The true cost for water used in oil and gas development is shrouded by complexities in water rights allocation and transfers, and uncertainties of how best to treat and/or dispose of wastewater. Water rules and pricing are often set by considerations associated with alternative uses. But even setting aside the issues of unmitigated environmental externalities and the definition of “highest use,” understanding the cost of water employed in resource development represents a challenge for oil and gas operators.
Supply chain issues associated with water management in upstream oil and gas production from unconventional plays are eroding margins and impacting operators’ bottom lines. The cost implications of water handling are aggregated across the process-flow and throughout the life of the well and even the play. The lifecycle process includes: water sourcing, transport, treatment and disposal. A primer on these components is available in our recent shale gas water management white paper. However, the cost of water and water management can be confusing when gross generalizations are made and local or regional issues are not included in the analysis; when there are unclear definitions on water quality specifications; and when costs centers operate within silos.
Clear assumptions and better analysis is necessary to fully understand the true cost of water management.
Oversimplification hides the real issue!
As an example of this confusion a recent article in the Wall Street Journal discussed the cost of water in the Bakken play. In this article the authors informed their readers that “Water alone can cost upward of $400,000 per fracturing attempt”. This statement is factually ambiguous and shows an over-simplification of a highly complex issue, missing the real issues around supply chain management for water.
While the factors involved can vary on a play-by-play basis, our analysis of the issues in this region demonstrate the cost to procure water per stimulation event in the Bakken is about $70,000 and hauling water is contributing $350,000 to the cost calculation. The quality of flowback water in this play is such that it can be recycled effectively. As the field activity continues water supply chain management constraints will increase. Onsite recycling of the water can have a significant impact, reducing the aggregated total cost of water sourcing, treatment, transportation and disposal by as much as 65%!
Why the confusion?
• Analysis needs to take geospatial and temporal issues into consideration.
• Water quality specifications and volume assumptions need to be clearly stated as they are critical drivers.
• Modeling efforts must understand that costs in the field are often managed within distinct cost centers even within the same company.
Is the future clear?
Water management is often identified as a ‘hyper-regional’ concern. I agree that understanding local and regional considerations within the play and at the watershed level are critical for managing water as a renewable resource. However, an often overlooked component is the expansion of water management to include changes that will occur throughout the full well-lifecycle, especially as produced water volumes increase in these plays.
Well productivity, profitability and water production change over time. In my prior blog post, I commented on the growing industry around produced water management. Building upon this, at a recent conference Commissioner Porter from the Texas Railroad Commission mentioned plans to reduce the future availability of produced water disposal wells in Texas in order to encourage recycling. Coupled with recent regulatory changes designed to support onsite storage and reuse of produced water is a welcomed policy in this water scarce region.
It all comes down to Quality and Volume
When completing any analysis in the water space, quantity and quality are the key drivers. Analysis in this industry is often constrained because:
• There are currently no industry standards for the minimum water quality specification needed to make fracturing fluid.
• Processing technologies have different influent and effluent specifications.
• Water production, quality and volumes are poorly reported with definitions that can vary between states.
Who picks up the tab – and when?
The last driver for complexity in this analysis results from the industry’s existing project management and cost accounting methods. When evaluating cost models it is important to understand if the analysis is focused on lifecycle water management costs or have the models broken out the decision tree for drilling, completion and production as separate cost components. In practice, most industry analysis and optimization modeling is built upon a lifecycle model for an asset. Yet, water management decisions and thus the component costs are, at present, rarely optimized throughout the full lifecycle. Each of the independent cost centers are accountable for standalone operating budgets. Too often there is poor communication among the teams responsible for drilling, completion or production, which can result in a huge impact on a well’s ROI.
While painful, the industry is learning
In their Q3 2012 earnings report, Devon Energy (NYSE: DVN) identified that in response to water shortages in the Cana-Woodford Shale play last year 60-70 wells were stimulated with reduced water volumes and have since shown significantly compromised EURs. To address this specific play and future issues around water supply chain management, Devon has built a water recycling facility that includes a 500,000-barrel storage reservoir and a series of pipelines that connect well sites to the recycling facility. They praise this project as the primary reason for their ability to continue with well completions during an extended drought.
Water is a regional and a very local issue. With extended droughts predicted in 2013, it is a growing concern. Many operators are still learning how to manage this supply chain effectively. Some make water management decisions during completions without realizing the potential future impacts; others are engaged in practices that adopt fully integrated management of their water supply chain. Furthermore, too often the complexity of the supply chain for water use and disposal in unconventional operations is oversimplified. As a result, details that can be beneficial for understanding how to reduce risk, lower costs and optimize production are lost in the rough. Not accounting for local or regional issues, competing fluid definitions and siloed cost accounting are making the water murky and preventing many operators from clearly seeing the issues in front of them.