Crucial Water Shortage Threatens U.S. Shale

“Water politics” will lead to major investing opportunities.

My career in the energy business has spanned nearly four decades. In that time, I have visited and advised on more oil and natural gas production sites than I can count all around the world. I have a global network of contacts that inform me about oil drilling in different places, and many of the drilling sites I’ve been to have been impressive and efficient.

But of all the countries that I’ve been to, and all the various oil producers I’ve visited, the one that stands out is right on our home territory.

The Permian Basin straddles Western Texas and Eastern New Mexico, and is a primary focus of the U.S. oil recovery. It contains enormous reserves – between 60 and 70 billion barrels worth, to be exact – made accessible by advances in horizontal hydrofracking. Not only did this exponentially raise U.S. producing, the Permian’s huge oil reserves also resulted in a remarkable decline in average per barrel drilling costs.

Now that we’ve “gotten over,” so to speak, the implications of the Permian’s resources, the reality is that several problems are emerging in continuing the full impact of this largesse.

One involves the availability of additional pipeline capacity to move extracted volumes out. This has resulted in bottlenecks and storage problems.

Another is the inflation in oil field service (OFS) prices. In a mirror image of the situation that hit throughout 2015 and into 2016 – when a collapse in crude oil prices obliged substantial upstream discounts among drillers – costs for OFS services are now escalating.

But there is a third problem that is looming as the most serious.

And it’s all about water…

Water Is As Important as Oil in Drilling

Despite advances in the use of other fluids, plasma, and carbon dioxide, fracking requires a lot of water. That water, in turn, creates concerns for the drilling process in three ways, and each one of these has the potential to add serious costs to the overall drilling process.

First, fracking requires a constant access of fresh water. That water is combined with chemicals and proppants and moved downhole under heavy pressure. A frack bursts open shale (or in the case of the broader category of tight oil/gas, other rock formations), but the proppants are necessary to keep those fissures open to allow product flow.

The chemicals are required to offset interruptions in that flow and to combat the rise of bacteria that will impede, and subsequently end, the flow altogether.

What the gas or oil moves back up hole, the remaining two problems emerge…

How the U.S. Used “King Shale” To Catapult to the Big Leagues

Second, there are certain factors that determine what the flow looks like at the wellhead: Well depth, the number of fracking stages, rock and fluid composition.

But much of that is flowback water.

As the amount of water increases, so does the cost of separating the water from the product.

Currently in the Permian, the average well is yielding four barrels of water for each barrel of oil equivalent. That is much more than the average only two years ago, and is likely to increase even further.

Of course, we also should put this in perspective. The advent of “King Shale” has catapulted the U.S. into one of the largest oil producers in the world.

Consistent American production should overtake either Russia or Saudi Arabia by 2020, if not before then. But this was a very different story until recently.

In the doldrums of U.S. production – the 1990s through 2005 – historically low production levels resulted in the country becoming heavily dependent on imports to satisfy close to 70% of daily demand.

At that time, over 60% of total domestic daily production came from “stripper” wells, with each one producing less than 10 barrels a day.

Unfortunately, the average stripper well was also producing 16 or more barrels of water for each barrel of oil. This cost was prohibitive, making it much cheaper to import.

These days, the Permian is hardly at such a level of water production. But with each increase in the water ratio, the rising cost of separation reduces profitability.

That flowback water also introduces the major problem…

To Use Water Is To Transport It

The third concern that water brings to the drilling process is that the water is also bringing back up the toxic chemicals initially sent down. Some of these are known carcinogens – in the early days of fracking, straight diesel fuel had been used instead.

This contaminated water cannot be reintroduced into the environment, therefore it must be segregated and injected into deep disposal wells.

These injection wells are becoming more difficult to come by. In addition, the governments of Texas and New Mexico have limited the licensing of new wells and the fracking of injected wells to increase disposal capacity.

It is not unusual for operators to haul flowback water by truck over considerable distances to the remaining available injecting wells.

This is accounting for the single fastest rise in production cost factors. I know one company that has resorted to hauling water to Utah!

But there is one more problem that this water concern brings…

Stay Tuned as “Water Politics” Lead to Profit Opportunities

The Permian water difficulty has also generated a distinct political problem: Landowners no longer simply lease property for drilling or access.

In many parts of the Permian, they also make money by monopolizing fresh water sourcing. In addition, area truckers are making a tidy income from hauling toxic water for disposal. None of these folks want the cash cows to be sacrificed.

In response, they have engineered local political roadblocks to both operating and OFS companies attempting to introduce new services to reduce costs.

This situation recalls a famous phrase by former U.S. Speaker of the House (and Texas good ol’ boy) Sam Rayburn: “It all depends on whose ox is getting gored.”

But as the Permian increases production, the water problem on all of these levels increases as well, and it opens the door for some profitable possibilities for new water providers and disposal. Several projects are also treating water on site and reusing in subsequent fracks.

Due to this, I am following developments on all of these fronts, and there are likely to be investment targets surfacing in due course.

More at:

New FCC Approval; Say Goodbye to Power Cords

The biggest mass manufacturing craze in a century set to begin any day now for new Nanocrystal Technology.

This is an investment in the energy sector at the top of our list.

See why here.