Before taking on his current role as president and CEO of Waterbridge Resources, John Durand was commercial lead on negotiations for Pioneer Water Management in 2014 when the company made a deal to purchase municipal effluent—city wastewater—from the cities of Midland and Odessa and put it to work for its operations in the Permian Basin. It was an example of water management in the midstream sector at work.
At Hart Energy’s recently-held Midstream Texas conference and exhibition, Durand joined David Finan, partner at EIV Capital; and Porter Bennett, co-founder and CEO of B3, a subsidiary of Ponderosa Advisors; to discuss the current state of water in the midstream.
All three agreed that water management in the midstream is costly. They also agreed that to truly differentiate itself from oilfield water services, a company would have to develop a customer-centric, money-savvy model. The panelists all emphasized that midstream water management would ideally become a sophisticated third-party service.
Effective water management in the midstream “depends on what the customer wants. In some cases it makes sense to use an oilfield services model,” Durand told the audience.
In the Permian Basin, “because it’s an emerging play, a lot of the aspects provided by oilfield services are not there,” he continued. “They have to be built. So you’re spending a lot more capital upfront in order to provide a full suite of services.”
Those services, according to Durand, include reuse and recycling of water, reductions on water disposal and gathering and moving water out of areas where there may be seismic concerns and disposal concerns. These services, he stressed, will be “some of the differentiating factors between the oilfield services model and the midstream water model.”
Finan said EIV Capital carried out a 15-year term contract with Encana Corp. He said the contract, to anchor a buildout, is an example of “a contract structure that looks and feels like a traditional midstream contract structure,” but addresses what’s most important to the customer—“a flexible footprint of pipe in order to angle their ever-changing drilling schedules, their ever-changing completion techniques that change the amount of water that’s going back into flowback.
“If your customer realizes the long-term value, it’s up to [capital providers] to sell them that that’s going to be the case,” he added.
Bennett said producers faced with a new option, eye a separate water midstream sector now like they have upstream MLPs in the past. In that structure an asset is built, moved into a tax-break MLP structure and monetized. The MLP market today, though, “is pretty different than what it was in the early 2010 to 2015 time period when producers could move effectively an MLP they’d built themselves and then monetize it by going public.”
As the midstream water sector develops fully into its own, the scale could become an issue of consideration. Bennett also said that he is unsure of the sector’s scale, which could be “waiting on most mid-level producers. The amount of money put in is enormous.”
He reiterated Durand’s comment on capital-intensiveness. Not knowing the true scale creates questions of where the true scale actually lies. Is it in basin sub-regions? The lack of clarity, he said, “speaks to the economic advantage you’re going to have to be able to provide the producer [in order to entice them] to walk away from their own construction project.”
Erin Pedigo can be reached at epedigo@hartenergy.com.
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