March 2020

New data confirms the end of the disposal investment cycle in Permian may be near

WASTED NATURAL GAS – HEAVY BURDEN OF PERMIAN BASIN PRODUCERS FREE REPORT

Is the industry doing enough to reduce emissions associated with wasted gas?

The Permian Basin in West Texas and New Mexico has become one of the world's most important oil producing regions. A dramatic increase in activity levels in 2017 and 2018 – followed by robust well completion programs even under the constraints of tight capital discipline in 2019 – brought many new challenges to the area. A massive increase in oil and associated gas production was accompanied by a substantial rise in the volume of waste gas.

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In Texas, water injection and disposal well information is reported on an annual basis via an H-10 monitor form to the Railroad Commission of Texas (RRCT), meaning that complete fact-based coverage for water injection and disposal in Texas is currently available through December 2018. In New Mexico, reporting is conducted on a monthly basis, therefore the complete picture for the Delaware New Mexico disposal and water injection market is already available through November 2019 with 75% coverage for December 2019.

Let’s take a close look at the epicenter of the recent water disposal market boom, the Permian Basin. Given the incomplete reporting on the Texas side of the basin for 2019, we can apply a similar methodology to estimate the final volumes for recent quarters. We also rely on reported New Mexico data through November 2019, although there is a chance of modest underreporting for 4Q19. Compared to our previous estimates, we do not observe material revisions for historical quarters through 1Q19. Texas estimates for 2Q10 to 4Q19 are revised upwards by 3% to 4%, whereas the revision for New Mexico is 3% downwards for 2H19. Overall, our updated estimate suggests a somewhat more robust disposal market growth in the Permian in 2019, though nearly all growth is driven by Texas – New Mexico disposal activity has remained essentially flat since 4Q18.

In New Mexico, the disconnect between water production and total underground injection (both enhanced recovery and disposal) has increased rapidly since early 2018. Historically, total water production and underground water injection (both enhanced recovery and disposal) followed each other very closely. This trend persisted in the conventional oil and gas era and through the end of 2013, as illustrated by Figure 2. Early frac water treatment and re-use projects slowed the growth of the disposal market relative to total water production in 2014 to 2017. The real boom in water treatment and re-use, along with heavier reliance on Texas’ disposal infrastructure, began in 2018. As of 2H19, Delaware New Mexico oil wells produce more than 100 million barrels of water per month, while less than 80 million barrels of water per month is returned back to the ground. In practice, the total underground injection market in New Mexico has remained almost flat since late 2012, while water production increased by more than 50% during that period. The emergence of a water treatment market in the state is the result of the increased industry focus on the long-term planning of US onshore asset development. While we still expect healthy growth in the Permian disposal market in the medium term, the quicker penetration of water treatment solutions is becoming an increasingly realistic scenario, offering the industry both long-term cost savings and environmentally responsible resource development. The slowdown in the new disposal permitting activity in the basin seemingly began in 4Q19, which suggests we might be nearing the end of a long 2-year infrastructure investment cycle.