is this network that most people within the industry refer to as “the good old boy network.”

 

But let’s stop for a second and consider if these networks and this “old school” process of water management is the best option. We must ask whether or not water managers are currently equipped to:

 

(1) Assess the market accurately.

 

(2) Assess the market quickly enough to act on the best deals.

 

(3) Get the best price and service in the market.

 

Considering that there are more than 120,000+ water sources in Texas alone, owned by almost as many different individual owners, it would be impossible for a water manager to know all of these individuals. But to play devil’s advocate, let’s say they did.

 

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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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The next question becomes, “how do water managers contact all of these water owners fast enough to discover current market pricing and available capacity for disposal or water volumes for sale?”

 

THEY CAN’T! And therein lies the problem with the current system.

 

And just when you thought all hope was lost, there is a solution.

 

The solution is simple in principle: as we have seen with so many other markets, a centralized online marketplace must be created for water and water services.

 

The online marketplace must include details of water and water services pricing, availability, water volumes, water quality, water location, and water owner contact information, among other important data.

 

Such a marketplace would enable water managers to gain instant access to millions of data points regarding water and water services with several clicks of their mouse.  The reliance on old networks and time-consuming phone calls that generate data that is out of date almost as soon as the phone is back on the hook would no longer be necessary. Business would get done faster, with far less effort and much better results.

 

But it’s not just about efficiency.

 

The most important reason markets exist is because they allow services to be accurately priced based upon both supply and demand in the market. An efficient market ensures that all demand is served and that all available services are utilized.

 

This is the reason airlines on travel services marketplaces like Orbitz and Expedia offer fare sales on airline tickets. When an airline discovers that seats on a flight are not selling, they can reduce their ticket prices until someone in the market buys each ticket at the market-clearing price.

 

This wouldn’t be possible without access to the key information of seat availability. In addition, continuing with the analogy of airline companies, they couldn’t offer such deals if there wasn’t an easy way to reach people interested in these deals at the time the deals were available.

 

The reason Orbitz and the airlines active on their online marketplace have access to the right information, the right people, and can communicate this information to those people in a timely manner is because of information technology and the wonders of the internet.

In fact, enabling live-time marketplaces like Orbitz to exist in the first place is one of the things the internet does best.

 

So why not use an internet marketplace to control costs and improve efficiency for oil and gas water management? Why not mimic the oil and gas markets we already see working so effectively? Pablo Picasso once said, “Good artists borrow, great artists steal.” It seems only logical for the most costly part of the oil and gas industry to adopt the most cost effective mechanism for controlling cost in the world…online marketplaces. Water managers and the upstream sector as a whole should take Picasso’s advice.

And the need for a centralized online marketplace for water is ever more pressing with the knowledge that a robust water midstream is being developed throughout the oilfield regions. Just like we saw with oil and then gas midstream development, water too will have the luxury of a vast pipeline infrastructure to transport fluids to and from locations throughout the oilfield. Companies like H20 Midstream are buying and building water infrastructure. But one must ponder how these pipelines are going to manage peak capacity and ensure that their inventory is fully utilized day in and day out.

 

The answer is, “through an online marketplace.”

 

But, in the present day, wide adoption of an online marketplace for water is just beginning.

Since 2014, an MIT spin-out called Sourcewater has led the charge to create the world’s first online marketplace for upstream water and water services.

 

The Sourcewater marketplace enables energy operators, service companies, and individuals to list their water and water services online for sale, search for and research the best deals in the market, and even transact online. It is even possible for energy operators to trade or recycle their water online to other operators (as mentioned above in the case of Shell and Chief). In this sense, operators become both water sources and water disposals for other operators.

 

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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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Sourcewater.com was created to solve all the difficulties I have addressed throughout this article for upstream oil and gas operators concerning the issue of water management and exponentially increasing water costs.

 

And Sourcewater is FREE to everyone! This means that you can use the Sourcewater marketplace right now completely free, regardless of who you are or where you work.

So here’s how Sourcewater works…

 

Sourcewater relies on user-created listings, much like Amazon or eBay relies on users to create listings for the products they want to sell online. For example, if a disposal well owner wants to market his disposal capacity on Sourcewater, he will:

 

(1) Register for free on Sourcewater.com.

 

(2) Create a disposal listing.

 

(3) Wait for a potential buyer to search for disposal in his area.

 

(4) Then, if a prospective buyer is interested in using the listed disposal service, they can contact the disposal owner or offer to buy the disposal service online through Sourcewater.

 

As Sourcewater grows, and as more water owners, disposal well service companies, treatment companies, hauling companies, and other water service companies create individual listings on Sourcewater, the more live-time accurate water data such as pricing, locations, owner contact information, etc. will be known to everyone.

 

Currently, Sourcewater has more than 500 active users registered on its marketplace with more than 1.4 billion barrels of water listed for sale and 4.4 billion barrels of disposal capacity available for those seeking salt water disposal.

 

Every day, new users are registering and creating new listings.

 

Although tons of water and water services are listed for sale on Sourcewater already, Sourcewater took additional steps to ensure that those who search the online marketplace find the water sources and water services they need.

 

Alongside the user-created listings, Sourcewater has proactively researched and collected water source and disposal well permit data from databases like the Texas Railroad Commission, Groundwater Control Districts, the Texas Council on Environmental Quality, the Texas Water Development Board, and many other sources to populate its database with complete water and disposal information.

 

Sourcewater representatives call, email, mail, and digitally market to local land owners, water rights owners, and disposal well owners to gather pricing, availability, water quality, and other important pieces of information for which Sourcewater users can search.

Check out the look and feel of the Sourcewater marketplace below…

Despite Sourcewater’s massive success and growth since 2014, it can’t continue its important mission of creating an online water marketplace without the support of the oil and gas community and people like you. So it’s time for you to get involved.

 

Here’s what you need to do…

 

(1) Spread the word about Sourcewater throughout the upstream oil and gas community. Inform your peers about the importance of a water marketplace and how it can benefit their company and current operations. A simple way to get involved is to share this article on your social media accounts or email your peers.

 

(2). Schedule your free consultative tour with one of our representatives.