HOUSTON (April 2, 2020) – By the end of 2022, produced water from oil and gas wells in onshore U.S. plays is expected to fall to nearly 20 billion barrels annually, reflecting an oilfield water market valued at $28 billion, said analysis by IHS Markit (NYSE: INFO), a world leader in critical information, analytics and solutions. While still considerable, these volumes represent a decline of nearly 4% from 2019 volumes, driven by plunging oil prices and falling oil demand due, in part, to COVID-19 impacts.
“After the recent oil price collapse and demand destruction for oil due to COVID-19 and other market factors, we now expect the total water management market size in the U.S. to drop about 20% below our previous estimates,” said Paola Perez-Peña, principal research analyst at IHS Markit and lead author of its water market analysis. “The dramatic decrease in drilling and completion (D&C) activity in the next two years will significantly reduce frack water volumes, while the decline in produced water volumes will be less severe.”
Frack water, a mixture of water, sand and chemicals, is forced down into a well under high pressure to create fractures in relatively impermeable rock and enable oil and gas to flow into a well. Water for fracking operations has historically received the most attention from operators and the public, but in reality, frack water volumes (combined with those for drilling) are dwarfed by subsequent, produced water (underground formation water that comes up through the well with produced oil or gas) volumes.
IHS Markit projects that year-end 2020, D&C requirements for water in U.S. shale plays will reach nearly 2.5 billion barrels, a dramatic 46% decrease when compared to 2019 volumes. But during that same time period, produced water volumes from oil & gas wells in onshore U.S. plays are expected to reach nearly 21 billion barrels—a slight 1% increase above 2019 levels, but more than eight times the amount of water expected to be used for drilling and completion in 2020.
To put the produced water issue in further perspective, a typical U.S. unconventional well in some of the most productive basins could have an initial water-to-oil production ratio of 2:1. However, according to IHS Markit WaterIQ study, by year four of the well’s life, this ratio could increase to 4:1, doubling the amount of produced water per barrel of oil in only two years. The ratio could be even higher for legacy wells, as high as 10:1, IHS Markit says.
Produced water volumes have historically been managed using injection wells, where the produced water was reinjected again and again in a field to enhance oil recovery operations in conventional wells. However, this process changed when unconventional wells became popular because, unlike produced water from conventional fields, water from unconventional wells cannot be reinjected into the producing reservoir, but instead, must be disposed of by other means.
Most commonly, produced water from unconventional wells is injected into nonproductive formations using saltwater disposal (SWD) wells. IHS Markit estimates by 2022, 41% of the produced water from oil and gas operations will be reinjected, 47% will be disposed of using SWD wells, and 13% will be recycled for reuse in fracking operations.
“The more oil the U.S. produces from these younger unconventional wells, which decline rapidly in their first year of production, the more the industry must drill and produce just to keep oil volumes level, which means more produced water to manage across the system. However, if we were to stop drilling activity right now, it will take up to a year for produced water to start decreasing,” Perez-Peña said. “Going back to the beginning of unconventional resource production, the focus was understandably on the water needed for drilling and completions. Now that there is a considerable, established production, operators are realizing the extent to which produced water is not only a sizable matter, but an ongoing and essentially, perpetual one.”
To estimate the future market value for oilfield water, IHS Markit considered the complete value chain of the market, which consists of water sourcing, treatment, and disposal, with logistics services throughout the chain. Of these segments, water logistics and disposal are the largest sectors, and when combined, are expected to drive 91% of the water market value in 2022. The significant decrease in D&C activity will represent a more than 60% decrease in demand for sourcing, pre-treatment and flowback services combined.
Logistics is the biggest single segment in the oilfield water management market. IHS Markit sub-divides the logistics market into hauling, transfer and storage. While water hauling continues to be the main value driver within the logistics market due to the high cost of using trucks to transport water (fees could range from $1 to $4 per barrel), it has also been the main driver of consolidation in the industry, as midstream companies focus their efforts to reduce water transportation distance and overall logistics cost.
Water disposal is the second largest segment in the oilfield water management market and can represent up to one-quarter of total lifting costs. Operators have historically managed their produced water disposal needs through in-house operations, which allows them to reduce operating expenses associated with managing water but requires significant investments in infrastructure. IHS Markit estimates that investment in water infrastructure by E&P companies will decrease in 2020 and beyond in response to falling oil prices.
As a result, third-party, water disposal companies have formed a new type of water midstream business model that has been increasingly adopted in the industry, especially in the Permian Basin. This approach eliminates the need for infrastructure investment from operators, however, it comes at a cost. These water-disposal companies may charge twice the disposal fees operators might incur with in-house disposal systems.
Much of the focus on produced water is on the Permian Basin and West Texas activity, which IHS Markit expects to account for more than one third of the U.S. produced water volumes once 2019 totals are fully reported and tallied. But other U.S. onshore areas also contribute to the growing produced-water challenge, IHS Markit says. The U.S. mid-continent region and the Haynesville shale follow the Permian as the top three water producers from unconventional assets.
Given the need for cost containment and the fragmented nature of water production—with many third-party disposal firms focused on their own specific areas—IHS Markit expects to see more collaboration and partnerships among operators. Operations to handle oilfield water will be more localized and will shift toward multi-operator infrastructure systems. Managing local resources will be highly relevant in this new, collaborative environment for operators to reduce operating costs associated with water, especially in the current environment of low oil prices, IHS Markit said.
“Before oil prices plunged, the need for a set of robust logistics solutions was pushing the Permian water market to build midstream water infrastructure—both in terms of equipment and expertise,” Paola Perez-Peña said. “However, the significant drop in oil prices followed by major E&P CAPEX reductions will challenge midstream water infrastructure development. Industry focus will shift from investing in water infrastructure to efficiency optimization and cost reduction.”
To speak with Paola Perez-Peña, or for more information on the IHS Markit water market analysis, please contact Melissa Manning.
About IHS Markit (www.ihsmarkit.com)
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