There is a multi-billion-dollar water industry forming before investors’ eyes in the oil patch.
It’s a huge opportunity for some great capital gains, but changing regulations, and a very attentive mainstream audience questioning business practices that have been in effect for decades, will will make it choppy water for investors.
“In 2008 there were 25 billion barrels (/bbl) of water handled (by the oil and gas industry) in the USA —even at $0.60/bbl it’s a multibillion-dollar business,” says Jonathan Hoopes, President of GreenHunter Energy Inc. (GRH-AMEX). “With the big growth in unconventional since then, it’s likely another 5-6 billion barrels.”
GreenHunter is a pure play on the fast growing water market in the oil patch, along with companies like Heckmann Corp (HEK-NYSE), and Ridgeline Energy Services (RLE-TSXv; RGDEF-OTCQX). There are also many private technology companies with new water treatment processes.
Ridgeline is developing a water purification and recycling technology for the oil and gas sector. CEO Tony Ker says the industry is just beginning to put a formal cost structure on their water, and it’s not always easy to see through the mist to a simple business model.
“Customers in the oil and gas industry are finding their way into the water industry,” he told me in a recent interview. “Two years ago customers didn’t know what the water business meant. At some point they knew they would have to clean and re-use it, but didn’t understand how to do it.
“Now we’re watching it form as we speak. Customers are now starting to define what the water business will be. Before, it had no shape or form. Now we’re seeing various companies put cost structure on the business; put costs on storage, treatment, transportation.”
GreenHunter has put some of these costs in their PowerPoint presentation.
In the Marcellus Shale, they say it costs $3+/bbl to dispose of water... and $7-$10/bbl to haul it away. If a horizontal well uses 4.2 million gallons of water to frack (that would be a slightly bigger-than-average well, but it makes my math easy), then that’s 100,000 barrels (42 gallons=1 barrel).
If you get 30% of that back in the first year, that’s 30,000 barrels x $10+/bbl hauling and disposal costs equal $300,000 in water costs per well. But that’s $300,000 in water revenue for the right company. Then there’s another 30% of that water you get back over the life of the well. Assuming costs are constant, that’s $600,000 in revenue.
There are thousands of wells getting drilled in North America each year. More than 80% of them are now horizontal, and most of those require fracking. The dollar value of managing that water multiplies fast.
GreenHunter is estimating that the 2011 water disposal market in the Marcellus shale formation alone was $1.3-$1.7 billion, and in 10 years the market will be $15-22 billion.
In the Eagle Ford shale play in Texas, they’re quoting a disposal fee of $0.80+/bbl and an average $3.00–$6.00/bbl hauling fee. With an estimated 800 new oil & gas wells drilled there in 2011, the market just keeps getting bigger. In 2011 the water disposal market was estimated to be $500-$800 million, and in 10 years they are guesstimating that local market will be worth $6-9 billion.
They estimate the Bakken will be a $10.6 billion market within 20 years.
Then there is the need to store all that water until it is ready to be used. With the new pad drilling, where producers drill multiple wells that splay out in different directions from one pad, millions of gallons of water can be stored in one spot for more than a year. Just storing that water has turned into a $150 million+ business with incredible profit margins, all in just one year. And this segment continues to have hyperbolic growth.
“I believe in two years you will see moderate-sized water facilities of 50,000 to 100,000 barrels a day, that are permanent, that will process water for re-use,” says Dennis Danzik, a director of Ridgeline and the inventor of their water purification technology.
There are other major revenue sources as well. Sourcing water is a revenue business as municipalities and landowners in the western USA sometimes sell their water to the industry for fracking.
Hoopes believes that regulation around water will develop to the point where producers and service companies will have to supply “cradle-to-grave” monitoring of water to prove it is either recycled or disposed of properly... which is great news for GreenHunter and Heckmann.
- Keith Schaefer
Keith Schaefer is editor and publisher of Oil & Gas Investments Bulletin
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