Water Outside the Permian: How Are Other Basins Handling the Volumes?
The Permian gets the lion’s share of attention when it comes to produced water, but other basins have a need to haul volumes off-site. How has the market changed in these areas recently? Is there a greater enthusiasm for pipelines, and can water midstream thrive?
Discussions of produced-water handling and the emerging water midstream sector typically focus on the Permian Basin, but water is an issue for a number of other basins. The needs of producers in these areas are driving greater investment in pipeline infrastructure.
“Every discussion that we’re having with every customer we’ve contracted to long term is about moving pipe,” said Brad Morgan, board chairman of Expedition Water Solutions, a midstream company that handles more than 100,000 BWPD in the Denver-Julesburg (DJ) and Powder River Basins. Morgan said water volumes and the push by regulators get water-hauling trucks off the road have fueled this push to build more pipe. Expedition has more than 100 miles of pipeline in greenfield expansion planned through 2020.
“When we started in 2013 in the DJ, there just wasn’t enough water to support pipelines. They weren’t doing the sizes of slickwater fracs that they are now, they weren’t doing pad drilling like they are now, and just the overall baseline of water wasn’t there. Now it is,” he said.
Producers in other regions may have less of an appetite for expanding pipeline networks, but the need to move water is still there, and in these areas the scope of water midstream operations is still evolving. Gage Herrmann, chief compliance officer at Oklahoma-based Lagoon Water Solutions, said trucking will stay active in the Anadarko Basin. While that does not mean pipeline gathering systems aren’t valuable there—Lagoon operates more than 75 miles of pipeline over more than 200,000 dedicated acres—the truck fleet provides operators with more flexibility.
“When we’re looking at the ultimate need of the operator, it’s flow assurance and the difficulties you can have with permitting, construction crews, weather, and ultimately that’s what kept our trucking business around,” Herrmann said. “We see our trucking staying around in SCOOP/STACK. There’s not enough rig activity to warrant full-scale infrastructure. That being said, we don’t even have a trucking yard in the core. We see it staying around, but it’s not a goal of producers in the area.”
With the water midstream business model continuing to develop, the contracts between producers and midstream companies have changed. Morgan said contract structures have always been a good indicator of the direction of the market. He noted that Expedition is in position to capitalize on the eventual transition to pipelines in the Denver-Julesburg because of the contracts it has signed with producers to control disposal capacity.
Acreage dedications and longer contract terms are becoming more common. Andrejka Bernatova, CFO at Goodnight Midstream, said that as infrastructure gets built in various plays, the water space may see more standardized contract structures. This shift has become more pronounced in the Bakken, where water volumes are more predictable and the infrastructure development is further along compared to the Permian.
“I often get asked where should water be valued and what should the contracts look like, and I think the toughest thing is the contractual structure in the water space,” she said. “It’s happening in water. Whether it’s standardization, FEED, whether it’s the different terms of these contracts, it’s happening in this space. We saw that happen in the Bakken and we’re seeing it happen in the Permian.”
Bernatova also said that public investors are starting to understand the nuances of water midstream infrastructure and the nature of contracts in the space. The challenge is in translating that understanding into value.
“This is infrastructure. It’s necessary. A water midstream provider has to do a good job for the producer because they want it and it’s such an important part of the value chain. … This is a long-term symbiotic relationship between the producer and the water company, so the contracts as a consequence have to look like long-term symbiotic relationships,” she said.
Morgan said that, while pipelines help establish a midstream company’s credentials, the certainty of cash flow that comes from long-term contracts for water handling are just as important. He said the Denver-Julesburg is gradually moving to a more pipeline-based infrastructure, but the smaller rig count and higher barriers to entry mean that it will take more time for that infrastructure to approach the levels currently seen in the Permian.
“Ultimately everybody’s going to view it as a midstream business because they’re talking to us about drilling plans years into the future, they’re talking to us about perspective areas in the DJ that they want to be in, and we’re going to get permits there. If they’re making those long-term decisions and focusing on us being ahead of the curve, that’s a midstream business in my mind,” Morgan said.
Herrmann echoed the sentiment of the value of contracts, pointing to a $500-million deal Lagoon reached with Macquarie Infrastructure Partners last year. Initial investment capital in that deal focused on the expansion of Lagoon’s current assets to support existing long-term contracts secured with Anadarko Basin producers. Herrmann said that, in the SCOOP/STACK, “everyone wants the contract,” but midstream companies have to balance the needs of its investors with the needs of potential operator clients.
“Some of the operators will work with you, but unfortunately with some of the competitors we have, they just want to drive you out,” Herrmann said. “You have to balance that. You want to win the deal while securing that high-quality, long-term contract with good terms for your investors, but ultimately you need to know when to go back to the operator and say this is not a good deal for either of us. Figuring out when that bottleneck happens is a challenge. You want to make a good deal for both sides that everyone can sign off on.”
Herrmann, Bernatova, and Morgan were speaking at a panel discussion held during a recent event hosted by Oilfield Water Connection, “Oilfield Water: Identifying and Financing the Right Solution.”