What Tips the Balance in the Permian?

Saltwater production is a necessary by-product of oil production. Only in rare cases do you get 100% oil flow from a well, and even then, a reservoir will ultimately “water-out,” making further production pointless and uneconomic. The U.S. Permian basin has been the source of most growth in U.S. daily oil output for the last decade, if not a little longer. As the EIA graph below illustrates, other shale reservoirs are in decline or barely keeping even with past performance.

What hasn’t gotten a lot of attention until recently is the amount of water produced along with the oil and gas. It is a prodigious amount, ranging from 3 or 4, to as much as 12 barrels of water per day along with each barrel of crude. In its raw form, produced water must be disposed of or recycled in some way due to its salinity, which can be several times that of seawater.

Disposal down injection wells into permeable strata has been the preferred method for decades due to low costs, relative to the various recycling technologies available. The picture below taken from a WSJ article in April of this year, highlights the exponential growth in the number of these injector wells since 2010.

Several troubling aspects of this proliferation of injection wells to handle the 3.2 billion barrels of briny water the article mentions that were disposed of through down hole injection just in the Delaware sub-basin of the Permian, have manifested themselves over the past few years. They include surface subsidence, seismicity, and the effect that this injected water has on reservoir pressure in the injected zones. Increased seismicity is the impact getting the most attention currently, thanks to the increasing intensity of injection water induced temblors.

Christine Guerrero, Petroleum Engineer and Strategic Advisor at Octane Investments, commented, in a Webinar entitled, The Permian’s Watershed Moment, that there was a produced water “Tsunami,” in the Permian with water production currently of 19 mm BoWPD. Even with oil firms converting much of their frac water needs to recycled brine, this 19 mm BoWPD is far in excess of what the industry can consume in daily frac operations. As much as two-thirds of this water must then be reinjected-often into shallow reservoirs that can pressure up, and lead to the enhanced seismicity, discussed by Christine in her presentation.

Citing Energy Information Agency-EIA, projections of 27% growth in oil production over the next five years, Christine noted that “operators will have to find other ways to manage higher volumes of water, at significantly higher cost, in order to maintain the Permian’s global production dominance.” She concludes that “Seismicity is our Canary in the Coal Mine.”

As noted the production of highly saline water with crude oil is a fact of life and part of the process. At lower levels of drilling intensity-pre-2010, disposal down injector wells was really the only option and created no real issues. As drilling activity began to increase in the 2010’s with the shale revolution, oil companies recognized that drilling practices would have to be adapted to the new reality.

Chief among these changes was the trend toward converting frac fluids base brines to these produced brines. Major operators like Chevron, (NYSE:CVX) have made big steps toward recycling produced brines into their operations, as have others. But that just scratches the totality of the problem.

With about 5,000 new wells being drilled in the Permian on an annual basis, the industry can then absorb about 6.5 mm BoWPD into its fracturing operations. That still leaves about 12.5 mm BoWPD that must be disposed of, shifted to other locations by pipeline or truck, or treated to a standard where it could be used in agriculture.

Reinjection has been historically attractive to operators because it is the least expensive method to deal with produced brine that is in excess of what the industry can absorb. The increasing seismicity now seen in the Permian is going to require new solutions for much of this brine. As noted in the WSJ article, the Texas Rail Road Commission-TRC following a 5.4 magnitude earthquake in Reeves County, imposed injection restrictions in the area. In addition to increased seismicity, there are legitimate concerns about over-pressured disposal wells breaking down seals in older wells, allowing hydrocarbons to leak into and contaminate adjacent freshwater aquifers. This concern was discussed in the linked WSJ article-

“A growing concern for residents and scientists is that wastewater could migrate into the aging, unplugged wells that litter the Permian by the thousands and contaminate drinking-water supplies or shoot to the surface, where the fluids could damage ranchland.

Advocacy groups have asked the federal government to review how the state is regulating water injection in the region. The Environmental Protection Agency has said it would review the groups’ petition.”

Trucking to a location not presently impacted with seismic activity is also an option, albeit, one that brings more cost and air pollution to the basin. (The Permian has been flagged by the EPA for non-attainment of air quality regulations.) It is one now being used by operators in New Mexico. Disposal wells are more tightly regulated in New Mexico, than in Texas leading to some 2-mm BoWPD being shipped into Texas. With the scrutiny this problem is now getting from regulators, it’s hard to imagine this situation being allowed to persist for much longer.

Finally, we have the treatment/recycling options to clean and desalinate produced water to a standard that it could be used in agricultural applications. Through a process of chemical clarification, and reverse osmosis membrane filtration, contaminants and even salts can be removed from produced brines. This comes with substantially increased costs, but operators may not have a choice if they want to maintain output.

Fortunately, most of them have embraced this technology. This is good as if the EIA is right about a 27% increase in production over the next few years, produced water volumes are only going to rise. Worth noting as well, as companies begin to develop Tier II and III zones, water production will start earlier and trend toward the upper end of the range.

Your takeaway

Over the past couple of years, we have discussed potential limits to growth in shale, particularly in the Permian in a number of OilPrice articles. Among the issues we have reviewed are the depletion of Tier I inventory driving force behind much of the M&A activity over the last few years, the decline in drilling activity, and the role technology has played in keeping production at an elevated state. Last May we discussed the impact that rising gas production might have on oil drilling.

Thus far none of these have done more than cause Permian production to flatline. Dealing with increased amounts of produced water, and the related increasing seismicity that Christine Guerrero and the WSJ article documented may well be what tips the balance in the Permian.

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