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Mitigating Water-Related Business Risks in the Oil and Gas Industry

This blog previously addressed the serious issues presented with the use of water by the oil and gas industry , especially where the water is used for drilling and fracing in drought affected states. It has become an especially pronounced issue in the western states, like Texas, that have both significant oil and gas reserves and a limited water supply. A report from Wood Mackenzie Ltd., using data and analysis from the World Resources Institute (WRI) and published late last year, determined that almost all forms of energy production and power generation are dependent on water, although the impact differs depending on type of energy being produced and the location. The report indicated that the oil and gas industry is expected to use technology to mitigate water-related risks as water supplies become more scarce. The report found that some companies are able to mitigate some water risks by understanding their specific water requirements, identifying the water risk involved and developing a clean water strategy.

heron-1444867-s.jpg The World Resources Institute publishes an Aqueduct Risk Atlas which surveys water risk in the most active energy producing regions of the world. Among the regions found to have the highest water risk were U.S. shale gas plays, coal production (particularly in China), and crude oil production in the Middle East. In the U.S., more than half of the shale plays and gas reserves are in areas of mid to high-level water stress, where the oil and gas industry must compete with agriculture and other industries for water. This is true in Texas for the Eagle Ford Shale play.

The Wood Mackenzie report noted however that hydraulic fracturing requires large amounts of water only for a short period of time, and the rest of the time individual wells do not require a high volume of water. This means that shale gas drillers actually use a smaller percentage of water than many other industries. Still, the report notes, “These short but intense demands add up and can threaten to displace other water users. Over time, freshwater availability in shale development areas could decline as demand from homes and farms starts competing with hydraulic fracturing operations.”

As stated above, the World Resources Institute finds that increased demand for water in the oil patch is not just an American problem but a global concern. In the ten countries with the most shale gas reserves, 60% are in areas with mid to high-level water stress. It is expected that water scarcity and water pollution will be issues of increasing importance in the years to come. For example, in southern Iraq a lack of water is already prohibiting exploration and production in oil rich areas of the country.

Some companies are already working on possible solutions. For example, Antero Resources Inc. is planning to spend $500 million for an 80 mile pipeline to bring water to its shale development. In the Middle East, already an arid region. 93% of the onshore oil reserves are in mid to high-level water water stress areas.

There is a growing demand for another alternative water source, desalination, to counter the lack of fresh water, but the desalinization process consumes huge amounts of energy that would otherwise be exported at higher profit for that particular country. For example, in Saudi Arabia the government currently sells oil for powering desalination plants at $4/bbl instead of about $100/bbl when it sells the oil for export.

The report noted, “Some energy firms have already started planning risk-mitigation strategies to account for potential scarcity, even though they are costly. Unless all stakeholders work together to protect shared water resources, risks will steadily increase.”

I suspect that as water for all uses, including water for the oil and gas industry, becomes more and more scarce, the costs of alternative water strategies are going to look more and more reasonable. I heard someone say recently that water is going to be the new gold. That’s a safe bet, not just in Texas, but worldwide.