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The plunge in drilling activity is expected to result in a sharp decline in demand for water for fracturing operations and a drop in produced water volumes, prompting water midstream firms to shift from investing in infrastructure to efficiency and cost reduction.
lessPhoto: Courtesy Solaris Water MidstreamThe plunge in drilling activity is expected to result in a sharp decline in demand for water for fracturing operations and a drop in produced water volumes, prompting water midstream firms to shift from
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The plunge in drilling activity is expected to result in a sharp decline in demand for water for fracturing operations and a drop in produced water volumes, prompting water midstream firms to shift from investing in infrastructure to efficiency and cost reduction.
lessThe plunge in drilling activity is expected to result in a sharp decline in demand for water for fracturing operations and a drop in produced water volumes, prompting water midstream firms to shift from
... moreJust as surging Permian Basin production has transformed water management, the sudden and deep industry downturn could send the produced water business in yet another direction.
Produced water volumes are expected to fall to nearly 20 billion barrels annually for a market value of $28 billion, IHS Markit said in a report. This is down nearly 4 percent from 2019 levels, driven lower by plunging oil prices and oil demand.
“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 in the report. “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.”
That could bring to a halt much of the significant investment in building and expanding infrastructure because water midstream companies, which have been evolving from merely transporting water to or from well sites into water management companies that transport, treat, recycle and dispose of produced water.
More collaboration and partnerships will be needed, with operations more localized and turning into multi-operator infrastructure systems, Perez-Peña said in the report. Rather than investing in infrastructure development, focus will shift to efficiency optimization and cost reduction, she said.
Perez- Peña told the Reporter-Telegram by email that 2020 will still be a good year for those in the water disposal market, as disposal volumes are expected to increase because of the reduction in recycling volumes.
“While produced water volumes are expected to decrease in 2021 and 2022, midstream companies are not going to be nearly as affected as source water companies, so for the water midstream companies the landscape looks better than for most of the other segments,” she said. “Based on this, my advice to midstream companies is: Use these new conditions in the market as an opportunity and review your strategy for the next three years. Some midstream companies stand to gain new clients if they provide attractive pricing to E&P companies looking for cost reductions; also, be aware that the M&A market will soon become very dynamic and this could also represent an opportunity,” she said.
Also being impacted, she wrote, will be efforts to market produced water outside the industry.
“Treating the water for uses outside the oil patch is more expensive than treating it for disposal using a SWD. Since currently E&Ps are focusing on cost reductions, I see them losing interest in any water treatments that involve additional costs,” she said.
“During this current decline in drilling activity, impacts on the water midstream sector will vary from company to company. No doubt the demand for frac water will wane along with an accompanying falling-off in the volume of produced water,” John Durand, president and vice chairman, XRI Holdings told the Reporter-Telegram by email. “In terms of impacts to the water midstream sector, it is impossible to generalize. The overall impacts will be highly dependent on the financial health and viability of the individual water midstream company itself and whether it has a sound balance sheet that is not overburdened with debt, particularly during a protracted commodity price decline. A key consideration is also the makeup and the financial strength of the collective portfolio of companies in a water management company's E&P client base. Still another very relevant factor will be the quality and tenor of a water midstream company's contracts and the nature of those contract structures. Make no mistake, these times will be difficult and highly dependent on the influences and considerations mentioned above as well as the duration of the downturn. Although impossible to predict the extent, it would appear there could be quite a bit of consolidation and rationalization of assets throughout the energy sector, with the water midstream sector being no exception.
“From an XRI Fountain Quail perspective, we above all want to see a return to health for the U.S. economy as a whole and for our industry which is being ravaged by not only by the global COVID-19 pandemic, but also by a very unfortunately timed disagreement between Saudi Arabia and Russia, relative to production output in the face of unprecedented global demand destruction,” Durand said. “XRI Fountain Quail’s focus is to continue to be the trusted partner of our client companies as we work through these times together. We also seek opportunities to partner and collaborate with our peer midstream companies as well where possible, as it is vital that we meet the industry’s water management needs as a sector, regardless of whether we are in a falling, rising or stable market. XRI is fortunate in that we have great financials and a strong balance sheet and investment grade quality E&P operator clients. Couple that with our long-term contract structures and the strong backing of our capital partner (Morgan Stanley Energy Partners), we will persevere and seek opportunities to expand even during this period of decline and certainly as the state of the industry and the U.S. economy begins to recover and normalize.”
IHS Markit projects that by year’s end, drilling and completion requirements for water in U.S. shale plays will reach nearly 2.5 billion barrels, a dramatic 46 percent decrease when compared to 2019 volumes. But during that same time period, produced water volumes from oil and gas wells in onshore U.S. plays are expected to reach nearly 21 billion barrels — a 1 percent increase above 2019 levels, but more than eight times the amount of water expected to be used for drilling and completion in 2020.
Perez-Peña told the Reporter-Telegram that after 2021, a recovery in drilling and completion activities is expected, “which will increase the demand for frac water and it will increase the produced water volumes. However, we don’t expect produced water volumes to reach 2019 volumes in the next five years.”