Waste Water Management Economics as Part of the Global Oil Sector
Economics of Oil and Gas waste water is separate from the economics of oil exploration and production yet they are closely yoked. Waste water is not sold like natural gas, crude oil, or other hydrocarbons produced by an oil well and therefore a Salt Water Disposal (SWD) well’s revenue is largely immune from global product price cycles. Nevertheless, global cycles of oil economics wield a strong arm over oil and gas investments and it is these investments that give rise to oil and gas wastes. The blog below looks at the current global collapse of oil price and its possible effects on SWD projects. The blog suggests several strategic options that might be considered by SWD operators during the current global cycle.
Global Oil and Gas Economics
Present day oil price fluctuations appear to be dependent upon current oil volume in storage, short-term political events, current production trends of the major producing nations, competition between alternative energy sources, and any number of random upheavals that flit across our news media. These factors make for a complex calculus but in addition each factor embraces a bewildering network of variability. For example, political events will include internal conflict between the sitting queen/king and unhappy cousins or the election of a new parliament focused on environmental protection rather than oil and gas development. It is quite simple to assess the effect of a single sub-factor on productivity and therefore price but what is devilishly difficult is computing the aggregate effects of all of the sub-factors within a single news event. A single event, such as a newly elected parliament, may have implications for new regulations, new incentives for energy exports, new incentives for alternative energy sources, and new implications for currency value. The overall effect on just that country’s oil sector may not be known for months or years.
The graphs below (adapted from PeakOilBarrel.com 14-4-2015) illustrate in the very simplest way the future outlook for crude oil on a global scale within the coming ten years. The author of the forecast – a leading player in the business – wishes to be anonymous. Even over this short time period (only ten years) the net global crude oil market is loaded up with uncertainties and possible changes.
The forecast shown below is broken into three important phases of the industry.
- 2014 to 2018: Global oversupply and price collapse. Peak production and economic slow-down caused a glut of crude oil on the global market. Low prices have all but dried up investment in upstream oil sector thereby cutting oil production; the trend of oil production from 2015 onward (approximately 1.7% per year) can be interpreted as the average geological depletion of existing oil fields. Global prices will likely remain in the US$60 to 70/bbl range.
- 2018 to 2023: These five years may see an extended period of stable production and stable prices. Prices may be high enough to allow investors to drill the best projects around the globe; the new investments will flatten global depletion and bolster production rates.
- 2023 onward: This phase begins with the end of stable conditions and the precipitous fall of global oil production and associated rise in prices. Production decline is presumed to be the same as the rate established between 2015 and 2018 but in this case the increased price point will not be able to fund enough drilling to maintain sustainable production rates. Somewhere around 2023 or 2024 global crude prices will break through the approximate barrier of US$100/bbl above which grave harm has been done to global economies. It is highly doubtful that economic activity can be maintained long above that barrier. The only alternative at that point will be alternative energy sources such as wind, solar, and similar. High and unstable crude oil prices may have highly destabilizing effects across the energy and other business sectors.
Winners and Losers in the Near Future
We all know that the production and price figures above, even if they are correct, will not affect every oil industry player the same. Who will the winners be? Will the lean and mean junior with late-model, high-quality oil wells be the winner? Will the giant multi-national company with a wide range of reserves be the winner? The junior has the advantage of sound economics but will its meager revenues be enough to maintain operations, especially during periods of very low prices? A small operator will not have the resilience of the huge company with its monitory reserves; sudden changes in the market will affect small operators in drastic ways. In addition the multinational will continue to have significant economies-of-scale when negotiating costs with vendors. Juniors will more often have to pay cash for services and equipment. The coming stable period with moderating prices will be anything but stable on a fine scale and those companies able to economize and shed poor performing assets will survive.
Wastewater Economics in the Near Future
Continued oil production can be translated to mean continued wastewater management. Lack of new drilling to 2018 will translate into lack of demand for new SWDs but of course this is a widespread average that will persist over many basins but could be contradicted locally. Nonetheless, few new wastewater facilities will be needed. New investors in the world of waste water management will need to concentrate on buying existing facilities and making them more efficient. During the present period of price collapse large operators may see advantages in selling off SWDs, making opportunities for smaller companies.
Moderate new drilling will begin again in approximately 2018 and will continue for several years. This period will demand new waste management facilities in various petroleum basins. Drilling distribution will likely depend on economics of the plays; with average per-barrel prices around US$80 even some high cost plays such as Eagle Ford and Bakken shales can be drilled. Some of these plays will require extensive new wastewater management facilities. Whether or not there will be investment capital for waste management facilities is unknown.
Beginning approximately in 2023, global crude oil production will begin to decline and the decline will be inexorable because this is the point of Peak Oil. Continued drilling will not be able to staunch the geological decline of the existing world’s production. Very high oil prices will encourage operators to produce wells as hard as possible, leading to high water-cuts; this will supply larger than usual amounts of waste water. Waste water management facilities will be over-taxed.
Predictions are always difficult and unstable, predicting a situation as complex as the global oil system is insanely difficult. Nonetheless, it appears that current low oil prices are long-term, rising prices will likely come back, and eventually precipitous price rises will dominate the pattern. For those time periods, the SWD investor will want to match strategies with the state of the energy sector. During any global situation, efficiency and controlling CAPEX and OPEX will always be appropriate. Industry down-times are excellent for performing necessary upgrades since contractors are willing to cut charges to gain business. Aim to be the most efficient waste manager in that part of the oil basin that will see sustained development; aim to utilize your SWD throughout its long life.
Salt Water Disposal Institute
Bruce Langhus, PhD Marian M. Langhus, PhD