Crude oil, natural gas extraction and fracking is an industry which requires large quantities of water. Shale is an even thirstier business and has been draining away the scarce resource which is fresh water.
Scarce resource becoming scarcer
Water is a major cost for drillers and an expensive one. According to Schlumberger, the oil and gas technical expert, as much as ten percent of the cost of a shale gas well comes from water sourcing, transportation and disposal.
The use of water in the process of fracking has meant that water supplies have become strained. It was reported that in some U.S. counties, more than fifty percent of the scarce water resources went towards the processing of shale oil and gas. It is reported that between January 2011 to September 2012, 65.8 billions of gallons of water were used in hydraulic fracturing operations both for oil and gas development and in vertical and horizontal wells across the U.S. This amount represents roughly the water use of 2.5 million Americans for a year.
Ceres conducted an in-depth research into the impact of hydraulic fracturing process on water resources and reported that almost half (47 percent) of shale gas and tight oil wells are being developed in regions with high to extremely high water stress.
"Forty one percent of wells are in regions with extreme high water stress, which means over 80% of available water is being withdrawn by municipal, industrial and agricultural users in these regions. Overall 75 percent of wells are located in regions with medium or higher baseline water stress levels," says Ceres.
Figure 1: Map of hydraulically fractured well locations
The total number of hydraulically fractured wells is 25,422. Of these, 41% are located in areas with extremely high baseline water stress while another 6% are situated in areas with high water stress. The distribution of these wells in areas distributed by water stress is shown in the graph below.
Figure 2: Proportion of hydraulically fractured wells by water stress
Texas – a high risk area
Texas has the largest number of wells with high to extremely high baseline water stress. This is followed by Colorado. However, as a percentage, more than 50 percent of the wells in Texas are situated in areas with high to extremely high water stress whereas in Colorado, 97 percent of the wells are in the regions with high to extremely high water stress.
Both the and Eagle Ford shale plays are located in Texas and contain 6,000 wells (accounting for more than 50 percent of US public company shale and tight oil resources) in regions with high or extremely high baseline water stress. Considering the growth expected in these shale plays, the water stress in certain counties can become even more grave.
Pioneer reported an 11 percent YoY increase in total oil and gas production costs per boe (barrels of oil equivalent) in the first quarter, partly due to higher third-party water transportation charges in South Texas and the Permian Basin Royalty Trust (NYSE:PBT). Other onshore energy companies, including Occidental Petroleum Corporation (NYSE:OXY), Apache Corporation (NYSE:APA) and Chesapeake Energy Corporation (NYSE:CHK), may face similar pressures. Operators report water hauling costs from USD 2 to USD 10 per barrel, with Texas being at the top end.
"Texas expects a water supply-demand gap of 84 billion barrels by 2060. It takes about 100,000 barrels of water to frack one well in the Eagle Ford. Local operators recycle less than 10% of fracking wastewater," according to BNEF.
Growth in shale oil and gas activities
Shale oil and gas in the US are both expected to grow at exponential rates. In both oil and gas production, shale and tight activities will contribute up to forty percent of total production by 2040.
Figure 3: Growth in Shale Oil
Figure 4: Growth in shale gas
Water management – a necessity
Given such growth, it is becoming more difficult to manage the water resources effectively. Investors in shale regions should be aware of the significance of resource management in these areas. Attention also needs to be paid by regulators to this area of environmental safety.
The EIA says: "Shale development needs water to grow, but in order to do so, the industry’s current and future water requirements need to be better understood, measured and managed. The adage, “what gets measured, gets managed,” holds true. There needs to be across the board disclosure of the sources of water used for hydraulic fracturing, the amount withdrawn from each source, and the amount of flowback water (initial flows) and produced water (later flows) returned to the surface."