What a way to round out the quarter. The B3 team is preparing for our third annual Ripple Effects Summit and as we contemplate our theme, uncertainty in the markets and implications for managing an ever-growing volume of produced water feel like they will take center stage.
Headlines on the economy and politics these days are a rollercoaster ride from hell; to say that what comes next is uncertain seems a bit of an understatement. As recently as last week, I saw calls for $140 crude this year. Goldman Sachs (which has been bullish for a while now) asserts that the current banking crisis will drive price support because it will affect supply more than demand. How? Because regional banks will have a harder time lending to producers and the companies whose services support them, creating supply issues that will drive up prices. China’s reopening after years of Covid lockdowns is a critical driver of all bullish expectations. WTI will average $79 this year, according to Goldman’s commodities desk, and $91 next year. Those expectations sound like a recipe for a strong rig count, particularly in the Permian. This would support continued growth in water recycling, as it portends continued demand for produced water that would otherwise go to disposal.
Scan down the news page just a few lines, however, and you will find headlines about crippling strikes and protests around the world, continued risk of fallout from recent banking tumult, layoffs, stubborn inflation, an impending commercial real estate collapse, among others. There are a lot of issues out there that do not look particularly good for the economy and the word ‘recession’ is increasingly splattered across economic commentary. This creates real headwinds for water management – if price expectations (and oil well completions) are wrong to the low-side and if as a result, recycling demand decreases, how will we manage our produced water and at what cost?
As the industry rushes to increase recycling as a key means of reducing disposal injection in places affected by seismicity, or to achieve groundwater use reduction commitments, the complexity of the water balance increases. Namely, we should acknowledge the important dependency that exists between completions activity and recycling, and the implications that changes in completions will have on water management. Recycling water in completions is a central component of water stewardship, but let’s not forget that we get much more produced water out of a well than we put down hole. When completions go down, demand for recycling goes down (less frac water is needed thus less produced water gets recycled). But unlike groundwater, produced water volumes keep flowing, even when you don’t need them for the next frac. Having a place for that water, likely in a disposal well, and infrastructure to get it there, is critical.
Some of the largest companies in the Permian are announcing massive achievements in recycling – sourcing upwards of 80% of their water needs from produced water. That doesn’t leave a lot of room to grow if completions in their areas slow down. Are they and their water management providers equipped to balance volumes through a downturn, particularly in the face of seismicity? Small- and mid-cap operators in the basin often recycle less and thus offer another outlet for produced water in such a scenario, but are they adequately engaged and connected to infrastructure? How will water gathering and disposal costs change in a lower-than-expected completions scenario, as pricing power for marginal barrels lands in the hands of those with capacity and connectivity? I’m looking forward to spending time working through these questions with our customers in the coming months and hopefully arriving at a better understanding of how we manage through uncertain times.