WoodMac: Water challenges pose risk to Permian profits, production

With the recent rise oil prices, operators have been adding rigs and ramping up completions in the Permian Basin – the largest and most important source of oil supply growth in the world. However, persistent operational water challenges present a material risk to companies’ future profitability and production.

A new study by Wood Mackenzie, examines the current growing water situation in the Permian and models the combined impact rising water volumes and increasing water costs could have on future breakevens and oil production growth.

Ryan Duman, Principal Analyst with Wood Mackenzie’s Lower 48 Upstream Team, said, “As operator activity continues to pick up in the Permian, we expect over 2 million bbl/day of oil supply growth over the next five years.

“While attainable, the list of operational risks grows too, and the least appreciated of these is produced water. The combination of rising volumes and higher disposal costs threaten to shift cost curves and pose a growing risk to oil production growth in the Permian.”

The report models various scenarios of rising water cuts and growing water management costs and found in an “aggressive” future cost scenario. Breakeven costs in the Midland and Delaware sub-plays could increase by $3/bbl to $6/bbl – potentially curbing the growth of future Permian oil supply by 400,000 bbl/day by 2025.

“Water risks to date have largely been described as a cost issue, but as projects continue to build scale, the risks become more serious,” Mr Duman said. “They could impact the ability to actually carry out operations. Investors and project partners should challenge operators on how water is being managed.”

Over the past few years, water demand has continued to increase as operators strive to improve completion efficacy, utilizing almost twice as much water they did in 2015 – close to 17 million gal of water per current well in the Midland Basin Wolfcamp.

Record drilling activity is compounded by more water used in completions and water cuts from the targeted formations rising quickly in older horizontal wells. For the Wolfcamp formation in the Delaware Basin, water cuts have increased from an already high base of approximately 70% to 80% in the first four years of production. An initial water-to-oil ratio of roughly 2:1 can increase to nearly 5:1 by year four and eventually reach 7:1.

In the Delaware Basin water-to-oil ratios are often twice as high as in the Midland Basin, in some cases reaching as high as 10:1. Operators are simply unable to cheaply reinject all those volumes and water handling is expensive, ranging between $0.50/bbl to $3/bbl, including sourcing, transport, disposal and recycling. Trucking availability and the proximity of a well or pad to existing saltwater disposal wells are the biggest influencing factors on cost.

“Unlike some of the other subsurface constraints and risks facing the Permian, there are ways operators can mitigate risks from produced water,” Mr Duman said. “One of the best opportunities for operators to reduce water costs is by investing in pipeline infrastructure, limiting the amount of trucking and collaborating with offset operators.”

It can cost $2.50 to truck a barrel of water versus $0.30 per barrel to move it by pipe. Relying heavily on trucking can result in an incremental $1/bbl to $1.25/bbl which will only increase in the coming years as trucking regulations become stricter, pads become more remote and roads become more congested.

Water recycling is another way operators can reduce disposal costs and limit water sourcing constraints. The potential savings range from $1/bbl to $2.50/bbl, on total lease operating expenses and in some instances over $250,000 on development and completion costs due to lowered sourcing costs.

“Recycling will become more common as projects grow in scale and treatment costs fall with increased throughput volumes and fixed overhead,” Mr Duman said. “In time we expect to see the proportion of recycled water volumes continue to increase as more operators understand how to best manage chemistry and use the volumes in new, offset completions.”

He added: “Expect producers to invest more in water management solutions, and if budgets stay relatively flat the next few years, watch drilling capital be diverted to water-related investments. Just as the level of drilling intensity in the Permian breaks basin records, so should the scale of water management solutions.”