"Old black water, keep on rollin'... won't you keep on shinin' on me?" While probably not exactly what the Doobie Brothers had in mind while writing their iconic song Black Water, produced water—and the operational hurdles it creates—has many US exploration and production (E&P) companies expressing the same sentiment, as they continue to welcome that rollin' black water, and the issues that come with it, as a byproduct of the success they have experienced in developing unconventional oil and gas resources, predominantly shale plays, in the US.
Many E&P companies are facing a seemingly endless volume of produced water—typically a combination of formation water and fracturing water—in their unconventional resource operations. In the early days of such operations, E&P companies were focused on acquiring and holding acreage, optimizing drilling and completion operations, and securing takeaway capacity for produced hydrocarbons—with the flood of water that would eventually be produced from these developments left as little more than an afterthought.
As time passed, the continuous flow of produced water served as an opportunity for specialized midstream and services companies, along with their investors, to develop standalone businesses to help these E&P firms. Soon, massive amounts of private equity capital looking for infrastructure investments in the energy sector—recently estimated at $34 billion per year—helped spur the creation of integrated water businesses aimed at stemming the tide of produced water that continued to roll.
This article discusses the evolution of such water businesses, typical commercial structures that have been used therein, and issues and areas of consideration when undertaking transactions involving such businesses.
It should be noted that this article focuses on the gathering and disposal of produced water—it does not address the recycling of produced water, or sourcing of fracturing water, which are equally important areas of focus for E&P and midstream water companies.
The Produced Water Problem
While relatively moderate volumes of water have always been involved in conventional well development and production, the industry's somewhat recent ability to develop unconventional resources, through horizontal drilling and multistage hydraulic fracturing, has caused a significant increase in the amount of produced water for which E&P companies have been forced to find suitable offtake solutions.
Contrary to popular belief, in general, conventional wells generate greater amounts of produced water than unconventional wells comparatively speaking—in the Permian basin, for example, conventional wells produce 13 times more water than oil, while unconventional wells produce just 3 to 5 times more water than oil.
Despite this disparity, produced water from conventional operations has historically been reinjected into producing reservoirs to aid in enhanced oil recovery operations. In contrast, produced water resulting from unconventional operations cannot be reinjected directly into the low-permeability formations from which it came; instead, it must either be treated and recycled or injected into separate disposal wells drilled specifically for that purpose.
The prolific Permian Basin serves as a good example of how produced water considerations can potentially affect almost every aspect of development and production operations.
Larger well designs coupled with the evolution of hydraulic fracturing techniques contribute to ever-growing projections; as of January 2019, the basin's existing 5,500 wells were projected to require 2.75 billion bbl of water to complete, with wells expected to produce more than 15 million B/D of produced water.