IHS Forum: Water, not oil, is the lifeblood of Texas - James A. Michener*

Power (41% of US water withdrawal) and agriculture (38% of US water withdrawal) receive many of the water headlines today. Water has also been known as a driver of oil and gas activity for some time. Largely water has been taken for granted as being available. Today, all three industries face a similar challenge - what to do in the face of ever increasing demand and shrinking supply.

Growth

Water may be the lifeblood in in Texas - and in any hydrocarbon producing state - however, oil and gas has often been the muscle that has driven the economy here, and that muscle was in atrophy only a decade ago. Unconventional development across the Barnett, Eagle Ford, Permian, and other areas has put Texas back on a production ramp, when an industry decline was forecasted only a decade ago. The development of shale gas and tight oil in Texas, and the rest of the US, has revitalized the close watch industry has on water supply. The knowledge of water's importance is nothing new, but what changes the view of water is optimization of the resource and increased understanding of this increasingly limited resource.

Industry Situation

Industries are in a transitional phase regarding water. The transition is from taking water for granted, to rapidly taking advantage of technology to reduce waste and measure requirements. Metrics and regulation are evolving up quickly. Regulation is increasingly complex and will require more work to ensure that all industries are mindful of their water usage.

Stewart Ramsey, IHS Economist, studies and lives the reality of water in agriculture - he's a farmer in Pennsylvania. Increasing air temperature of the last decade coupled with increased CO2 emissions and increased potential for drought in the US has been a mixed scenario for the US agriculture industry.

An upcoming IHS Multiclient study will be taking a closer look at what effects water will have on agriculture and the resulting impacts on commodity and food prices, as well as global trade balances. That industry faces particular challenges, and the study downside will be dominant. Unfortunately upside is difficult to capture, since little storage is available, and forecasts drive the next year's planting. Downside of course always presents problems, and industry has adapted. Drought tolerant plant variations, as well as water use modeling and technology to monitor crop needs have emerged to help avoid downside and reduce waste. Waste reduction and optimization is not just water driven, but includes an energy element, as a big cost driver is the energy used in pumping water, whether it is electric, diesel, or other power sources. Variability of water is the disruptor and cause for concern. Stocks of agricultural products have become limited, so impacts of disruptions will be greater.

Power presents unique water scenarios, as supply is not the only factor; temperature of the water matters. Cooler water provides a more cooling capacity. The trouble is power generation heats the environmental water in a closed system since water from the plant flows out at a slightly higher temperature. So withdrawal may not consume water, but ultimately there is consumption of thermal capacity. Temperature "pollution" is fairly new and not well tracked; however regulation already in place in Europe will likely make inland power plant construction impractical.

These factors change the investment focus in the power industry. Current power facilities face a challenge and are expensive for retrofit and flexibility. Air cooled plants also face a rising temperature challenge. Regulation now focuses lower temperature water exhaust and often has an upper limit on water temperature. The trouble is, water temperature is the highest in the summer, when electric demand tends to be the highest, so one can see why power shutdowns have been required in the past during hot and dry summer periods. Despite the annoyance often attributed to regulation, it may eventually advantage the US and Europe as having considered thermal impacts on water supply. This is contrary to countries like China, where thermal stress has not been considered and rapid growth and demands on thermal capacity may eventually impact electrical capacity and influence GDP, and other measures.

Generally oil and gas is not a major consumer of water. However unconventional development is water intensive and localized development is often in drought prone areas in Texas and Oklahoma. Water in oil and gas is a very local issue. Supply is the concern in Texas where the land is increasingly drought-prone. Pennsylvania has an adequate water supply, but limited disposal options. Operators in the Marcellus in Pennsylvania have undertaken more water recycling and reuse, because of lack of disposal capacity and high transport costs to neighboring states. So cost drives the water management so far. Water-related capex can equate to 8-10% of well capex and with well costs ranging from $3MM to $10MM per well, there is a fair amount of cost wrapped up here. Cost sensitive unconventional plays that follow a manufacturing development approach are constantly seeking ways to reduce costs, and considerable opportunity remains here.

Opportunity

The challenge now is to take advantage of the market's emerging needs. Industries grew to serve water needs across industry: water recycling driven by high disposal costs in the oil patch, to automation and optimization in the corn fields, to improved technology in handling cooling water on power plants. Opportunities exist in finding ways to overcome ever-increasing costs and scarcity of supply. Early adopters have an advantage over other operators in reduced costs. Early movers in developing water savings technology unlock a potential for profit in helping to drive down costs and provide increased recycling and reuse in a supply-constrained future.

* Texas: A Novel (1985)

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.