Diamondback Energy has offloaded its produced water pipeline system in a deal with a private-equity company, creating a large industrial water company in the Midland Basin.
The deal with Five Point Energy pays Diamondback $500 million, and Diamondback retains a 30% stake in the new company, Deep Blue Midland Basin, and will receive future incentive payments if it meets performance goals.
Deep Blue starts out as one of the biggest water players in the Permian Basin, said Laura Capper, principal at Cap Energy, an energy industry consultant with many clients in the water business.
The low-profile water services sector has become an increasingly important factor in the nation’s largest oil-producing basin as earthquakes have revealed the limits of its underground water storage capacity.
“The writing's on the wall that we we’re going see a lot more consolidation,” Capper said. “I'm kind of guessing there's going to be two or three families, if you will, big midstream players.”
Reasons for consolidation begin with the well-established oil-industry strategy of spinning off operations outside of exploration and production.
“We have spent nearly a decade building a differentiated water infrastructure platform in the Midland Basin, and believe this is the opportune time to monetize this business while retaining meaningful upside through our equity ownership,” said Kaes Van’t Hof, president and chief financial officer for Diamondback, according to the announcement.
The new company is starting with 800 miles of pipelines, produced water recycling facilities able to process 500,000 B/D for fracturing, and disposal wells able to inject 2 million B/D into zones capable of holding more than 65 million bbl.
Diamondback has agreed to provide produced water and to supply fracturing water within a 12-county area in the Midland Basin for 15 years. The network includes “two investment-grade” customers, with leases covering 20,000 acres with expected produced water volumes of over 75,000 B/D through 2024, the release said.
It will be competing with other water companies to expand its water volumes to be handled and footprint in the Permian.
Industrial water companies in the Permian will need to build pipeline networks covering large areas to ensure customers can dispose of water to continue producing oil. Companies are working for backup disposal options since high injection levels have triggered earthquakes in areas, leading regulators to limit water-injection disposal nearby.
Over the longer term, Scott Mitchell, CEO of Deep Blue, said they plan to be “driving the advancement of new technology solutions for our customers.”
They are among the companies with desalination technology pilot projects. Finding a reliable, efficient way to remove the salts, minerals, bacteria, and remaining hydrocarbons is the first challenge.
Scaling up from a pilot plant will require creating pipeline networks that deliver water to feed large-scale operations that clean up the water, deliver it to customers, and economically dispose of the mountain of removed solids.
“Understanding that to get the economies of scale working, you’ve really got to aggregate some volumes,” adding to the pressure to consolidate, Capper said.
Growth will also increase the visibility of the water midstream business which has expanded in the Permian with minimal outside notice.
Even those following the business must do some digging to get basic information like how many miles of pipelines are currently operating because Texas has never required disclosures by a business born within oil company lease lines.
In New Mexico, where disclosure is required and water reuse is a priority, produced water represents about 70% of the water used for fracturing, Capper said. In Texas, her educated guess is it is considerably lower but growing.
The Texas Railroad Commission “is figuring out what kind of reporting enhancements they're going to make or not. We really do a less-than-impressive job of tracking our water in Texas as a whole. We don't regularly report produced water volumes. We don't report recycled volumes,” said Capper.
Those against regulation say regulators should not force water companies to give up the advantage gained by withholding information. Capper countered by saying, “It's kind of back to that old mantra: You can't really manage what you don't measure.”
