H2O Midstream-Encana Deal Highlights Water Management Role in US Shale

In a recent acquisition, H2O Midstream will own and operate Encana’s produced-water gathering system in Howard County, Texas, and will expand it to also serve third parties.

A pond used for water storage in Encana’s Permian Basin operations, which is similar to one that H2O Midstream plans to construct there to serve Encana and nearby producers. Source: Encana.

H2O Midstream’s recent acquisition of produced-water infrastructure from Encana Oil & Gas (USA) in the Permian Basin highlights the growing importance of efficient water management in United States shale plays.

The acquisition, announced on 14 June, was concurrent with the execution of an acreage-dedication-based midstream water services agreement, under which H2O Midstream will gather, dispose, and deliver for reuse produced water for a substantial portion of Encana’s acreage position in Howard County, Texas.

By terms of the acquisition, H2O Midstream will now own and operate Encana’s existing produced-water gathering system that consists of more than 100 miles of interconnected pipeline and five saltwater disposal wells with a total permitted disposal capacity of 80,000 BWPD.

New State-of-the-Art Hub

H2O Midstream plans to expand the existing system significantly by adding new produced-water pipelines and disposal wells and building a state-of-the-art water storage and reuse hub. By next year, the company expects to have more than 200 miles of pipeline for gathering, 140,000 BWPD of disposal capacity, and more than 2 million bbl of storage to serve Encana and other nearby producers.

“We are pleased to have been selected as Encana’s long-term partner in this exciting area,” said Jim Summers, CEO of H2O Midstream. “This acquisition fits perfectly with our strategy of building an expansive gathering, disposal, and storage network to provide producers a full suite of midstream water services in the Permian Basin.”

Encana US Media Relations Manager Doug Hock said, “We’re in the business of drilling wells. So the sale of the assets allows us to focus our resources on that and at the same time provides a long-term agreement for the handling of produced water.”

Exclusive Focus on Water

A relatively new company backed by private equity, H2O Midstream focuses exclusively on water-handling for oil and gas producers.

The company’s Chief Commercial Officer Darrell Bull said, “We went out and got our private equity backing with the vision that we wanted to take produced water gathering/disposal/reuse and bring it into a traditional midstream industry perspective like natural gas gathering and processing has been doing for 30 years, where third parties are involved in long-term contracts and pipelines—replacing 30-day truck contracts.”

In view of the sheer amount of water produced and handled in shale operations, the number of water-focused midstream companies is likely to multiply. Before H2O Midstream was launched, Bull said, “We did a survey of private equity startup companies and identified 92 traditional midstream teams already out there. There were only one or two water teams. But we think in 5 years those numbers will be comparable.”

Costs Could Drop by Half

With H2O Midstream’s planned expansion in Howard County, Bull said that Encana’s water costs could potentially “drop in half just because of the scale we’re going to bring. We get to bring in third parties to expand the use of the system, and this could be the biggest benefit to Encana from the recent transaction.”

As the involvement of midstream companies in water gathering, disposal, and reuse expands, infrastructure can be rationalized and the duplication of new facilities avoided.

Bull also noted that some operators have likely built out water-handling networks with the expectation of selling them. So more transactions such as the H2O Midstream-Encana deal are surely on the way.

“Just like companies did the last 20 or 30 years in the traditional gas gathering and processing, there are now companies doing it in water on the infrastructure side,” he said. “You’ll definitely see hundreds of millions if not billions of dollars come to the market in the next few years.”