The Rising Cost of Pore Space Congestion

I’m sitting down to write this, watching snow fall over my family’s cattle operation in southwest Montana (my deadline for this post is a great excuse for why I ‘can’t’ go out in the storm to move cows). This winter season has been a rough one for ranchers in the West. First no snow, no moisture, then way too much. The result: huge concerns about ability to feed cattle after a dry fall and early winter stunted grass growth, followed by so much snow that cattle couldn’t graze so we were all forced to feed hay months ahead of normal. Most operations have fed upwards of 50% more hay than they budgeted for and hay prices are shockingly high. Many operators, our ranch included, sold off parts of their herds early in the season on fears of uncontrollable feeding costs. The implications are far reaching, both across the industry and over time as we look into 2023 and 2024. Budgets have been blown by unexpected hay needs and inflation, herds are smaller than they should be and the industry faces a shortage of animals to rebuild those herds. Costs continue to rise. Good for some, devastating for others. The center of it all? Our most important ingredient: water. It all sounds familiar, doesn’t it?

As the B3 team has begun to prepare for conference season and develop the content we will be presenting over the next few months, I’ve been struck by the parallels between ranching challenges and oilfield water management. It seems seismicity and increasing competition for pore space in the Permian are the oil industry corollary to precipitation in ranching. Both are hard to understand and predict, have major impacts on industry behavior, and have the potential to drive significant shifts in costs (both near- and long-term). Further, both industries produce commodities that are required by the broader economy to keep it humming along; energy for oil and gas companies and protein for ranchers. This means that these rising costs will have to be spread up and down the value chain to keep the industries functioning.

We have started looking at the fundamentals in the oilfield water management market that could drive future costs. Disposal needs are a central factor. All while existing capacity has been reduced in areas impacted by seismicity (seismic response plans have reduced capacity by 1.3 mmbbld from permitted levels from 2021 to 2022 and more reductions are in store this year), demand for disposal is growing and will continue to grow for several years, even in a market scenario with aggressive growth in produced water reuse. In our base case, we see a 14% increase in disposal volumes and an 11% increase in reuse volumes this year from 2022 levels. Scale that up in our aggressive reuse scenario and a 25% increase in reuse still drives a 12% increase in disposed volumes, all else staying the same. If we run a projected water balance into the future assuming that yearly growth in reuse stays high, 2027 is the first year that we track a decrease in Permian disposal volumes, but that change is less than a 1% drop compared to 2026. Looking at the market today, there isn’t enough disposal capacity in the basin to serve this demand, and that is assuming that seismicity does not continue to result in the curtailment of existing capacity. Operators and midstream companies are actively permitting new facilities, the costs of which have increased significantly over the last two years. These factors are driving up costs for water management as a whole – we know anecdotally that disposal fees in some areas affected by seismicity have more than doubled in the last year. How high will costs go? There is a lot of uncertainty yet to be hammered out in the market but higher costs for water management across the board will add new tools to our collective tool chest to deal with future water volumes.

What’s encouraging to many is that these market forces are slowly closing the cost gap between treatment to near freshwater quality levels and disposal. A meaningful spread remains, but the directional pressure is right.