The single biggest cost of operating an oil or gas well in the U.S. is the cost of transporting and disposing of the “water cut” – the water that comes up with the oil and gas for the life of the well. This can be over 50% of total operating cost.
Water management cost was easy to overlook when oil was $100 per barrel. Though water is essential to energy operations and is by far the largest volume input and output of every oil or gas well, it was cheap per barrel to source and dispose of water compared to the value per unit of energy produced. Now with energy prices near ten-year lows, the cost of disposing of produced water could be the difference between staying in business or plugging wells and going home. If you’re in Pennsylvania, produced water disposal can cost over $20 per barrel. Ironically, most Marcellus Shale operators were recycling their produced water during boom times to avoid the high cost of disposal, but as they have slashed completion budgets, they have been forced to dispose of their produced water rather than recycling it, causing operating costs to soar.
One company, Sourcewater.com, is using the Internet to solve water management challenges for the energy industry. Much like travelers use Expedia, Orbitz or Kayak to find their best travel options and prices and get the best deal in minutes instead of spending days on the phone calling airlines comparing rates and routes, Sourcewater offers an Internet marketplace that allows energy operators and service companies to optimize their water management decisions in minutes rather than days. The result can be much lower water management costs for operators and higher profitability for service companies at the same time.
The Oklahoman newspaper reported recently that Josh Adler, founder and CEO of Sourcewater, said that as a Sloan Fellow for Innovation and Global Leadership at the Massachusetts Institute of Technology, “I was shocked to learn that there was no marketplace for water.” Adler has also said “Markets work. They allow fair and efficient resource allocation and incentivize innovation, investment, conservation and substitution. Water needs a market.” So he decided to create one. Today, Sourcewater has over 100 companies participating online, with over one billion barrels (42 billion gallons) of freshwater and non-freshwater available online for disposal, treatment and recycling.
How do energy companies benefit from an efficient market for water sourcing, disposal and transport? Many ways. One obvious way is the time saved finding the optimal choice between many different disposal wells, treatment facilities and recycling options based on distance, availability, waiting times and price, variables that are constantly shifting. Another advantage is just being able to find available water, trucks and disposal when completion schedules are constantly changing, without having to call dozens of companies every time the schedule changes.
One advantage that is less obvious, though familiar to frequent travelers, again comes from the travel industry: fare sales and advanced booking discounts. These help both buyers and sellers. Much like airlines and hotels, water trucks and disposal wells have perishable inventory. If they don’t sell all of their capacity today, they start over tomorrow and lose today’s potential revenue forever. You can’t sell a ticket on a plane after it takes off or sell yesterday’s hotel night. At the same time, it costs about the same to operate a full plane or hotel as a half full plane or hotel. Water sellers, trucks and disposal wells are the same way. It makes sense to offers discounts for advanced reservations and last-minute fare sales on slow days rather than let that excess capacity go to waste. This maximizes utilization and profitability for sellers, even if average prices are lower to the buyer, and it creates additional effective capacity in the system without additional investment by reducing waste. But it only works if all of the buyers and sellers are in one online market where price changes can make a difference in demand.
Consider how this system could benefit both energy and service companies in the real world. Most energy producers wait until the last possible minute to get rid of their wastewater, hoping to stall the cost into the next fiscal period. They wait until the impoundment is almost full and then call around for trucks and disposal. Of course that means they are always paying the highest possible rate, the last-minute necessity price. Now imagine that a nearby disposal well is having a slow day or has a cancellation, and so they advertise a fare sale on disposal through Sourcewater at half-off, today only. It’s better to make some money today instead of making none. The energy producer with a half-full produced water impoundment nearby could choose to empty the impoundment today at half-price instead of paying full price next month when it’s full. Both the energy company and the disposal company come out ahead – it’s a win-win made possible by the Internet marketplace.
Sourcewater also creates the ability to replace long-term take-or-pay contracts with a flexible spot market, eliminating costly over-commitments that energy companies make to ensure availability of water and disposal. These take-or-pay contracts are inherently bad deals financially – they are always for too much or for too little. But energy companies do them to ensure supply for operations. With a deep, flexible marketplace, the market becomes the insurance policy.
It was this scenario that drove the need for an online market place home. Adler described a potential situation to Water and Wastes Digest, “Let’s say I had a groundwater permit to pull 600,000 barrels of water for five wells. A few days before I plan to stimulate the wells, I send my trucks to pick up the water, but the well has run dry in the record drought, or the groundwater district says that, because of the drought, it is only allowed to give us 100,000 barrels.” Adler strove to think like an energy producer and the solution became clear – the industry needed a digital marketplace.
Sourcewater is changing the business model for water and water services. Adler compares the wastewater disposal industry to a restaurant that doesn’t take reservations. “[Restuarants] open every night with all their staff and inventory to pay for, and they have no idea whether there will be a line out the door or empty tables. They expect this Saturday night will look a lot like last Saturday night, they hope their regulars will show up, but really they have no idea. You wouldn’t run an airline like that – you make sure the plane will be full before the day of the flight by using price to match supply and demand. It should be the same with water trucks, disposal wells and treatment facilities. ”
Another reason to opt into the Sourcewater platform is that the wastewater disposal industry is shifting. Between seismicity and drought, unpredictable environmental factors are forcing change. Water management needs will only grow more complex. Online marketplaces are the future, offering flexibility in the face of fluctuating economic and environmental conditions.