Water and Unconventional Oil & Gas Development: Exploring the Economics, Technological Opportunities, and Environmental Challenges of Increased Water Usage in Oil & Gas Development

This report analyzed water usage in hydraulic fracturing operations in four major shale plays across the United States, including: the Bakken, the Marcellus, the Eagle Ford, and the Permian. The purpose of this analysis was to identify constraints in water supply chains and to assess the potential growth of wastewater recycling and treatment.

The Capstone team’s research shows that water regulations and constraints differ dramatically across shale plays. In the Marcellus in Pennsylvania, operators are required to comply with a complex system of federal, state, and local river basin regulations, but have plentiful access to water. In the Eagle Ford and the Permian in Texas, operators enjoy a favorable regulatory environment, but face the prospect of water shortages due to groundwater depletion, competition with other users, and more frequent droughts. In the Bakken in North Dakota, operators face relatively lax regulation and are not exposed to water constraints due to low population density and strong support for the industry.

Analysis of the economics of hyrdraulic fracturing shows that water management costs have assumed greater significance for operators following the fall in oil and natural gas prices over the past year. The cost of water is now a relatively larger component of exploration and production expenses. According to primary source interviews, companies that adapt to environmental challenges will be better positioned to outperform other companies in the industry in the future, given the likelihood of future regulation associated with water management.

A greater understanding of the environmental risks posed by fracking has compelled regulators to tighten laws such as a proposed rule in Pennsylvania that mandates companies comply with more stringent storage methods for drilling fluids. Indeed, operators in the Permian and Marcellus have shown that the use of brackish water and recycling technologies can offset a significant quantity of fresh water used in the fracking process, and do it in a cost efficient way. Furthermore, companies can reduce transportation costs through the usage of pipelines, which can also prevent road damage caused by heavy truck traffic.

Finally, the team also found examples of drilling companies and municipalities collaborating by trading water for unconventional production. Treated effluent water from municipalities can cut costs for drillers, and offset a share of freshwater used for fracking. This model has significant potential, especially in the Permian and Eagle Ford basins in Texas.

To view the derivative report published by Barclays: https://yoursri.com/media-new/download/impactseries_waterreport_final.pdf