MIDLAND, Texas—Solid production growth from the Permian Basin is something most in the oil industry believe is a foregone conclusion in the foreseeable future, however, there are some obstacles both infrastructure and regulatory based that may pump the brakes on the region’s expected output. While some of that is on the oil production side, a fair share of uncertainty also falls on the basin’s midstream water assets, its capacity and path to expansion.

Kelly Bennett, president and cofounder of B3 Insight
“Regulatory uncertainty is weighing on the future of the industry,” Kelly Bennett, president and cofounder of B3 Insight, told water forum attendees at Hart Energy’s Executive Oil Conference on Nov. 5. (Source: Hart Energy)

Speaking at the water forum ahead of Hart Energy’s Executive Oil Conference, analysts covering the sector point to saltwater disposal capacity risks and need for cash-hungry oil producers to raise capital by divesting non-E&P assets as key drivers in looming consolidation for water players in the Permian Basin region.

Since June 1, over one-third of the approved saltwater disposal well permits in the Permian’s Delaware Basin have had capacity reductions imposed by regulators.

“Some are small, but some are quite large,” said Kelly Bennett, president and co-founder of B3 Insight, which supplies water management intelligence to the oil and gas business. “Regulatory uncertainty is weighing on the future of the industry.”

Bennett added that these types of constraints can drive consolidation in the disposal industry, as can companies looking to shed non-upstream focused assets to raise cash.

“It is oftentimes a bit of a question mark as to why essentially a billion dollars of water infrastructure is sitting on the balance sheets of companies that need to be producing oil,” he said. “Smaller water midstream companies are building some really great asset bases in good places. We’re already seeing some of these getting absorbed into the larger players in the basin.”

Raymond James analyst Marshall Adkins
Raymond James analyst Marshall Adkins told conference attendees on Nov. 5 that the midstream water space is one of the true bright spots in the industry today and “it is only going to get better.” (Source: Hart Energy)

While investor sentiment toward the oil and gas business is at historically low levels, water is the one highlight for potential investors in an otherwise barren landscape, according to Raymond James. The investment bank sees Permian water production growing by over 9 million barrels over the next five years, and scale will be needed to properly manage the excess.

“I see no way around not needing a lot more infrastructure for water disposal,” said Marshall Adkins, analyst with Raymond James. “Water to me is one of the true bright spots in the industry today and it is only going to get better in the next five years.”

Adkins added that water disposal will be a faster-growing component than oil over the next half-decade, but expects Wall Street will sit out most of that growth cycle.

“Nobody cares on Wall Street right now,” he said. “Private equity gets it. They will play the water space. The generalist guys have no clue what is going on with water.”