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Permian Water Shortages Cited as Material Risk to E&P Profits, Output

Permian Basin operators have been raising more rigs and ramping up completions of late, but persistent water issues could be a material risk to future profitability and production, according to Wood Mackenzie.

The new study by the consulting firm examined a “growing water situation” in the Permian and modeled the combined impact that rising water volumes and increasing water costs could have on future breakevens and oil production growth.

"As operator activity continues to pick up in the Permian, we expect over 2 million b/d of oil supply growth over the next five years,” said principal analyst Ryan Duman with the Lower 48 upstream team. "While attainable, the list of operational risks grows too and the least appreciated of these is produced water.

“The combination of rising volumes and higher disposal costs threaten to shift cost curves and pose a growing risk to oil production growth in the Permian."

Wood Mackenzie researchers modeled various scenarios of rising water cuts and growing water management costs. They found in an “aggressive” future cost scenario, with breakeven costs in the Midland and Delaware sub-plays possibly increasing by $3.00-6.00/bbl. Those higher costs could curb the growth of future Permian oil supply by 400,000 b/d by 2025.

"Water risks to date have largely been described as a cost issue, but as projects continue to build scale, the risks become more serious," said Duman. "They could impact the ability to actually carry out operations. Investors and project partners should challenge operators on how water is being managed."

Water demand in the past few years has continued to increase as operators improve completion efficacy. Permian wells now use about twice as much water as they did in 2015. For example, wells in the Midland’s Wolfcamp formation now use close to 17 million gallons/well.

“Record drilling activity is compounded by more water used in completions and water cuts from the targeted formations rising quickly in older horizontal wells,” researchers noted. “For the Wolfcamp formation in the Delaware Basin, water cuts have increased from an already high base of approximately 70-80% in the first four years of production. An initial water-to-oil ratio of roughly 2:1 can increase to nearly 5:1 by year four and eventually reach 7:1.”

In the Delaware sub-basin, water-to-oil ratios are often twice as high as in the Midland, and in some cases it is as high as 10:1, according to Wood Mackenzie.

“Operators are simply unable to cheaply reinject all those volumes and water handling is expensive, ranging between 50 cents-3.00/bbl, including sourcing, transport, disposal and recycling.” Trucking availability and the proximity of a well or pad to existing saltwater disposal wells “are the biggest influencing factors on cost,” said researchers.

"Unlike some of the other subsurface constraints and risks facing the Permian, there are ways operators can mitigate risks from produced water," Duman said. "One of the best opportunities for operators to reduce water costs is by investing in pipeline infrastructure, limiting the amount of trucking and collaborating with offset operators."

For example, it may cost a producer $2.50/barrel of water to truck in water versus 30 cents/barrel to move it by pipe.

“Relying heavily on trucking can result in an incremental $1.00-1.25/barrel, which will only increase in the coming years as trucking regulations become stricter, pads become more remote, and roads become more congested,” Wood Mackenzie noted.

Water recycling is another way to reduce disposal costs and limit water sourcing constraints. Potential savings are estimated at $1.00-2.50/barrel of water on total lease operating expenses and in some instances more than $250,000 on development and completion costs because of lowered sourcing costs.

"Recycling will become more common as projects grow in scale and treatment costs fall with increased throughput volumes and fixed overhead," noted Duman. "In time we expect to see the proportion of recycled water volumes continue to increase as more operators understand how to best manage chemistry and use the volumes in new, offset completions."

He expects producers to invest in more water management solutions.

“If budgets stay relatively flat the next few years, watch drilling capital be diverted to water-related investments. Just as the level of drilling intensity in the Permian breaks basin records, so should the scale of water management solutions."

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