At the reading of this column, we may know who our new President will be. There are many people who believe that depending on who the President is, our future as an industry will be changed.
I would like to believe that if I look at just the next Presidential term, change is not likely. The reason is that the transition from oil will not take place in the next four years. And along the way, they will realize that the goal will have to be one of balancing alternative energy and hydrocarbons, and not eliminating the latter. As many of us are aware, oil and gas are used for many other purposes beyond just energy; then there is the infrastructure challenge of alternative energy, combined with reliability. I think people will come to the realization that eliminating hydrocarbons is not just unrealistic, but potentially economically dangerous.
So how does this impact oilfield water management? As I have mentioned in a previous column, oil demand does directly affect oilfield water demand, and we are currently in a depressed oil demand state. The question is, will we ever see pre-Covid demand numbers? This is harder to answer, as we don’t really understand, yet, the economic devastation caused by Covid, and how many businesses will be left standing. How many people will opt to work from home in a post-Covid world, and will the economic engine of the U.S. ever get back to where it was? The answers to these questions will have a direct impact on oil demand and, ultimately, the oilfield water market.
Today, we face depressed well completions in the unconventional market, which for oilfield water market folks, is the key market indicator. Many of us in the oil field like monitoring rig counts, but drilled wells aren’t always completed wells, and it takes a well completion to create water demand. So, to truly evaluate the oilfield water market, we will focus on frac crews and not rig counts. I would like to thank Primary Vision and specifically Matt Johnson for access to their frac crew data. Well completions not only drive oilfield water demand, but recycling of produced water is dominated by reuse as a completion fluid. So, let me be clear—without well completions, there is not enough activity to sustain an oilfield water industry.
Covid-era water concerns. Historically, we have had such great demand in the oilfield water industry that disposal wells, water suppliers and water recyclers co-existed with very little conflict. The question is what happens today. So pre-Covid, we had oilfield water suppliers drilling wells for their current demand. We had new supplies in the form of municipal discharge water entering into the oilfield water supply markets, including some recent announcements of municipal water pipelines being built specifically for oilfield water demand. In addition, we had disposal well permitting taking place at an accelerated pace, and recycling activity started to ramp up. Then the world changed, and we face a new Covid reality.
The big concern is that we have been working hard to supply demand, and then demand crashed, leaving a significant oversupply. In an oversupply, we will see prices drop and supplies consolidate. We haven’t seen the level of consolidation I expect in oilfield water management, but it will come. It will come to disposal well businesses and water suppliers. Some of this already was occurring as a result of the Water Midstream concept, but with overcapacity and low demand, I expect to see more. This can directly affect the recycling-of-produced-water market, as oversupply drives prices down. Will operators decide to forgo recycling for an abundance of low-cost non-produced water? I would hope that ESG concerns drive more recycling, but we will see how all this plays out.
ESG perceptions. As an industry, public perception is that we care very little about ESG, something that we need to push back on, as perceptions become reality. I have to admit, I am beginning to doubt our commitment to ESG as an industry. I see a lot of statements made, but very little action. I’ve only encountered one operator that takes carbon emissions into account as part of its cost review, when comparing vendors.
In municipal water, for example, the use of bleach as a disinfectant gave rise to concerns over chlorinated disinfection by products like trihalomethanes (THM). This gave rise to the use of chlorine dioxide, because it produces far less THMs. But then the municipal water industry began moving away from chlorine-based chemistries altogether and pursued Advanced Oxidation Processes (AOP). These are technologies and chemistries like ultraviolet light, ozone and hydrogen peroxide, and combinations of the three.
In oilfield water management, we’ve seen chemistries start with chlorine dioxide for bacteria control in the oil field and then peracetic acid (PAA), which is hydrogen peroxide-based. But now, we see the oil field look at bleach again. When you discuss this with water folks outside our industry, they scratch their heads and ask, “why are you going backwards environmentally?” This is what gives me pause about produced water recycling—if we can move backwards, then will we take low-cost fresh water (for example) over recycling? We will see.
So, let’s get back to frac crews and completion demand. Pre-Covid, the U.S. had up to 350 frac crews, but that number plummeted to under 100. Late October, we saw 130 frac crews, with 52 in the Permian. In early November, we see 127 frac crews nationally, with 60 in the Permian. The Permian remains king. With natural gas prices rising, I expected that we would see a shift there, but that has not materialized, yet. The Permian with its higher water cuts and activity levels, will remain ground zero for the oilfield water management industry, but expect a rocky road, regardless of who wins the Presidency.
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