This may sound funny, but water availability is becoming an issue in energy generation. And it may start to impact prices.
The issue here is not the environmental impact of water usage. That is quite a different debate.
What I'm talking about today is the water supply/demand issue.
Because water is plentiful in those areas of the U.S. where shale gas and tight oil drilling is most concentrated, the price of the water itself is very low.
But there are three other costs involved with the usage of water, and those are beginning to cause some serious concerns.
Here's what I mean...
Last week, noted energy blogger Eli Hinckley suggested that a combination of factors may yet result in rising energy prices. In a piece appearing in The Christian Science Monitor, Hinckley noted prolonged droughts and overuse may prompt a reconsideration of the three real issues that would impact energy producers:
With fracking, about one gallon of water is required for each million BTUs (equal to 1,000 cubic feet of gas). My latest estimates put our expected production at 87 billion cubic feet per day by 2020. In addition, coal-fueled electricity generation uses one gallon per kilowatt hour, while nuclear generation requires much more.
Now all of this still this does not translate into any appreciable drain on the amount of available water. At least not by itself. But the primary water usages are elsewhere.
Agricultural production accounts for about 70% of annual water usage worldwide. Drilling and mining needs are included in global industrial usage of about 23%. On the other hand, that category increases to as much as 40% in the U.S. All remaining needs must be covered by what remains.
Right now, there's no need to panic. All estimates indicate there is sufficient freshwater to cover all of these requirements, at least for now.
Unfortunately, there are indications that rising demand from all areas may begin to outstrip water supply by 2030. Some studies put the deficit as high as 40%.
But I have doubts about whether these predictions are accurate.
What's more, there are conservation programs, industrial and technical advances, as well as desalination developments that are quite likely to change the equation over the next several decades.
Lack of supply (i.e., rising costs) is hardly the first water problem likely to be faced by energy producers. It will be from the three categories I mentioned earlier: access, treatment, and transport.
What is beginning to concern an industry having genuine prospects to revolutionize domestic gas and oil extraction is not how much the water costs by itself, but three other expenses...
1) Local authorities are making water access more expensive.
Some of this may be genuine reactions to imbalances for water use in other areas, maintaining adequate water pressure to provide everything from residential and commercial use to fire hydrants and public safety. But the issue of water in many communities is becoming a political issue. And whenever that happens, operators brace for heightened charges and increasingly restrictive licensing.
2) Expenses are increasing to treat flowback and processed water once it has been used in the fracking process.
As the volume of shale and tight drilling increases, so also does the problem of what to do with contaminated water that comes back up pipe with the gas and oil. The flowback contains tailings (rock shavings and other drilling residue), the chemicals put down the hole in the fracking process, and the hydrocarbons themselves.
New advances in fracking that are less reliant on harmful chemicals are being introduced. As that happens, and the use of non-water fracking (carbon dioxide and propane, for example) becomes commercial, the resulting water flow may improve. Also, water is currently reused for later drilling in most locations.
But at some point what is coming up hole exceeds standards and cannot be reintroduced into the environment. The water must then be treated and permanently injected into deep "disposal basins." As basin capacity becomes exhausted, hauling such water to available injection locations becomes a very expensive proposition.
3) The cost of moving water to and from drilling sites.
Broader transport issues have already begun adding to the actual water costs of projects. On-site aquifers sufficient to service drilling pads (locations at which there are a number of horizontal wells being drilled) are not usually available. The water for the fracking must be trucked in, and, as already noted, the used water must be trucked out, either for reuse or disposal.
Aside from the damage done to road infrastructure from this water hauling, the cost of the transport itself will increase the water-related portion of operational expenses.
As the domestic search for oil and gas intensifies, we will have hundreds of thousands of wells coming over the next decade.
Well before serious questions emerge about whether there is sufficient water, the increased costs resulting from using water in drilling could impact significantly on the profitability within broad parts of the energy sector.
The drive to develop more efficient ways to use water, combined with pioneering non-water approaches, is rapidly becoming a priority.
And whenever that happens, there are always new investment opportunities resulting in technology and application.
I'm tracking them carefully.
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About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.