Mike Christensen strides among rows of gleaming steel tanks, pointing to pipelines that arrive from miles around to this corner of former farmland near Midland, Texas, the heart of the largest oil patch in the U.S.
His company is one of dozens opening sites like this one that handles, not the lucrative oil, but the shale industry's dirty secret: wastewater.
While U.S. oil production has reached record levels on account of the shale revolution of the last decade, much of the supporting infrastructure has failed to keep up, including how to transport the large quantities of water used in the hydraulic fracturing process and the water that is produced from wells alongside oil and gas.
Once managed individually by energy producers, the job of supplying, collecting and disposing of water is a rising cost, and has spawned a $34 billion a year business in the U.S. that has lured investors including TPG Capital, Blackstone Energy Partners LP and Ares Management Corp. (NYSE: ARES) to back these firms.
Oil production in the Permian basin that spans West Texas and southeastern New Mexico is expected to rise 35% to 5.4 million barrels of per day (bbl/d) by 2023, requiring even more water supply and disposal, said analysts.
In two New Mexico counties, firms produced 505 million barrels of oil from 2016-2018, and five times that in water, a Reuters analysis of state production data showed.
"You can’t bring production online until you have a solution for the water," said James Lee of Riveron Consulting.
There are 5,500 Permian wells to be drilled, requiring 2.75 billion barrels, or 115 billion gallons to complete, a Morgan Stanley report estimated.
While much of the water in the Permian is transported for high fees by trucks, which also exacerbate traffic congestion around production sites, midstream companies build and use pipelines which energy producers pay to utilize.
Christensen's company, On Point Oilfield Holdings LLC, owns a water disposal network that this year will take up to 375,000 bbl/d of wastewater. Some of that water will be recycled, but millions of gallons will eventually be sunk deep underground in West Texas.
"Water was always an afterthought for producers," said Christensen, who stretches him arm and draws a 360-degree arc to show the locations of lines carrying oilfield bilge to the site. "Now it's a business plan in itself."
Raising cash at a time when the industry is under pressure to restrain spending and improve returns has also fueled the trend, prompting some producers to cash in on their water projects.
In December, Hess Corp. (NYSE: HES) got $225 million for some of its water handling assets from a joint venture with Global Infrastructure Partners, while Halcón Resources Corp. (NYSE: HK) received $200 million in cash and up to another $125 million over five years from WaterBridge Resources LLC for its water infrastructure assets.
"When capital discipline is higher on the priority list, it's very attractive to monetize" water management assets, said Benjamin Shattuck, an analyst at consultancy Wood Mackenzie.
$14 Billion Water Bill And Rising
The average frack job now consumes 13 million gallons (49 million liters), up 40% in two years, according to a Reuters analysis of Permian producers' data reported to FracFocus.org.
That translates to water bills in the Permian Basin soaring 17% this year to $14 billion, according to consultancy IHS Markit, more than three times what North American producers spent last year on sand to frack their wells.
That lure is attracting investors who once viewed oil and gas as the prize.
TPG last week agreed to pay $930 million for a majority stake in Goodnight Midstream's water pipeline network, which consists of more than 420 miles (670 km) in three U.S. shale basins.
Other private equity firms, including ARM Energy Holdings LLC and Ares Management, have committed $4 billion to buy or start water management firms over the last four years, according to researcher Global Water Intelligence.
Water management at this scale is in its infancy compared with the business of moving oil and gas by pipeline, but more private equity firms are looking for investments, said Jim Summers, CEO of Houston-based water company H20 Midstream.
A Fraction Of The Cost
Acquiring and disposing of water costs between 50 cents and $4 per barrel, depending on whether it moves by pipelines or more expensive trucks, and can be a steep cost for producers when oil dips as low as $40 a barrel in the Permian, as it did late last year.
The cost has inspired some companies to shift gears.
ARM Energy formed a company, Salt Creek Midstream LLC, to gather oil and gas and was quickly pulled into offering water management, said CEO Zach Lee. By hiring Salt Creek, shale producer Lilis Energy Inc. (AMEX: LLEX) expects its water disposal costs to fall to 48.5 cents per barrel from $2.
Not all producers, however, want to let go of their water management.
Diamondback Energy Inc. (NASDAQ: FANG) is considering selling shares in a subsidiary that manages its water, oil and gas transport, but would retain control of the subsidiary.
"If I have to wait on somebody to get a pipeline built or a saltwater disposal system put in place, that is going to be a bad day. I need to be in control of that, not the other way around," said Diamondback's CEO Travis Stice.
Parsley Energy Inc. (NYSE: PE) spent $150 million to develop a water system that can handle up to 1 million bbl/d, which helped cut its wastewater costs by two-thirds, to 50 cents per barrel, CEO Matt Gallagher said.
"If you want to be a good shale operator you have to be excellent at water sourcing and management," said Gallagher. Otherwise, "the whole operation could come to a screeching halt," he said.
Baker Hughes reported the oil rig count fell to 663 this week, the lowest since April 2017.
Drillers cut five oil rigs in the week to Nov. 1, bringing down the total count to 691, the lowest since April 2017, Baker Hughes said in its weekly report.
Drillers cut 10 oil rigs in the week to Nov. 15, bringing down the total count to 674, the lowest since April 2017, energy services firm Baker Hughes Co. said in its weekly report.