Guest Editorial: Permian Shale Water Management: The Hidden Costs

Abstract

Guest editorial Water management in shale plays is an extremely competitive business. Every cent counts. This is most evident in the Permian Basin where companies work tirelessly to minimize operating costs in order to contract new capacities and fill their capital-rich infrastructure. These players are under enormous pressure to evaluate every component of costs and wring out excesses. While traditional operating expenses (OPEX) are heavily scrutinized, a full picture of profitability in water management is gained only after comprehensively examining the unique aspects of their overall business model. Traditional OPEX components in produced water management include labor, chemicals, consumables, infrastructure maintenance, transportation, disposal, solids handling, and power and other utilities. Capital expenses (CAPEX) must also be considered in light of tradeoffs between CAPEX and OPEX. Water CAPEX is generally composed of infrastructure, including pipelines, disposal wells, ponds/storage treatment facilities, and associated utilities infrastructure; equipment; engineering, project management, and permitting costs; and land. While all companies focus on these key expenses, another very significant cost driver emerges when the business model is more closely examined. Midstream companies’ revenues originate from three primary sources: Handling fees. Operators pay companies to collect and dispose of their produced water/flowback on a volume basis, and disposal is usually to a saltwater disposal (SWD) well. Gathering fees are charged for pipeline collection and disposal fees are charged for volumes disposed into SWDs. Commodity-based margins. Companies separate skim oil from disposed volumes and sell oil. In some cases, ownership of the skim oil remains with the operator. Royalties and accounting costs must be considered as a component of the profitability of skim oil sales. Treatment fees. Instead of disposing to a SWD, companies can treat produced water/flowback and sell recycled water to operators on a volume basis. The fact that recycling in the Permian is gaining in popularity due to local water scarcity, transportation costs, environmental stewardship, and/or SWD limitations creates additional opportunities for generating new revenue by increasing the volumes of water treated and associated water disposal/delivery fees. Revenue Bottlenecks As recycling is more readily adopted, revenues are becoming constricted by a number of factors including: pipeline capacity, treatment facility capacity, water quality fluctuations that cause upsets in facility operations, and transportation distances/location to fracturing sites.