Unconventional drilling (ie: horizontal drilling and fracking) aims to extract hydrocarbons from rock formations that were not economic to extract using conventional methods (ie: vertical drilling). Extraction is uneconomic because the hydrocarbons lie in tight rock formations, such as shale, which has low permeability and porosity. In order to extract hydrocarbons from tight formations, high volumes of water and sand are pumped into wells to “frack” or break-apart the tight rock formations, allowing the hydrocarbons to move freely through the wellbore to the surface. Because this process is expensive relative to conventional or vertical drilling, high oil prices are needed to make the process economic for companies. Crude oil prices have risen considerably over the past decade, which has increased the use of unconventional drilling techniques; however it has created concern for not only the cleanliness of our water (see my fracking piece), but the quantity as well.
Water Usage by Energy Source
Source: Estimated Use of Water in the U.S. 2005 USGS (updated every five years)
While the above graph shows mining and oil & gas only represent 1% of total water usage in the U.S., it’s undoubtedly higher today as fracking was in its infancy when this data was last updated. Additionally, we are beginning to reach a tipping point with water which has forced oil & gas companies to compete with the farming industry over water rights. Last December, the Wall Street Journal ran a story on “Oil’s Growing Thirst for Water.” In the story, Texas cattle rancher Darren Brownlow who has a PHD in geochemistry, said he recently leased his cattle ranch for oil exploration using the following rationale: we can use 407 million gallons of water to irrigate and grow $200,000 of corn on 640-acres or use a similar amount of water to drill unconventional oil & gas wells which will produce $2.5 billion worth of oil & gas.
Because oil and gas companies are much more profitable than farms, they are outbidding farms for water rights in Texas (see map below), and future conflicts between the two industries can be expected. How can this be bad for the oil & gas industry? We are running out of available water to quench the thirst of oil companies. If big oil continues to bump up against other industries who politicians deem vital to local and/or national economies, we could see regulations limiting the oil industry’s ability to use water.
Source: Bureau of Economic Geology, University of Texas
According to the International Energy Agency (IEA), fracking an individual well can consume anywhere between several thousand and twenty thousand cubic meters of water (this equates to a range of one to five million gallons of water). To complicate matters, this water can’t simply be reused, leaving companies with millions of gallons of toxic water to dispose. The traditional method for water disposal has been to drill disposal wells and inject the water back into the ground. The industry’s shift from primarily conventional to unconventional extraction techniques has created several problems for this method:
1) As shown by the graph below, the industry has a lot more water to dispose of than previously.
2) Not only do disposal wells cost several million dollars to drill, the water must be transported to them from each well by truck which adds another cost on the company.
3) Disposal wells have been linked to earthquakes in several states, which has the potential to be another PR issue for the already controversial topic of unconventional drilling.
Water Usage by Well Type
So how is the industry responding to the water usage issue? Some companies are using water recycling companies to recycle and/or reuse their waste water. Fountain Quail Water Management, a subsidiary of Aqua-Pure Ventures (TSX: AQE), uses its mobile NOMAD water recycling center to travel to oil and gas fields where it uses an evaporation technique to separate water from the toxic chemicals. Devon Energy (NYSE: DVN) is building a water recycling facility to service its wells in the Anadarko Basin of Western Oklahoma. Sabre Energy Services (private) is using chlorine dioxide to treat frack water for reuse.
In Colorado, Noble Energy (NYSE: NBL) has formed a consortium with Colorado State University (CSU) to study the impact of shale drilling on the environment. The consortium recently studied the life cycle of water in Colorado and found, among other things, that while unconventional recovery uses a lot of water, it’s an efficient process relative to other resource extraction techniques on a water intensity basis (gallons of water used/MMBtu of energy extracted):
The key takeaway from this article is that, while relatively efficient, the fracking process uses a lot more water than conventional drilling methods. Consequentially, companies are going to have to change the way they dispose of waste water. If your stock portfolio consists of companies who operate in dry areas such as Texas or Colorado, pay attention to how your portfolio companies are handling the water issue. You should question the aptitude of a company’s management if they aren’t at least discussing more economic and environmentally sustainable methods of waste water disposal.