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Five things I learned at PWS’ midstream financing workshop

Several government agencies are looking for answers to one of the oil & gas industry’s biggest concerns: produced water.

1. Regulators want to transform produced water from a waste into a resource

Several government agencies are looking for answers to produced water industry’s biggest concerns. In 2019, the Department of Energy has allocated more than $4.5 million for treatment projects under the Water Security Grand Challenge and kickstarted the Energy-Water Desalination Hub through a $100 million grant. The New Mexico Environment Department and state university have established a consortium to research produced water treatment technology ahead of rulemaking for beneficial reuse projects. New Mexico’s Oil Conservation Division anticipates tweaking some of its policies to better align them with the state’s new Produced Water Act, which aims to conserve freshwater resources and incentivize recycling and reuse.

2. New Mexico is a desert sitting on top of an ocean

New Mexico has a dearth of freshwater and faces regular drought. As such, regulators and industries there have valid concerns about meeting future water needs. At the same time, more than 3 million bbl/d of water is pumped as an oil & gas waste product, and that volume is expected to grow exponentially in coming years. Currently, around 90% of that water is injected for disposal or enhanced oil recovery. With concerted efforts from local authorities, industry and academia to turn produced water into a resource, New Mexico will have an ocean of new opportunities to explore.

3. Investors are placing safe bets

Even with the hype around water recycling and the far-off possibility of beneficial reuse projects, participants in the finance panel made it clear that disposal will continue to be favored among investors. Recycling alone will not be able to absorb all the water that will be produced in the Permian Basin in the coming years and, as a result, large volumes will still go to disposal. Furthermore, the existence of infrastructure for cheap disposal make it a more appealing alternative to beneficial reuse, which will initially require costly technologies that have not been de-risked.

4. Billions more will be poured into the water midstream sector

The water midstream sector stands to gain from the tight capital squeeze that oil & gas producers are experiencing. Not only is the sector expected to see more incremental investments – worth about $16 billion, according to Pete Bowden of Jefferies – but producers will shed more water assets as they refocus on core business. That will provide water midstream companies with opportunities to pick up new assets and build out their infrastructure networks and services offerings. That, in turn, will attract backers beyond the realm of private equity, including larger institutional investors.

5. Compared to other sectors, produced water is underregulated

Water midstream panel participants said the sector is subject to little oversight in terms of water infrastructure specs and impact metrics. Companies are also not obligated to report much information to regulators to make available to the public. Panelists agreed that sector standards should be set, but were divided on how those standards should come about. Some said a framework, put in place by an industry association, would be adequate, while others asserted a need for government regulation. All agreed that water midstream companies should cooperate on developing best practices in order to better position themselves for when regulations are set.

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