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Better water networks in the Permian

Interconnected, large-scale water midstream infrastructure could transform the sector

With Permian water production predicted to potentially double by 2024 from more than 400 million bbl/m in 2018, the existing water midstream model must transition to one of “hydrovascular” networks to allow for sustainable management. So said Gabe Collins of Rice University’s Baker Institute for Public Policy during his keynote address on the first day of the Produced Water Society Permian Basin 2019 conference.

Large-scale, interconnected networks of saltwater disposal wells and pits, pipelines and recycling facilities will enable Permian operators to rationalize capex and lower opex, as well as contribute to more sustainable long-term valuations. It would also allow for greater water management flexibility in a lower-for-longer oil price environment.

With hydrovascular networks, “You can start wheeling water between different systems. You can be more nuanced in how you operate disposal wells because you can take a more dynamic, cost-based approach and a capacity-based approach, depending on the circumstances,” Collins told the audience. He added that it would also lead to an environment conducive to water-related public-private partnerships.

A more interconnected water midstream sector would bring benefits for both investors and customers. “You can manage your risks better. You can generally deliver your service at a better cost that ultimately leaves everybody happier and ideally better off than they were when dealing with” a fragmented midstream sector, Collins said.

The sharing of disposal, transport and storage capacity would be possible, and a new pricing dynamic could emerge that might facilitate water swaps and see spot deals become more attractive than long-term contracts in some cases. This would also help operators avoid problems inherent in traditional closed-loop systems with high utilization, such as disposal well shutdowns due to overcapacity.

“You can actually make things more fluid and market-responsive than what we see at present,” Collins explained.

A confluence of factors is paving the way for the establishment of these hydrovascular networks, such as the rapid growth of Permian Basin oil and gas production. Increasing transactions that have led to a consolidation phase have also played a part, piquing the interest of larger, longer-time-horizon investors such as private equity funds and sovereign wealth funds.

Collins closed his address with several predictions for the sector’s continued development. By August 2020, he thinks at least two restructuring deals will move forward for distressed water assets. He also foresees at least five Permian-focused companies joining the ranks of Pioneer Water Management in transporting and injecting a minimum of 500,000 bbl/d of produced water. In the next 24 months, Collins predicts the sector will handle at least 4 million bbl/d of produced water more than at this time last year.

There appears to be no response from water midstream companies about their own willingness to establish hydrovascular networks in the Permian, but if the sector sees the consolidation and restructuring Collins predicts by this time next year, companies may be more willing to share to improve service.

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