Forget Oil, Water Is New Ticket for Pipeline Growth in Texas



(Bloomberg) -- The torrent of dirty water coming out of almost every American oil well is the next big bet for a former fund manager for billionaire Paul Allen.

Getting rid of wastewater from onshore wells has become an increasingly costly problem for oil producers as U.S. crude output surged in recent years, especially in the new shale fields from Texas to North Dakota. Drillers typically get about seven barrels of water for every one of oil, and some struggle to deal with the overflow that is mostly sent by truck to disposal sites miles away.

David Capobianco, a former managing director for Allen’s Vulcan Capital, is trying to change that by building pipelines to get wastewater out. His newly formed WaterBridge Resources LLC aims to be a water-management company for oilfields. The firm is considering a public share listing within a year to 18 months, taking advantage of a U.S. shale boom that the government expects will boost crude production close to 10 million barrels a day next year.

“Next to profitability and safety, water may well be the next most important topic for an oil company,” said Laura Capper, chief executive officer at EnergyMakers Advisory Group, an industry consultancy in Houston. “It has risen to the forefront over the last five years unlike anything I’ve ever seen.”

To get a sense of just how much water is involved, consider the forecasts for rising oil output in the Permian Basin, the busiest field in Texas and a big beneficiary of increased investment in shale reserves. It currently pumps 2.4 million barrels of oil a day, but production could grow to a peak of as much as 10 million in future years. At the current rate of disposal in the area, that would mean 30 million to 50 million barrels of dirty water every day, enough to fill the Empire State Building eight times a day.

Disposal Cost

Disposal can be expensive, especially with oil prices around $50 a barrel, half the price in 2014. West Texas Intermediate, the U.S. benchmark, was trading down 15 cents at $49.74 a barrel as of 1:19 p.m. Singapore time on Friday.

Most drillers hire oilfield-service companies to get rid of the wastewater. Trucks dump the water into holes dug deep underground that lead to porous formations, thousands of feet below the drinking-water table. In Texas, the service costs about $1.50 to $2.50 a barrel. Capobianco, in an interview, said he can reduce that to roughly $1, once his pipelines are in place.

“We are at a tipping point,” where water is set to join oil and natural gas as a key commodity for the industry’s pipeline companies, said Capobianco, who is also a former board member for the general partner of Plains All American Pipeline LP. “Water is at a very nascent stage. The market hasn’t caught up with the ultimate reality that water will trade the same as any other hydrocarbon.”

If Capobianco takes WaterBridge public, the company would be the first devoted entirely to oilfield-water pipelines to be traded on any major U.S. exchange, according to EnergyMakers.

Explorers are starting to face the fact that their water production is becoming too big to truck away.

But only recently have integrated water-solution systems become economically viable for the industry, as activity picked up this year in the Permian’s Delaware formation in West Texas, according to Colton Bean, associate of midstream research at Tudor Pickering Holt & Co. in Houston.

One big reason: Roads in the rural basin already are jam-packed with trucks shipping in fresh water, sand and equipment to well heads, and taking oil and dirty water away. “There is not a well-developed road network, so ideally as many trucks you can get off the road the better," Bean said.

Capobianco is chief executive officer for the Houston-based private equity firm Five Point Capital Partners, which funded WaterBridge Resources with $200 million at the start of 2016. Last month, WaterBridge acquired EnWater Solutions LLC for an undisclosed amount, its first acquisition of a water-pipeline company in the Permian Basin. It will be announcing another deal in the next two to four weeks, Capobianco said.

Capper said she’s counted roughly 25 companies similar to Capobianco’s that are in various stages of development for water pipelines. “It’s a market that is developing for very good reason,” she said. “It’ll be here for the long run."

Wastewater isn’t the only goal. After Capobianco builds out a bigger network of disposal pipelines, the next major step will be an integrated system of management that cleans and recycles it for use in future production, he said. In fracking -- a technique that helped fuel the U.S. oil boom -- water, sand and chemicals are forced into the ground to loosen oil trapped in layers of shale rock.

The industry’s water use isn’t without controversy. In Oklahoma, where as many as 20 barrels of water are produced for every barrel of oil, heavy injections of wastewater underground have been blamed for all the earthquakes in the state. Using pipelines might help address that problem, by providing access to areas better suited for disposal.

“We’re a whole lot better about producing oil and gas than we used to be,” Capper said. “And when you produce more oil and gas, you get more water with it.”

To contact the reporters on this story: David Wethe in Houston at dwethe@bloomberg.net; Ryan Collins in Houston at rcollins74@bloomberg.net. To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net Steve Stroth, Carlos Caminada.



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