Recycle Produced Water, Reduce Costs, and Boost Invest-able Capital

Gabriel Collins, “Recycle Produced Water, Reduce Costs, and Boost Invest-able Capital,” Texas Water Intelligence™, Water Note #6, 2 October 2017

Surface owners’ new water-powered earnings machine is a boon to them, but increasingly, poses a cost burden to operators who would like to reduce freshwater use and instead recycle produced water. This burden is exacerbated by low commodity prices that make reducing well completion and operating costs a much more pressing concern than they were when oil sold for more than $100 per barrel and price masked—or compensated for—inefficiencies.

Approach Resources, which operates in the Southern Permian Basin, stated in April 2017 that its recycled water supplies cost between $0.50 and $0.80 per barrel.[1] Freshwater supplies in the vicinity of Approach’s acreage cost approximately this much, but by recycling, the company minimizes other water-centric cost drivers such as trucking and disposal, and reports that it ultimately saves from $3.20 to $4.50 per barrel of water by using recycled water processed through the firm’s own infrastructure.[2]

Savings of this magnitude in programs drilling Delaware Basin horizontal wells using 500 thousand barrels of water per frac could reduce completed well cost by as much as $2.25 million per well as a project proceeds and the operator begins reaping the benefits of minimizing/avoiding produced water disposal costs. If those savings were re-invested back into drilling, an operator could potentially drill at least three additional Wolfcamp wells per $100 million in capital spent—a 23% increase in potential productive assets. [3] Depending on the productivity of the formations in a given area, three additional wells per $100 million in CAPEX spend could add three million barrels of oil equivalent—or more—in ultimately recoverable reserves.

Produced water recycling can push producers onto a lower position on the global production cost curve. This is an advantageous place to be with commodity price volatility and as OPEC producers struggle to balance budgets at current oil price levels.  Whether the market is “forties forever,” “lower for longer,” or “fifties for a while,” one thing is certain—the lowest cost producers globally will be the best off. In the forest, you don’t need to be faster than the bear that is trying to eat you—you just need to be faster than the other people. Same concept applies to the oil production cost curve and a company’s ability to survive–and even thrive–in the coming months and years

[1] Approach Resources DUG Water Conference 2017 Presentation, available at http://ir.approachresources.com/phoenix.zhtml?c=214016&p=irol-presentations

[2] Ibid.

[3] Calculated based on EOG Resources 2Q2017 reported completed well cost of $7.6 million per well in the Delaware Basin Wolfcamp play. I adjusted the $2.25 million per well potential cost-savings from water recycling down to $1.5 million per well (yielding a per well cost of $6.1 million), as the top-tier operators like EOG are already applying cost-saving approaches across their water value chains and I don’t want to over-estimate the potential economic impact of produced water recycling on their operations. The 23% figure is based on the fact that including the $1.5 million per well in savings, $100 million in a development budget can now go for 16 wells instead of 13, as would be the case with a cost per well of $7.6 million. Original data source: EOG Resources 2Q2017 Quarterly Presentation, available at http://investors.eogresources.com/Presentations-and-Events

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