Wastewater treatment - 165476814Thus far, the idea of using purified municipal sewage effluent—“reclaimed water” in industry parlance—for city water supplies has proven a tough sell. Human psychology poses significant barriers to overcoming the “toilet to tap” aversion. But “toilet to frac” is an entirely different matter. In dry locations with large municipalities (100,000 persons or more) located within 50 miles of drilling operations, using reclaimed municipal effluent as a frac feedstock holds significant promise for reducing calls on groundwater. As oil prices stabilize and recover, the Permian Basin is likely to become the epicenter of municipal effluent use in fracing operations.

Pioneer Natural Resources’ current municipal effluent supply agreement with the city of Odessa and a prospective volume commitment from the city of Midland could by themselves supply enough water to frac nearly 6,000 long-lateral horizontal wells, or several times as many vertical Spraberry wells, during the next 11 to 12 years (Exhibit 1). Depending on oil prices, the Midland Basin likely has approximately 40,000 remaining drilling locations.[1] Therefore, municipal effluent has the potential to make a significant dent in local freshwater demand for fracing.

Exhibit 1: Midland/Odessa Municipal Effluent Frac Water Supply Potential

Note “PXD” is shorthand for Pioneer Natural Resources.

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Source: FracFocus, Odessa American, Midland Reporter Telegram, Author’s Estimates

Among shale drillers, Pioneer Natural Resources is the first to try to source municipal effluent on a long-term basis at industrial scale. The company reached a 10-year agreement with the city of Odessa in July 2014 under which it would purchase a baseline volume of treated municipal wastewater that it could then use to support fracing operations in the area.[2] The contract is “take or pay” and calls for purchases of a minimum of 3 million gallons per day (gpd) the first year, and 4.2 million gpd thereafter. Initial water deliveries will cost Pioneer approximately 27¢ per barrel, a significant discount given that procuring freshwater for frac jobs in the Permian typically costs between 50¢ and $1.50 per barrel.[3] Pioneer will have the right to purchase additional water volumes at a lower price.[4]

Pioneer and the city of Odessa have since amended the contract to allow Pioneer to defer its initial water deliveries because low oil prices have reduced its fracing activity level. The amendment provides that Pioneer will pay $3 million for each year it defers beginning water deliveries (for up to two years) and lengthens the term of the agreement to 11 years.[5] Pioneer has also conducted discussions with the city of Midland concerning a potential 20-year deal under which it would invest as much as $100 million to upgrade Midland’s wastewater plant in exchange for the exclusive right to purchase 10 million gallons per day of treated effluent.[6]

Legal Framework

Municipalities may legally assert ownership of their effluent for the purposes of selling it to oil field consumers. That said, there are several important legal issues that market participants should be aware of.

First, the reclaimed water needs to be moved by truck, pipeline, or other private channel to ensure the buyer retains ownership. Under Texas law, the method of transport can profoundly affect ownership of water. This is because groundwater and “diffuse” surface water—for instance, rainwater accumulation in a farmer’s field—are privately owned.[7] However, surface water that enters a state watercourse becomes state property, held in trust for the public.[8] A watercourse has (1) a defined bank and beds, (2) a current of water, and (3) a permanent source of supply.[9] What this means for purchasers of municipal effluent is that so long as “the reclaimed water is transferred or piped directly to the user or to a holding pond or vessel and never enters a state watercourse, then it is not state water[45] and is not subject to water-rights restrictions.”[10]

Permian Basin projects such as Pioneer’s will move the treated effluent into the oil fields by pipeline. However, potential loss of ownership is a bigger risk to any potential Eagle Ford water supply proposals that might contemplate using existing surface waterways to move treated effluent from San Antonio to withdrawal points within economical transport distance of drilling locations. The bottom line under existing Texas law is that if the treated effluent is injected into an existing waterway, it co-mingles with the water already there and becomes state water subject to water rights authorization.

Second, users must avoid having their reclaimed water become subject to water rights authorizations. The reason for this is both simple and critically important: reclaimed water that becomes state water may face water rights restrictions or water right calls during a drought. A core motivation for sourcing municipal effluent to support fracing operations is to reduce the call on freshwater in dry regions and also to ensure a secure and stable baseline water supply source. Exposure to water rights authorization undermines both those benefits.

Third, municipal effluent users need to maintain robust infrastructure integrity to prevent leakage and avoid environmental liability. Operators sourcing municipal effluent for fracing operations should be cognizant of rules from both the Texas Commission on Environmental Quality (TCEQ) and the Texas Railroad Commission (RRC), which govern oil and gas activities in the state. The TCEQ brings Rule 210.23 of the Texas Administrative Code, which lays out stringent storage requirements for treated effluent. Readers should note that a number of areas in the Permian Basin and Eagle Ford areas are considered to have “high groundwater pollution potential.”[11]

This author believes that in practice, operators who are thinking about incorporating municipal effluent into their frac water feedstock streams should use the standards set forth by Rule 210.23 to guide their storage facility construction. Part of the reason is that Texas Railroad Commission Rule 3.8, which governs fluid recycling, has strict but less explicit standards, and using the Rule 210.23 parameters ensures that water supply infrastructure can seamlessly handle both recycled frac flowback and produced water, as well as municipal effluent.

There are also practical operational concerns that will influence how operators engage with the pit and storage regulations for reclaimed water. Both fabricated tanks, such as those Apache Corporation has used in its Barnhart recycling project, and double-lined ponds with leak detection systems can handle recycled water and municipal effluent supplies. Ponds have the benefit of larger storage volume for a given level of investment. High storage capacity is important because it enables operators to more easily balance regular inbound recycled and municipal effluent water streams with the high-intensity but sometimes irregularly timed water demands of frac completions.

Impacts of Using Municipal Effluent as a Frac Water Feedstock

The concept of using municipal effluent as a baseload frac water feedstock is still novel and relatively untested. Pioneer is the first large oil and gas operator that seeks to obtain a sizable proportion of its frac water feedstock this way. The legal foundation for such creative uses of municipal wastewater under Texas law is strong, and as oil prices stabilize and completion activity increases, this author expects more widespread interest in the practice among operators. Interest will accelerate if long-term conditions in the Permian and Eagle Ford remain drier than normal (notwithstanding the amazingly wet May 2015 enjoyed across Texas). To boot, using alternative water sources strengthens industry’s social license to operate. Competition for water resources is a friction point that is fundamental enough to be problematic even in extremely pro-industry areas such as the Permian Basin.

Municipal wastewater at this point does not offer a supply alternative on the scale that recycling of produced water and frac flowback does. But at the field and company levels, its positive impact on frac costs and water supply security—especially in the Permian Basin—has the potential to be significant.

[1] “Information on the Permian Basin,” Natural Gas Intel, http://www.naturalgasintel.com/permianinfo (accessed on 22 July 2015)

[2] Corey Paul, “Pioneer cites imperative to find water alternatives as usage increases,” Odessa American, 27 July 2014, http://www.oaoa.com/news/article_243c100e-1450-11e4-8903-0017a43b2370.html

[3] Id.

[4] Id.

[5] Corey Paul, “New Pioneer water deal longer, brings in more money for city,” Odessa American, 30 April 2015, http://www.oaoa.com/premium/article_6aac426a-eed0-11e4-b2e8-2b4f2715b7f9.html

[6] Joseph Basco, “City to sell effluent to Pioneer subsidiary,” Midland Reporter Telegram, 17 June 2014, http://www.mrt.com/top_stories/article_b9bc43f8-f67b-11e3-bfd2-0019bb2963f4.html

[7] Turner v. Big Lake Oil Co., 128 Tex. 155, 169, 96 S.W.2d 221, 228 (1936)

[8] Tex. Water Code Ann. § 11.021 (West)

[9] City of San Marcos v. Texas Com’n on Envtl. Quality, 128 S.W.3d 264, 272 (Tex. App.—Austin 2004, pet. denied)

[10] “Requirements for Reclaimed Water,” Texas Commission on Environmental Quality, https://www.tceq.texas.gov/assistance/water/reclaimed_water.html (accessed 22 July 2015)

[11] DRASTIC Map, http://texreg.sos.state.tx.us/fids/30_0210_0023-1.gif (accessed 22 July 2015)