Calvetti Ferguson

Greener Fracking

Greener Fracking: Economics and Realities

The largely-untapped oil and natural gas in shale plays is an undisputable new source of reserves for the companies that explore and produce it, as well as a financial boon to the surrounding communities that benefit from the associated activities of exploring for and producing oil and natural gas. However, the environmentalists that worry over the amount of fresh water used in fracking, as well as water contamination post-fracking are gaining ground with many state governments.

Hydraulic fracturing, or fracking, is the method producers use to extract the shale oil and gas embedded in rocks a mile or more underground. Drillers use a mixture made up of 98 to 99.5 percent water and sand and .05% to 2% chemicals to extract the oil and gas. Fracking requires significant amounts of fresh water, which is just one piece of the environmental puzzle. Once the fracking has taken place, the water is dirty with sand and chemicals, and producers have to recycle or dispose of it in an environmentally sound way. The issues of water usage, disposal and treatment have become a heated topic.

While the potential solutions to the water usage, disposal and treatment challenge range from roaring ahead to completely banning shale fracking, there are solutions available that allow the country to create local jobs and become more energy-independent, in an environmentally sound way. One of the most seemingly- viable solutions is ‘cleaning’ the fracking mixture, so it can be reused.

However, for any solution to be a realistic one, the economics of water management and treatment must be examined. Reusing the fracking water addresses the issue of fresh water demand and also means fewer chemicals must be disposed of after the fracking process. However, what sounds like an easy answer may not be currently financially realistic. Currently, recycling is 50 to 75 percent more expensive than injecting polluted water into deep wells, according to a presentation recently given to Texas lawmakers by Devon Energy.

The amount of water usage varies from well to well and depends upon the well configuration (vertical or horizontal), the number of stages fractured, and the specific characteristics of the formation being fractured. In vertical wells with a single fractured stage it is not uncommon to use less than 50,000 gallons of water during a fracture job, while a multi interval fracture job in a horizontal well can use several million gallons of water. In the Eagle Ford shale play in Texas, a common disposal fee is $0.80+/bbl with an average $3– $6/bbl hauling fee. In the Marcellus Shale, disposal fees are $3+/bbl with an average hauling fee of $7-$10/bbl. If a horizontal well uses 4.2 million gallons (100,000 bbls) of water to frack in the Marcellus Shale the disposal costs for the water would range from $1,000,000 to $1,300,000 per well. With hundreds of wells being drilled monthly in the hotter shale plays, it’s clear that the cost of water disposal or recycling is a significant factor for any producer. To ask any company to add 50 to 75 percent to the cost of the water disposal for recycling would be unrealistic.

As long as fresh water is cheaper to use and dispose of than buying recycled water, or recycling water themselves, companies will buy fresh water. However, costs to haul fresh water for fracking has increased as recent droughts in Texas in 2011 and the Midwest in 2012 force drillers to buy from more distant suppliers. As a result, more companies have been forced to recycle waste water for reinjection in the fracking process. This economic reality may push companies to utilize recycled water sooner rather than later.

It’s clear that fracking, with all of its benefits and challenges, is going to remain an issue for the industry for the foreseeable future. As the industry works to address economic, environmental and legislative issues, a water treatment market has emerged with the hopes of recycling fracking water for reinjection into shale formations. As shale exploration continues to grow, more companies will compete to develop viable technologies to reclaim and reuse the recycled water in hopes of making the cost of recycling water in line with or cheaper than using fresh water.

While there is no silver bullet for the shale water challenge, many forces, including economic, environmental, legislative, as well as mother nature, all will play a role in determining future water sources for hydraulic fracking.

Erick Wegmann, CPA, is a Partner with Calvetti Ferguson, a full-service CPA firm focused on the health care, energy and multinational sectors.