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News Release
Friday, October 20, 2017

Baker Institute expert: Recycling water produced during development of Texas oil fields threatens landowners’ profits

HOUSTON – Landowners who depend on sales of water and disposal services in the oil field may oppose plans by oil and gas companies to save money by recycling the water from their fracking operations. A new issue brief by an expert in the Center for Energy Studies at Rice University’s Baker Institute for Public Policy explores the economic and legal realities that will influence the conversation between these two parties and, ideally, inform potential business-side and legal resolutions to conflicts over water-recycling issues. 

“Frac Ranching Versus Cattle Ranching: Exploring the Economic Motivations Behind Operator-Surface Owner Conflicts Over Produced-Water Recycling Projects” was authored by Gabriel Collins, the Baker Botts Fellow in Energy and Environmental Regulatory Affairs.

Hydraulic fracturing, or "fracking," uses millions of gallons of water combined with chemicals to shatter underground rock formations and release the oil and gas trapped inside. Fracking operations in Texas often buy this water from farmers and ranchers who own the land. Large volumes of water are also often produced once an oil or gas well comes online. This water is called “produced” water, and also generally includes some or even all of the water injected during the fracking process.

Previously, this water frequently could not be economically reused because it was contaminated with dissolved solids, chemicals, oil droplets and other contaminants that were expensive to remove, and the water was disposed of in deep underground wells. However, technical and economic advances have made it increasingly feasible for the operators to recycle the produced water. 

“Water in Texas oil fields is enormously valuable, selling for five or more times what even water-desperate cities can afford to pay for it,” Collins said. “The opportunity to sell frack water and disposal services also opens the door for a host of landowners to make substantial returns -- including many who are located in areas with significant drilling activity, but who had largely been left out of previous booms because they didn’t own mineral rights. Ranchers can now make many times more per year selling frack water and disposal rights than they did raising cattle. But produced-water recycling threatens these rents, especially when offered at a price range palatable to operators. Conflicts are likely to result.”

Three key factors underpin the growth of produced-water recycling activity, Collins said. “First, exploration and production companies are amassing larger contiguous blocks of drillable acreage -- particularly in the (West Texas) Permian Basin -- and are building midstream infrastructure to maximize operational efficiencies and reduce costs, especially in water handling,” he wrote.

“Second, frack chemistries can now increasingly support the use of minimally treated produced water. Greater reuse of produced water can slash total life cycle water costs by reducing an operator’s need to purchase water from landowners and decreasing the volumes of flowback (used fracking fluid) and produced water that need to be disposed of as oil and gas wells enter production. This in turn reduces lease-operating costs and makes producers more globally competitive,” he wrote.

“Third, an increasingly sophisticated group of midstream water service providers -- many of them backed by cash-flush private equity funds -- is emerging, building infrastructure in high-activity areas and engaging in significant consolidation that could ultimately form the foundation of integrated oil field water-management networks in core parts of the Permian Basin and other plays.”

The high profitability of “frack ranching” versus the much-lower returns of traditional cattle ranching sets a tough stage for negotiations between landowners and exploration and production companies, Collins writes. “Nevertheless, if produced-water recycling grows and activity and infrastructure density become sufficient to sustain value-added trading of produced water, there is likely to be latitude to work out mutually beneficial solutions in the water-recycling space,” he wrote. “But as this process unfolds, expect a substantial rise in legal disputes between landowners and operators over oil field water recycling. If things play out this way, such litigation would likely constitute an essential -- if somewhat unpleasant -- intermediate step as the law catches up with oil field technology and best practices and provides greater clarity to guide future contractual decisions.”

Collins conducts a range of globally focused commodity market, energy, water and environmental research. His current research focuses on oilfield water issues, groundwater valuation in Texas, evolutions in the global gasoline market, shifts in China’s domestic oil consumption structure, Texas water governance and the food-water-energy nexus.

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