World Water Day
March 22nd is World Water Day which was created, in part, to learn more about the issues that surround water. This includes the importance of access to fresh water for both people and industry. In recognition of World Water day, I will be posting a three part series this week discussing the use of fresh water in oil & gas development in West Virginia, Pennsylvania and Ohio.
Surge in Oil & Gas Development Triggers Demand for Fresh Water
Since its inception the oil & gas industry has been a boom or bust industry. With high oil prices, national security concerns and advancements in technology, oil & gas development saw a major resurgence over the last decade. Areas of the country, such as the Midwest, which had not seen major development in many years, suddenly experienced a renaissance in energy investment.
The surge in oil & gas exploration and development in the Utica and Marcellus Shale Regions resulted in sharp increases in the demand for fresh water. Some companies addressed their needs by accessing the most readily available sources of fresh water, which out of necessity included small streams and tributaries. Other companies elected to invest millions of dollars in water infrastructure to ensure a consistent and reliable source of fresh water.
Due to the abundance of fresh water in the Midwest (as compared to other portions of the country) most states employed very little regulation of water withdrawals prior to the surge in fracking for oil & gas development. Limited regulation coupled with a spike in demand for fresh water triggered concerns regarding ecologic impacts as well as concerns pertaining to availability of water. Some states responded by adopting complex water management requirements. Other states relied principally on water allocation based upon riparian rights.
With the drop in oil prices, the Midwest has seen significant decline in oil & gas exploration in the last 12 months. The reduction in drilling activity has also lessened the demand for fresh water. However, it is only a matter of time before oil prices go back up. This temporary lull in drilling activity offers an excellent opportunity to analyze the current state of water rights and water withdrawal regulation in the Midwest.
The Need for Fresh Water in Oil & Gas Exploration
Hydraulic fracturing (fracking) is the technology that allowed oil & gas deposits in the Utica and Marcellus Shale regions to be accessible. Fracking is the process of injecting fluids, including large amounts of fresh water, under pressure into a well to create fractures in the rock that allow the gas to be released and recovered. The amount of fresh water used to develop an oil & gas well varies greatly depending upon the region, in the Midwest a typical well can utilize anywhere from 3 to 5 million gallons of water.
Which water resources are accessed for fracking is dependent on the location of the oil & gas well. Location of wells is driven by anticipated productivity. Once the oil & gas company determines the location of its well, it then tries to determine how it will source fresh water to allow for development of the well.
How the Oil & Gas Industry Selects Fresh Water Resources
Fresh water resources are largely selected based upon economics- the cost to move water from its source to the oil & gas well. The shorter the distance between the well and the fresh water resource, the higher the strategic value of the resource. While reliability of the resource (i.e. abundance of fresh water) is an important factor, distance is still the most significant economic driver behind selecting which fresh water resources to access.
There are significant differences in the strategies employed by oil & gas operators when it comes to securing access to fresh water. Due to capital constraints, some companies are driven by short-term delivery costs and simply chose the most readily accessible resources. Other companies have elected to make long-term investments in major fresh water infrastructure to move water from large reliable sources to their operations.
As an example of the costs to move fresh water, in West Virginia it can cost $4-6 per barrel of water to truck water to the drill pad. In comparison, it may cost only .50 cents per barrel to pump water using pipes to the drill pad. However, piping typically requires large upfront capital costs that many companies find difficult to justify unless they have large and consolidated acreage under control. Furthermore, aggressive development must be planned in order to justify significant upfront investment in water infrastructure.
These distinct business strategies trigger a different array of legal issues. Companies electing to utilize the most readily available resources are more likely to access small streams and truck water when those streams are dry during summer and fall. Companies that access the most readily available sources of water are more likely to trigger legal disputes with landowners regarding how much water is utilized or concerns regarding ecological impacts.
Those companies that elect to make major capital investments in water infrastructure face a very different set of legal concerns. These companies must be assured that they will have uninterrupted access to an abundant water source in order to justify their expenditures. These operators are most concerned that their legal right to utilize the water is secure over the long term.
Next Post: Overview of Water Rights and Regulation