The Oil Business is the Water Business

Most people outside the energy industry don’t know that the average onshore oil well produces ten times the volume of water as oil, all day, every day. In fact, the cost of dealing with this “produced water” is the primary cost of operating an oil or gas well. Moving, treating and disposing of water is half to two-thirds of the total cost of producing each barrel of oil, from $20 to $30 per barrel.

While energy production requires water as an input, the industry is a net generator of surface water. By tapping into prehistoric water that has been trapped for eons below impermeable rock, the production process generates water without depleting groundwater stocks—something no other industry does.

In California, the production process creates a thousand times more water than the energy industry uses. Most of the produced water goes right back down the well for enhanced oil recovery. But it doesn’t have to – it could be treated and reused on the surface. I’m not the only one to notice: at the Global Water Summit in Abu Dhabi, the Executive Editor of The Economist, David Franklin, said that the world’s largest company in 2050 could be “ExxonHydro.”

Waste disposal is the #1 operating cost for the oil and gas industry. 

Waste disposal is the #1 operating cost for the oil and gas industry. 

Sourcewater is the first online marketplace for water and water services for the energy industry. I started Sourcewater because I was shocked by the absence of water markets. Water is by far the largest input and output of the upstream energy process. How could there be no marketplace in which to find the resource, value it fairly and ensure supply? Energy companies have markets for the chemicals they use, even the sand. They employ thousands of brilliant people and the most advanced software and financial analytics to squeeze the last penny out of every oil and gas trade. Yet a $1 savings in water management is equivalent in their bottom line to a $10 per barrel increase in the price of oil. Surely water optimization should get at least as much attention as energy trading. But it doesn’t.

Hitting a gusher or making a deal is exciting. Wastewater isn’t exciting: it’s a nuisance.

Some of this is a cultural legacy in the industry. Hitting a gusher or making a deal is exciting. Wastewater isn’t exciting: it’s a nuisance. It’s not just a cultural barrier though. There is a good reason for the lag in investing in water management – it only recently became a survival factor. Before the shale boom, there hadn’t been large-scale onshore energy development in the U.S. for decades. All prior developments had been conventional, where only a diminutive amount of water is needed for drilling, and most of the wastewater is re-injected onsite for enhanced oil recovery. However, enhanced oil recovery does not apply to extracting unconventional resources, an industry that has skyrocketed in the past decade.

In 2009 to 2014, hydrocarbon production in the U.S. doubled. Alongside the boom in unconventional production, the volume of onshore wastewater requiring disposal increased by 20x in the same timespan. Water as an operating expense exploded.

No one in senior management noticed. Nor should they have, from a purely rational economic standpoint. When oil is $100 per barrel and your total operating expense is $40 per barrel, you’d be foolish to spend any time or money trying to get your operating expenses down by a few dollars. You’d rightly spend all of your efforts on getting more oil out of the ground to make that $60 per barrel margin while the sun shines. But in the last 18 months, oil went below $40. If we can save them 10% to 20% through more efficient water markets and better data, that might mean the difference between solvency versus insolvency. For the first time, water management has become the primary survival issue for U.S. oil and gas companies.

An efficient water marketplace is going to lead to more recycling, more conservation, and more investments into water treatment technologies. Not limited to the energy sector, a marketplace model has the potential to improve sustainability for every major off-grid user including agriculture and industry. With an effective system in place, all kinds of water, not just freshwater, can be appropriately valued, traded, and put to its best use.

Sourcewater is a 2016 Imagine H2O Water Data Challenge Finalist.