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Mixing Oil and Water: Scenes From the Texas Oil Boom, Pt. 1

Posted by Monika Freyman at Feb 13, 2013 10:40 AM |
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Advances in drilling technologies, most prominently hydraulic fracturing, have unlocked shale oil and gas resources previously thought unrecoverable and quite literally changed the American landscape.
by Monika Freyman, Director, Investor Initiative, Water Program Ceres Posted on Feb 13, 2013

This post is the first in a two-part series from Monika Freyman, Manager in Ceres’ water program on hydraulic fracturing, water supplies and energy development. Read part two here.

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Boarding a puddle jumper in Dallas, I picked up a copy of USA Today and opened to the headline “Wealth Rises in the USA’s Heartland”. It was a fitting start to my trip to Midland, Texas. As it turns out, my final destination had reported the second highest per capita income in the nation. Only the bankers of Stamford, Connecticut were making more money than the average Midlander in 2011.

If you have been following the energy sector as closely as I have, you might have guessed the cause: oil. The U.S. is in the midst of an energy boom, with the International Energy Agency predicting that the U.S. will be almost self-sufficient in energy by 2035. The country’s resurgence in oil and gas production is largely attributed to advances in drilling technologies, most prominently hydraulic fracturing, which has unlocked shale oil and gas resources previously thought unrecoverable.

Over the past several months, my colleague Ryan Salmon and I have been researching the effect of hydraulic fracturing on water resources. Our goal is to assess the potential risks associated with this industrial process and inform investors in Ceres’ Investor Network on Climate Risk on the water risks and issues they may face in specific regions, across the many stages of the water lifecycle. I was on my way to see this phenomenon firsthand in Midland, a city of roughly 100,000 inhabitants that sits in the middle of the Permian Basin in Western Texas.

Hydraulic fracturing has quite literally changed the American landscape. As the airplane descended, I could see dozens of well pads dotting the horizon (see photo). The airport walls were lined with advertisements for drilling gloves, pipe lubricants and other specialty products. I would not have been surprised to see a rig in the middle of the runway.

At dinner that night, I struck up a conversation with a waitress named Anna. She told me how the Midland community had changed during the latest rush. Hotels are full, food prices are rising and specialized labor is hard to come by. Hiring a contractor can take up to a year, as demand for skill labor has skyrocketed along with the boomtown economy.

While she agreed that oil had been a boon to many local businesses, Anna told me that sudden wealth had left the community divided. Those with family members working in the industry feel the boom is a blessing; those that do not feel otherwise as they face the burden of local inflation with no income upside. Others are feeling the pressure in their rents. A house on Anna’s block that used to rent for $600/month two years ago now rents for $1,600. Midland had been through boom times before, she reminded me. The key is to remember that a bust always follows.

For the moment at least, Midland is flush. By my estimates, an owner of one section of land (640 acres) can make between $500,000 to $2,500,000 on just the lease of the land to oil drillers before taking into account any additional income from royalties once the oil starts to flow. This bonanza can be divisive in this region, as ownership of the subsurface minerals sometimes rests in one set of hands, while the ownership of the land rests in another. In that case, a mineral rights-owner reaps a significant financial benefit, while the surface owner has none.

Though Midland has quickly realized the value of its land, the community’s approach to valuing and managing its already scarce water supplies has lagged behind the boom. Hydraulic fracturing is a water-intensive practice, and citizens and local businesses are now competing with the oil industry for increasingly scarce freshwater supplies.

I grew up in region with many similarities to Midland—southern Alberta—, which is equally flat as a pancake and also prone to drought-like conditions. Unlike Midland, southern Alberta can source some of its water from the nearby Rocky Mountains and seasonal snowpack. Midland, on the other hand, relies heavily on groundwater, increasingly so after all but one of its surface reservoirs dried up during the drought of 2011.

The precipitous decline of the city’s water supply didn’t seem to be the result of the thirst of a growing population—everyone seemed to drink bottled water, due to some issues with the taste. But the resulting credit downgrade of the town’s water authority clearly illustrates the need for better water management. Midland is far from the only town affected by this phenomenon, and is the topic of a recent Ceres white paper on credit trends in the water sector.

These water-related tensions fueled by the town’s economic lifeblood—the oil and gas industry—are likely to define the coming years in Midland. In my next post, Ryan and I will describe our experience on-site at a hydraulic fracturing operation, where all of these issues intersect.

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Barry Borak says:
Feb 13, 2013 12:01 PM

More balance in your commentary would lend objectivity to the dialogue producers are currently having in the Permian Basin. I manage an investment with a Permian Basin operator for a large institution. This operator recycles flowback water -- at a lower cost than disposing this water. Some operators ARE part of the solution, but you're sensationalizing the issue rather than providing a realistic view of the issue.

Barry Borak says:
Feb 13, 2013 12:04 PM

AND, by the way, there is a growing trend for Permian Basin producers to use sub-aquifer (deeper) low-saline formation water in many hydraulic fracturing operations. I appreciate your observations but feel they must be fair, balanced, and complete if you want to have a dialogue with Permian Basin producers.

Monika Freyman, Manager, Water Program says:
Feb 14, 2013 09:27 AM

Appreciate your input Barry. In subsequent analysis we are looking at just the topics you bring up in your comments. One of the goals of this work is to not only have an open discussion about the many regional water issues (hydrological to stakeholder and everything in between) but also to bring to light some of the better practices, novel approaches and new models in handling and managing water wherever we find them. What is particularly tricky about water is that it we are often as society better at engineering solutions around its sourcing, use, reuse, treatment and disposal but too often we leave out the community and stakeholder perspective. I hope to cover all this ground while hopefully being as unsensational as possible so that we can collectively move forward on solutions that cover all these complexities.

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Meet the Expert

Monika Freyman

Monika researches corporate and investor exposure to risks related to growing water scarcity and water quality issues. She explores capital markets solutions to these challenges and ways that businesses and investors can more proactively manage water risks and limit impacts to water resources. Her work looks to reshape how economic actors value water and drive better water management, recognizing that healthy water resources are an economic imperative. In addition to her current focus on water use trends in shale energy development Monika supports the Water Program's research on water issues in agriculture and municipal systems.

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