The outlook for 2020 US E&P upstream spending has faltered over the past four to six weeks.
Six months ago, consensus 2020 E&P capex expectations were flat year-over-year. Now consensus is coming down and triangulating on a 10-15% contraction next year.
While the water management sector is far better insulated than services closer to the drillbit, upstream spending matters for the water midstream outlook. The short cycle nature of US tight oil wells means E&P activity changes can translate rather quickly into production rate changes – both for hydrocarbon and water production.
This year, we estimate that US E&P capex contracted about 5%. The efficiencies that operators have squeezed out of their supply chains have driven production growth despite the 2019 spending cut. However, the rate of growth is decreasing, and it is decreasing faster than the E&P spending cuts. Specifically, US oil production growth (while still positive) is on pace to shrink 25% in 2019 vs. 2018’s record high production gains.
After several years where US oil production has grown annually by more than 1mmpbd, largely driven by the Permian, 2020 growth may come in closer to 0.5mmbpd. The EIA is still projecting 2020 growth of 0.9mmbpd, but we don’t believe they’ve taken into account recent E&P budget cut signals. In a lower production growth scenario for the early-2020s with potentially fewer wells coming onstream, what happens to the 2021-2023 projections for a tidal wave of incremental produced water?
Food for thought:
- Scenario analysis becomes imperative when discussing water volume projections in this environment.
- If frac activity declines as spending falls, will demand for produced water reuse in fracs decline cyclically or will it still rise because of structural uplift from more E&Ps adopting recycling?
- If reuse for frac water falls, this could create pockets where disposal requirements surge, requiring flexibility from water midstream providers.
- The contraction could result in a lower velocity produced water stream on average (i.e. less flowback, more legacy production in the mix).
- Will the drilling mix shift favoring higher water cut plays (like the Delaware Basin) help to offset the top line drilling activity decline when it comes to future water volumes?
- How is the risk of slower volume growth being worked into contracts and commercial agreements, which are still evolving in third-party water midstream?
- Will the contraction be more regional specific, with some area (again like the Delaware) still experiencing a tidal wave in the early-2020s while others (maybe the STACK/SCOOP) feel the brunt of the E&P spending reduction on PW volumes?
- How can operators provide their water infrastructure providers with assurances that they will drill when and where they say they will amid volatile upstream macro conditions?
- Deal fever likely continues as water midstream evolves and the sense of urgency in certain regions should remain in tact, but a projection re-calibration may be coming.
- We submit this evolving water midstream risk as upstream spending cools off (and how the risk is managed) is something to listen closely for as 2020 water conference season begins.
Depending on market conditions by May 2020, we expect this could be a topic of high interest in the expert discussion you’ll experience at our May 2020 conference.
Speaking of our conference, we are also excited today to announce the first two Gold Level sponsor signups for the event:
- Special thanks to Mark Patton and the team at Hydrozonix for signing up early on in support this important industry gathering. We applaud Hydrozonix for their commitment to innovation in the oilfield water value chain.
- Kirkland & Ellis is now a “three-peat” sponsor for our events, having sponsored our first two this year, and now signing on as a Gold Sponsor in support of next year’s event. Thanks to the Kirkland team for the expertise they serve the water midstream sector with (this expertise was on full display as the firm’s Chad Smith spoke at our last event).
And now, here is the oilfield water business news digest for the past seven days…
News Digest
Why Is ESG Trending In O&G? Follow The Money, But Remember HSE & Societal Value Predate The Trend In O&G [Free Trial Available]
ESG is hot. Scorching hot. In a series of charts and analysis, the Infill Thinking team quantified the sentiment surge, explained why, and discussed how it is impacting RFQs and business development. There is a huge opportunity for oilfield water industry to play into this trend....
The Current State of the Water Midstream Industry [Q&A With H2O Midstream's Stephen McNair]
There are three big obstacles to the commoditization of water: fungibility, distance/geography, and operators’ willingness to interconnect systems...
Water Came Up As CNN Sat With Scott Sheffield For A Permian Deep Dive [4 Minute Video]
For years, Midland, Texas, was a quiet corner of the oil patch, in the middle of the desert, hours away from the state's population centers. It knew oil booms and oil busts, but little changed year-to-year....
Permian Operator Pieces Together A Produced Water Deal Puzzle. This One Is Complicated By E&P M&A… [Free Trial Available]
As the old saying goes, a stitch in time saves nine. So Parsley is in a position of wanting to execute on their water process as soon as possible but also needing to maximize the value of their water asset by integrating Jagged Peak’s H2O infrastructure...
Historical Data Confirms Recent Increase in West Texas Earthquakes
Maps depicting the locations of earthquakes near Pecos in West Texas from 2009 to 2017, based on a new analysis led by the University of Texas Jackson School of Geosciences. Most were very small in magnitude...
Blue Mountain Midstream Is Growing While Discussing Strategic Alternatives With TPH
An update last week highlighted the company's continued engagement with Tudor, Pickering, Holt & Co. to review strategic alternatives to unlock unrealized value..
WATER TALENT POOL: B3 Insight Hiring
B3 Insights is growing and seeking dynamic new team members in Denver and Houston (Texas)...
WATER TALENT POOL: Blackbuck Resources Hires CFO
Blackbuck Resources announced the hire of Jamie Liang as CFO....
Energent Quantifies Eagle Ford Frac Water Demand
Not only is frac water usage increasing as lateral lengths get longer, but the trend has been getting steeper since 2014.
WhiteWater Midstream Announces Major Expansion of the Agua Blanca System
Joint venture partners WhiteWater Midstream, alongside Agua Blanca lead investor First Infrastructure Capital, last week announced final investment decision to proceed with the expansion of the Delaware Basin Agua Blanca System. This is a week old, but our last newsletter was scheduled to ship prior to this news, so including it here...
Gravity To Acquire On Point, A Permian Basin Focused Water Midstream Gathering And Disposal Company
Gravity, a leading water and energy infrastructure company backed by affiliates of Clearlake Capital Group, last week announced it has signed a definitive agreement to acquire On Point Oilfield Holdings, LLC from White Deer Energy. This is a week old, but our last newsletter was scheduled to ship prior to this news, so including it here...
Fort Stockton City Council Met Yesterday To Consider Termination, Renegotiation Of WaterBridge Contract
While the meeting notes aren't online yet and the local papers haven't yet covered the result, the city council agenda for yesterday's meeting included: "3. Discuss/Act upon Termination of Water Purchase Agreement between the City of Fort Stockton & WaterBridge Resources LLC; Adopted July 18, 2017..."
Background on WaterBridge's Fort Stockton Deal [July 2017]
WaterBridge in 2017 entered into a long-term public-private partnership with the City of Fort Stockton, Texas to develop and purchase the City’s water resources for commercial oil and gas use...
Trican Sells Canadian Water Management Business For $17.6 Million
Last week, Trican Well Service announced a definitive agreement with an investor group led by Green Energy Services Inc for the sale of all material assets and business of Fraction Energy Services. Fraction...
Produced Water Leaks Into Lake Texoma
Godfrey Oil Properties reported to the Oklahoma Corporation Commission that it lost about 4,200 gallons of crude oil and 1,680 gallons of produced water...
Drilling Boom Adds Stress To U.S. Western Water Supplies
About 60% of federal oil and gas drilling leases offered since 2017 are located in areas that are at risk of shortages and droughts, according to a report released on Tuesday...
Wyoming Eyes Downgrade Of Oilfield Creeks' Protection
Environmental regulators are surveying two polluted creeks near the Moneta Divide oil and gas field to assess whether their protective classifications are appropriate or should be modified, possibly reducing water-quality standards...
University of Wyoming CEPWM Awarded $1M For Drilling Wastewater Research
Wyoming ranks fifth nationally in volume of produced water. Produced water — or the water that surfaces during hydraulic fracturing and well treatment — is often chock-full of salts, metals and other chemicals....
Effluent Water Reuse In Fracing [CNN Business Article]
America's oil industry faces a number of challenges, including low oil prices, the rise of electric vehicles and proposals to limit fracking. But one of its biggest problems: The industry is running out of water...
Brine Mitigation For The Mining And Food And Beverage Industries
Combining a reverse osmosis system with an integrated salt precipitation unit can create a solution for industrial wastewater and brackish water...
Hydration Is Vital To The Life Of A Frac Site
“This is a very thirsty operation,” Justin Welker said during a recent work break at the Ziolkowski Pad in Imperial, Allegheny County....
Study Shows Water Table Benefits From Solar & Wind Power
As if the case for renewable energy needs any more making, along comes a new study showing that wind and solar power are good for the water table and they could help farmers survive periods of drought, too....
DOE Releases Request for Information/Sources Sought for Nationwide Low-Level and Mixed Low-Level Waste Treatment Services Procurement
The U.S. Department of Energy (DOE) today issued a Request for Information (RFI)/Sources Sought for the Nationwide Low-Level and Mixed Low-Level Waste Treatment Services.
Houston Chronicle Argues That Bandwith Will Follow Water As Next Big Permian Bottleneck
"At first, there were not enough pipelines to move oil and natural gas to market. Then, it was a lack of water for drilling and hydraulic fracturing operations. And then it was an insufficient number of disposal sites to handle all the wastewater from the oil fields. Now, bandwidth — the capacity to transmit data over the internet — is poised to become the next big bottleneck in the Permian Basin, the nation’s largest and busiest oil field...."
Water Goes To Washington [TX Alliance Coverage]
Alliance Chairman Jim Beck (left to right), John Durand, Blythe Lyons and Alliance EVP Karr Ingham traveled to Washington DC to present the newly published Produced Water White Paper to the DOE, EPA and Congressional staffers...
Texas Industry Pushes For Water Rule Changes [TX Alliance Coverage]
An organisation representing the oil and gas industry in Texas is pushing US federal regulators to make changes to rules regulating produced water ahead of the presidential election...
Produced Water In Texas: How To Grow Energy Sustainably [More TX Alliance Coverage]
In recent years, the debate over produced water was whether it is “an asset or a waste.” Currently, it looks like it isn’t a choice, but possibly both. As Texas once lead our new shale era production revolution, it now once again has a chance to lead with produced water....
EPA Repeals WOTUS Rule [Analysis]
Once effective, the repeal rule will restore the regulatory definitions and guidance that were used to make jurisdictional determinations prior to the 2015 WOTUS rule.
WOTUS Repeal Challenged
Good summary article recapping some of the litigation popping up in the wake of the repeal, including the lawsuit filed by the New Mexico Cattle Growers Association...
Texans Say Climate Change Is Happening, But It’s A Highly Partisan Issue, UT/TT Poll Finds
Two-thirds of Texas registered voters believe climate change is happening, but their urgency about it varies considerably, according to the latest University of Texas/Texas Tribune Poll....
And Finally In Other News Beyond The Oilpatch... Did The 9 Mormons Killed By The Cartel In Mexico Recently Die Because Of A Battle Over Water?
“The farming collective is called El Barzón. Its dispute with the Mormon clan over local aquifers goes back some six decades, and had escalated dramatically over the last few years. The farmers accuse the family of syphoning “excessive” amounts of water from rivers and vital aquifers for the commercial cultivation of maguey, nopal, and walnut trees, leaving nearby communities without enough water for subsistence farming. In April of 2018, more than 100 members of El Barzón invaded the LeBaron family ranch at La Mora to protest the diminished water table...”
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