Unconventional oil and gas exploration and production involves vast amounts of water, elevating effective water management to a key strategic concern.

In many parts of the United States, business once took water for granted, regarding it as an essentially inexhaustible resource. Today, though, water is increasingly recognized as a scarce and precious asset that is an essential component of enterprise sustainability and financial success. Whether an integral part of the manufacturing operation or a less visible component of the corporate value chain, water must be measured and managed, just like any other key production input or byproduct.

Water is especially vital in oil exploration and production (E&P) operations. Once reliant on conventional vertical drilling and completion techniques, E&P companies have moved to unconventional drilling and completion processes—specifically, horizontal drilling and hydraulic fracturing—to access previously inaccessible resources. Water is a significant part of the unconventional production processes, and managing its use and disposal throughout the value chain is complex (see image below). Specific water-management strategies vary not just among plays but by individual well, depending on where it is in the production cycle (see sidebar “The water management value chain” at the end of this article).

For E&P operators in North America, water management is not only about managing direct line-item costs but about mitigating risk. Operators must assess the operational risk and impacts on capital expenditures (CapEx) and operating expenses (OpEx) as well as manage challenges from increased regulatory oversight and public scrutiny. Operating companies that effectively prioritize water management can better mitigate risk, improve operational excellence, and protect millions of dollars in potential earnings.

Water’s role in E&P operations

The majority of new wells drilled and completed onshore in the United States use horizontal drilling and water-based hydraulic fracturing programs, which are far more water-intensive and pose very different management challenges than conventional E&P. The hydraulic fracturing process calls for large volumes of water for use in a fluid that is injected under pressure to create fractures that enable the flow of oil and gas. The fluid also contains small sand or ceramic particles, called proppant, that lodge within the fractures to keep the fracture sites open once the hydraulic pressure is released and the fluid flows out of the well bore. Today, hydraulic fracturing is a common practice both in conventional E&P, where it is used to extend the useful life of old wells, and in unconventional E&P. A typical hydraulic fracturing program involving a conventional well requires approximately 25,000 barrels of water. An unconventional well can require up to 250,000 barrels of fluid during the completion process and generate large volumes of wastewater.

That wastewater is categorized as either “flowback fluid” or “produced fluid”. “Flowback fluid” is the waste that returns up the well bore during the initial stages of fracturing and production. The volume of flowback fluid is high in the first few weeks and months of operation, when as much as 40% of the initial fracture fluid volume can make its way back up the well bore. “Produced fluid” is the wastewater generated once the well begins producing hydrocarbons in volume. It dwindles to a trickle over the remaining life of the well (see figure below). For example, a typical well in the Marcellus shale play in Pennsylvania may generate 1,200 to 1,500 barrels per day of flowback fluid for a few weeks after the drilling and completion process and then decline to only seven barrels per day of produced fluid for the duration of the well’s life.

Handling and disposal of oilfield wastewater is not a new issue. United States production from conventional E&P historically generates three to nine barrels of oilfield wastewater for each barrel of hydrocarbon, according to the Argonne National Laboratory. Conventional E&P has developed a well-established set of management practices and a mature market of products and services that address the transportation, treatment, and disposal needs for this wastewater (see figure below). But the much larger water volumes involved in hydraulic fracturing, coupled with the rapid growth of development activity for unconventional oil and gas plays in the United States, creates a set of new challenges for operators and a growing marketing opportunity for water-management companies and oilfield service providers.

For E&P operators in North America, water management is not only about managing direct line-item costs but about mitigating risk. Operators must assess the operational risk and impacts on capital expenditures (CapEx) and operating expenses (OpEx) as well as manage challenges from increased regulatory oversight and public scrutiny. Operating companies that effectively prioritize water management can better mitigate risk, improve operational excellence, and protect millions of dollars in potential earnings.

Managing water for a sustainable advantage

The value of an effective water-management strategy more than offsets the relatively insignificant costs of water acquisition and wastewater transport, storage, treatment, and disposal. Although those costs can add up to hundreds of thousands of dollars over the life of a well, the cost of lost business is much higher. And the danger of losing business rises sharply when an operator fails to make water management a strategic priority. Without effective water management, operators risk lower production rates, production halts, regulatory penalties, and a breach in stakeholder faith. Wells can be damaged. Drilling and completion programs can be stalled or compromised. And millions of dollars in potential earnings can be washed away.

In contrast, business leaders who regard water as a key part of their operations can create true business advantage. This is true both for oil and gas companies and for businesses in industries such as chemicals and mill products. By managing water in an integrated, cross-enterprise way, executives can improve efficiencies, reduce production and operational costs, and enhance credibility with local stakeholders such as community members and regulatory bodies. Taking the time to understand and build effective water-management strategies, deploy demonstrated best practices, and invest in innovative technical solutions can help companies in many industries convert water-management challenges into opportunities for business success.

Balancing cost against regional drivers

The increasing use of hydraulic fracturing has drawn many new stakeholders into local and regional water-management discussions and increased scrutiny for operators. Regulators, shareholders, and community members carefully track and sometimes object to the industry’s water consumption and environmental practices. The American Petroleum Institute highlights alternative best practices that require less freshwater and utilize water-recycling technologies. These technologies and tactics are often costly, however, and operators must use them effectively and efficiently to remain financially viable.

Water acquisition and wastewater disposal constraints can create tremendous economic and management pressures that vary by geography, operational conditions, and phase of play development, (see sidebar “Water management economics for unconventional plays” at the end of this article). For example, in water-stressed areas such as the Permian Basin in West Texas, the biggest challenge is gaining access to the volumes of water required to support production. In the Marcellus Shale region of the northeastern United States, geological conditions and regulatory oversight constrain the availability of underground injection wells for wastewater disposal. Thus, water-management strategies must be developed locally, with a sensitivity both to budget constraints and to regional drivers such as regulatory culture, the availability of water resources, and the capacity for wastewater disposal.

Accounting issues also create management challenges. Under generally accepted accounting principles, all expenses generated before a well begins producing, such as the costs of hydraulic fracturing and flowback fluid management, are considered CapEx. Costs incurred after oil or gas is flowing, including the costs of handling produced fluid, are attributed to OpEx. In areas where water is scarce or disposal is costly, water-management costs are high and growing; they account for 10% of the CapEx budget and as much as 50% of OpEx. Operators must balance the cost of drilling and completing a well with the effectiveness of their production operations to assess whether the well generates attractive returns.

Regulatory oversight and public scrutiny are another challenge for many E&P operators. Oil and gas activity on private land is regulated at the state level, not by federal agencies. In some states, river basin commissions and regional water-management boards are responsible for issuing water withdrawal permits. In other areas, representatives from the public sector and community groups work in consortiums to ensure an equitable allocation of water among E&P operators and downstream residents and businesses.

New operational strategies

To help reduce the costs of water management, increase efficiencies, and maintain a social license to operate in communities, leading operators in the United States are exploring a variety of new options and approaches. Through these efforts operators are gaining the know-how to manage water resources as carefully as any other corporate asset. The water-management landscape is changing on a number of fronts:

• Increasing reuse of oilfield wastewater.Unconventional energy production generates large volumes of flowback fluid. Recognizing this water as an asset creates opportunities to reduce freshwater consumption, cut costs, and increase sustainability. Physical and chemical characteristics of flowback and produced fluid vary, and the level of treatment (if any) applied to recycled wastewater is a unique operational decision dictated by the completion-engineering program.

• Replacing freshwater with brackish water.Some operators, especially in water-stressed regions, are beginning to investigate the use of brackish water to offset freshwater use in hydraulic fracturing programs. Demand for brackish water is certain to escalate as water-conservation boards impose increasing restrictions on freshwater withdrawals and operators and service providers increase the tolerance levels of the chemical additives used to make fracturing fluids and drill fluids.
• Reducing disposal volumes.Most flowback and produced fluid generated from unconventional activity is disposed of via wastewater disposal wells. Where readily available, disposal wells are the most economically viable option for wastewater management. Regulatory or geological considerations, though, sometimes require operators to seek other means of disposal. For example, in Pennsylvania, where geological factors limit the drilling of water disposal wells, operators reuse more than 85% of wastewater rather than truck it to disposal wells in other states. Regulators in Texas, on the other hand, have explored the addition of a per-barrel disposal fee to create an incentive to reuse and reduce the volume of disposed fluid. Whatever the nature of the constraint, the optimal strategy to address geological and regulatory influences on disposal availability is to reduce wastewater volumes.
• Treating water locally.Many operators have adopted mobile water-treatment technologies, which can increase the flexibility and mobility of wastewater recycling options at drilling sites. Additionally, semimobile modular systems are gaining popularity. These systems offer economies of scale with increased process efficiency and simplified water transportation logistics. Careful analysis of water demand, wastewater production, and logistical considerations enables geographical optimization that can reduce transportation costs and increase the reuse of scarce water resources within a play.
• Vendors supporting multiple components of the value chain.The landscape of products and services addressing the need for oilfield wastewater management is, today, highly diverse and heavily disaggregated. A few large oilfield service providers offer components of water management that complement their existing pressure pumping and hydraulic fracturing services. Most of the market is comprised of many smaller companies that provide individual services within the water-management value chain. Many E&P operators prefer to work with vendors that bundle offerings across the value chain, driving the emergence of a new class of oilfield water-management company with products, services, and capabilities tailored to the unconventionals market.
• Improving transportation options. Water transportation by truck is one of the most costly components of the water-management value chain. Each well may require thousands of truckloads of water and wastewater. Communities are often eager to keep these vehicles from traveling on local roads to reduce the degradation to local infrastructure and the creation of dust, noise, and congestion. Increased reuse of oilfield wastewater and mobile on-site treatment can help operators reduce the need to transport water and wastewater. In addition, operators are experimenting with networks of pipes that can transport fluids to centralized locations for treatment. High-density polyethylene pipes are an option for this procedure, as are lay-flat hoses (like those used by firefighters) that can be quickly compressed and efficiently transported and deployed.
• Transferring knowledge. In North America, operators have gained extensive experience in the exploration and production of unconventional energy sources. As the industry begins to pursue similar opportunities in other regions of the world, operators are drawing on lessons learned in these early plays. Shared expertise can help inform decision making on issues such as sourcing water, dealing with stakeholder concerns, and creating the optimum infrastructure for transporting, treating, and disposing of water. Some operators are also turning to industry analysts and consultants to collect and share necessary expertise.

New growth opportunities in water management

Aiming to reduce operational risk, capital and operating costs and stakeholder concerns, operators are increasing the reuse of oilfield wastewater—in particular, flowback fluid—within their operations. This operational shift has created an evolution of water-management strategies with significant variability among operators and across plays. The dynamic nature of the optimization challenge has also created growth in many components of the water-management value chain.

No single water-management approach makes sense for all operators or all plays. Even two operators within the same play, or a single operator working across multiple plays, may employ different solutions. At this stage of the unconventional E&P industry’s development, though, many operators lack a holistic view of the water-management challenges in their operations. Others have not yet developed the water-management expertise to accurately assess their challenges, and they may need to find partners that can help them select the optimal strategies, technologies, and solutions for their unique position.

A fragmented, localized water-management value chain also adds complexity. Unlike more traditional oilfield services, where integrated oilfield service companies compete to handle end-to-end components of a process, operators in the unconventional energy market usually cannot call on a single vendor to manage all aspects of oilfield wastewater management. In these markets, multiple local specialists handle discrete stages of the water-management process, from trucking to treatment to disposal. Few of these companies are integrated, placing most economies of scale out of reach. Valuable opportunities are waiting for vendors that can deliver a full suite of services to operators in the unconventionals space.

The water management value chain

Water source. Water for hydraulic fracturing operations is typically sourced from surface water or freshwater aquifers. Increasingly, however, operators are turning to brackish or wastewater sources to reduce local stress and minimize the risk of supply-chain interruptions for their operation.

Water transportation (transfer and hauling). The two most common methods for water transportation in hydraulic fracturing operations are water hauling and water transfer. The industry refers to the transportation of water via pipe and pump as “water transfer.” “Water hauling” involves moving water via 130-barrel tanker trucks. Water transfer is the more economical option to move water as far as five miles. Tanker trucks are more expensive but provide increased range and operational flexibility.

Water storage. Earthen impoundments, commonly known as pits, provide the most economical means to store very large volumes of water—up to several hundred thousand barrels in one impoundment. Storage tanks above ground offer more flexibility, in addition to providing superior environmental stewardship, when storing wastewater. New technologies are quickly becoming viable options for longer term storage capacity.

Water treatment. Wastewater drill fluid, flowback fluid, and produced fluid treatment can serve to meet different water quality goals and may be accomplished through a number of discrete water-treatment steps that are highly dependent on effluent quality specifications. Treating to yield fit-for-purpose fluids is the best management practice. It can range from minimum effective treatment for reuse as fracture fluid to full desalination for discharge to the hydrological cycle.

Wastewater disposal.The most common method for disposing of oilfield wastewater is underground injection. There are more than 168,000 registered underground injection wells in the United States. Permitted under the EPA but often managed with oversight from a regional regulatory body, these wells inject wastewater into a deep geologic formation removing it from the hydrological cycle.

Water management economics for unconventional plays

To better understand the impact of key operational challenges in water acquisition and wastewater disposal, IHS created a water-management cost model that analyzed costs for a hypothetical well in four scenarios. Each scenario, as described in Future of Water in Unconventionals: Water Management Strategies in the Continental United States, is defined by two conditions: freshwater availability and disposal well availability. These two operational concerns have the greatest impact on well economics and water-management strategies. Because these two factors are subject to hydrological, geotechnical, and regulatory influences, they are typically beyond the control of an operator. When water is scarce or disposal options are limited, operators can either accept increased operating costs or choose to recycle wastewater.

The IHS cost model assessed the impact of water management on a well’s CapEx and OpEx. Using the four scenarios, IHS estimated that water-management CapEx equals roughly 6% to 13% of total well CapEx. Water management also equals 27% to 53% of the total annual OpEx for each well. To help reduce these costs, IHS suggests that operators recycle wastewater. Even where disposal costs are high, the analysis revealed that operators that recycle water could realize a 25% CapEx savings and an annual OpEx savings of 38%.

Marcus Oliver Gay, Research Director, Water Information and Insight, is the Project Manager for the IHS Future of Water in Unconventionals research.
Andrew Slaughter, Vice President, Energy Insight, leads the IHS practice for upstream development license to operate issues.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.