Tightening of wastewater regulations has become a nuisance for shale drillers

A new report from Rystad Energy has revealed that dealing with water produced from the US shale oil industry is increasingly controversial for operators. Although total quantities produced are expected to reach new record levels in the coming years, the treated water is expected to be relatively less than in the past, despite water disposal practices increasing the seismic activity of oil fields, with doubling Earthquakes almost in West Texas alone in 2021.

The future growth in shale activity in the United States is associated with an inevitable increase in productive water, as hydraulic fracturing to produce hydrocarbons leads to greater amounts of water. Therefore, as higher oil prices drive shale activity in the major basins, water levels produced in US onshore oil fields are set to return to an all-time high of 22.9 billion barrels in 2022, an increase of 8% from 2021. It is New records are expected from 2023 at 23 billion barrels, and a further increase to 23.8 billion barrels in 2026. Hydraulic fracturing activity alone will rise by 7% in 2022.

When the water is treated, saline water disposal (SWD) through underground injection which has been associated with increased seismic activity is avoided. Looking at the absolute numbers, the amount of treated water has risen to 1.9 billion barrels in 2021, up from 1.6 billion barrels in 2020, and is set to fluctuate between 2 and 2.2 billion barrels through 2026. However, what is the expected rise in absolute volume For the treated water does not show is the amount of untreated remaining water, which is in line with reaching an all-time high of 20.9 billion barrels in 2022 and then steadily growing to 21.6 billion barrels in 2026.

In percentage terms, the treated volumes reached their highest level in 2018 and 2019, accounting for 9.4% and 9.6% of the total volumes of water produced, respectively. Rystad Energy’s forecast to 2026 shows that these levels will not be achieved again. In 2020, the proportion of treated water decreased to 7.6%. In 2021, it reached 8.9%, and between 2022 and 2026 it is set to fluctuate between 8.7% and 9.2%.

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The trend is cause for concern, particularly in light of the surge in earthquake activity in West Texas revealed by Rystad Energy’s analysis of seismic data. Earthquakes in West Texas with magnitudes greater than 2.0 nearly doubled in 2021, from 1110 to 1929. As a result of pressure on the E&Ps sector to establish greater responsibility for ESG, the need for water treatment and recycling is more evident than ever.

Besides the low availability of fresh water in some shale basins in the United States, there is much research for an alternative to using fresh water in the fracking process.

“The oilfield water market is highly primed for 2022. M&A activity, regulatory responses to induced earthquakes, and increased volumes of water produced across the lower 48 United States all set the stage in 2021 for what will certainly be the most dynamic market conditions,” says Ryan Hassler, Senior Analyst at Rystad Energy “in the growing oilfield sector”.

Despite the hype of activity and investment in the water recycling sector across much of the Permian and DJ Basin, disposal volumes are still expected to increase year on year until 2026. Disposal volumes are expected to rise from 11.5 billion barrels in 2021. to 13.4 billion barrels by 2026. In most cases, potable water storage capacity remains plentiful, with almost no bottlenecks at the basin level. However, local restrictions are evident in specific areas such as Northern Colperson County or Howard and Midland counties.

Clusters of SWD wells of significant size and pressure use are located in these areas, and thus experience an exponential rise in seismic activity. In 2021, seismic activity of magnitude 2.0 or greater increased 74% in West Texas compared to 2020 levels, with Colperson County alone experiencing an 112% increase. Martin, Howard, and Midland counties have also noted similar increases in seismic activity.

In response to this high disposal activity, the Texas Railroad Commission (RRC) has imposed unprecedented restrictions on solid waste disposal sites in recent months. The first response came in September and October 2021, when the Rapid Response Center (RRC) identified two seismic response areas (SRAs), the Gardendale SRA and Northern Culberson-Reeves SRA. These areas have seen reductions in DSA capacity, stricter reporting guidelines, and a moratorium on all new DSA permits for at least one year.

Redoubling efforts, the Resettlement Center recently ordered the suspension of all well disposal permits to inject water produced into deep injection wells below the top of the thatched formation, particularly the Ellenburger Formation in Gardendale SRA. This procedure applies to 33 deep disposal wells operated by 14 operators, with a total allowable disposal capacity of approximately one million barrels. The order came into effect as of December 31, 2021. Of the 33 wells, 25 are currently active, 2 are inactive and 6 have been allowed but are awaiting drilling services. Of the 14 operators, ConocoPhillips faces the largest loss in disposal capacity, with a total of 186,000 barrels closed, followed by Rattler Midstream at 150,000 barrels and Wasser and Fasken Oil and Ranch operations each with a loss of 120,000 barrels of permitted disposal capacity. SWD operators in Northern Culberson-Reeves SRA must wait patiently to understand the full regulatory response that may befall them after witnessing the fate of their Gardendale SRA peers.

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In addition to these two SRAs, the RRC has identified three additional seismic investigation areas (SIRs), which it considers to be at high risk of being upgraded to SRA status, leading to effective capacity reductions, the suspension of all new permits, and potential suspension such as at Gardendale. Finally, Texas RRC cut the capacity of SWD within SRAs by half under current guidelines. Operators and sewer networks including ConocoPhillips, Rattler Midstream, NGL Energy Partners, Coterra Energy and Chevron will lose more than 50% of their disposal capacity at major land area sites.

Although the annual growth in the recycled water market is expected to rise, the water produced is expected to grow at roughly the same pace, which means that disposal remains an essential component of the process. Given the current regulatory environment and the potential for more restrictive measures to be enacted, the cost of disposing of a barrel of water in the Permian Basin is likely to increase. Out-of-treatment options exist, such as extending pipes for longer distances to underutilized SWD wells in adjacent spaces or even further distances outside the basin to the central platform where there is minimal seismic risk. Of course, the cost dictates the adoption of such solutions.

The best way to hedge against regulation and cost is to invest now in the recycling network needed to handle future water barrels. In the latest round of sustainability reports, many operators were more transparent about their water stewardship, reporting standardized metrics for the investment community to analyze. In 2022, there will likely be more frameworks created to calculate ESG scores and benchmark operators on their water management practices, just as emissions. The investment needs to be made today to move forward on the curve and stand well for 2022.

by Rystad Energy

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