SWDI Investors’ Guide – Economics
of Disposal Projects January
22, 2013
Introduction
Income, costs, and profits from saltwater disposal (SWD) wells fit into a complex equation. If the investor is careful, costs and net revenue can be remarkably stable, leading to steady profits and reliable forecasts. This current post will take an abbreviated look at typical costs, market trends, potential problems and due-diligence issues for the careful investor.
Income, costs, and profits from saltwater disposal (SWD) wells fit into a complex equation. If the investor is careful, costs and net revenue can be remarkably stable, leading to steady profits and reliable forecasts. This current post will take an abbreviated look at typical costs, market trends, potential problems and due-diligence issues for the careful investor.
CAPEX: Capital costs for disposal well
projects can be listed in several categories:
1. Well costs – whether drilling and completing a new well or purchase of an existing bore-hole – these costs can be very easily be into the millions. At least one well is needed but a back-up well is essential to provide constant service at a large disposal facility.
2. Surface equipment – these items might range from several steel or fiberglass tanks, transfer and injection pumps, to extensive concrete pad and full electronic tracking systems.
3. SWD operator may elect to use his own transport trucks to pick up and deliver water.
4. Pipelines – long-term customers will want to be serviced by underground pipelines to avoid problems and cut costs; these might be installed by the customer or by the disposal well operator.
5. Water treatment facilities – might include filters, oil separators, polymer breakers, and paraffin blocks. Generally treatment is meant to improve injection efficiency.
1. Well costs – whether drilling and completing a new well or purchase of an existing bore-hole – these costs can be very easily be into the millions. At least one well is needed but a back-up well is essential to provide constant service at a large disposal facility.
2. Surface equipment – these items might range from several steel or fiberglass tanks, transfer and injection pumps, to extensive concrete pad and full electronic tracking systems.
3. SWD operator may elect to use his own transport trucks to pick up and deliver water.
4. Pipelines – long-term customers will want to be serviced by underground pipelines to avoid problems and cut costs; these might be installed by the customer or by the disposal well operator.
5. Water treatment facilities – might include filters, oil separators, polymer breakers, and paraffin blocks. Generally treatment is meant to improve injection efficiency.
OPEX: Operation and Maintenance costs
will of course be on-going throughout the life of the project.
1. Power consumption by the facility for pumps, lights, and secondary equipment.
2. Personnel costs can be large if 24-hour operation is adopted, if trucks are used, or if water treatment must be extensive. Heavy equipment must be used by staff but operations are not routinely hazardous.
3. Motor fuel, lubricants, and chemical costs can be significant.
4. SWD well and equipment maintenance will be significant over the life of the well; working over the well to repair bad casing or a bad packer can cost a half-million dollars.
5. Regulatory compliance will vary between agencies but monthly and annual reports and tests are usually required. An annual mechanical integrity test of the well will require that the well is shut-in for the day with resultant loss in revenue.
6. Environmental liabilities are unlikely but real, tanks are protected by fire-walls but wellheads are usually not and they can have leaks. Trucks can suffer leaks while loading or unloading. Pipelines can leak at the surface or below the surface. Insurance and rapid-response need to be arranged before operation starts.
1. Power consumption by the facility for pumps, lights, and secondary equipment.
2. Personnel costs can be large if 24-hour operation is adopted, if trucks are used, or if water treatment must be extensive. Heavy equipment must be used by staff but operations are not routinely hazardous.
3. Motor fuel, lubricants, and chemical costs can be significant.
4. SWD well and equipment maintenance will be significant over the life of the well; working over the well to repair bad casing or a bad packer can cost a half-million dollars.
5. Regulatory compliance will vary between agencies but monthly and annual reports and tests are usually required. An annual mechanical integrity test of the well will require that the well is shut-in for the day with resultant loss in revenue.
6. Environmental liabilities are unlikely but real, tanks are protected by fire-walls but wellheads are usually not and they can have leaks. Trucks can suffer leaks while loading or unloading. Pipelines can leak at the surface or below the surface. Insurance and rapid-response need to be arranged before operation starts.
Revenues: Several profit streams may be
present at the disposal facility:
1. Disposal of produced water is of course the principal source of revenue for the well; revenue will depend upon the amount of production in the area, the average water cut (percentage of water in the production stream), and the other disposal wells in the area.
2. Captured crude oil is also an important economic factor. The amount of entrained oil in the water will vary by region and by formation but is often close to 1% of the produced water volume. Revenue is important since the sale of this recovered oil is without royalties.
3. Storing and selling heavy brine can be a source of profits if local operators use heavy brine for drilling or completing wells.
4. Some produced water can be easily treated for a specific re-use such as drilling or fracking.
1. Disposal of produced water is of course the principal source of revenue for the well; revenue will depend upon the amount of production in the area, the average water cut (percentage of water in the production stream), and the other disposal wells in the area.
2. Captured crude oil is also an important economic factor. The amount of entrained oil in the water will vary by region and by formation but is often close to 1% of the produced water volume. Revenue is important since the sale of this recovered oil is without royalties.
3. Storing and selling heavy brine can be a source of profits if local operators use heavy brine for drilling or completing wells.
4. Some produced water can be easily treated for a specific re-use such as drilling or fracking.
Trucking: Saltwater hauling can readily be
incorporated into the SWD project as a way to increase traffic to the SWD and an
added profit stream. A fleet of tank trucks in several sizes can be purchased
to insure access to most well site locations. Trucks and trailers are expensive,
require frequent maintenance to continue to be efficient, require an adequate
truck shed and yard but CAPEX and OPEX for the trucking equipment can be
recouped through trucking charges to the area’s oilwell operators. Indeed, if
his competitors choose to use trucks, our SWD operator will very likely be
forced to add trucking to his repertoire in order to maintain customers.
Landfilling: New drilling wells and older
producing wells spin-off liquid wastes that are best injected into an SWD, but
they also produce copious volumes of solid wastes that cannot be injected. For
example, drill-cuttings are generated while drilling a well; these cuttings are
high in salinity and high in oil & grease content. Cuttings are coarse and
cannot be liquefied; they are not to be injected into an SWD well except under
very unusual conditions. Cuttings and other solids such as contaminated soil
are best landfilled and this can be done on-site into a small, lined trench or
at a large commercial facility. An oil & gas landfill can be merged with an
SWD facility when there is sufficient acreage available and sufficient working
capital can be arranged. Regulators usually require that a commercial landfill
be equipped with an appropriate geo-membrane liner to isolate the fill contents
from groundwater and surface water runoff. The incorporation of a solid waste
landfill with the SWD will allow the project owners to accept and bill for all
the wastes generated by E&P facilities.
Market Trends: Any business must seek to match
its facilities to the demands of the market – if the restaurant is over-built
to the clientele, efficiency and net revenues suffer. At the same time the
businessman must be knowledgeable of market trends – are demands growing every
year or are they shrinking? If a new SWD project has high CAPEX demands it will
likely require several years to pay-out and accurate knowledge of the local
produced water trends is vital. Following are aspects that need to be
considered to understand the local market (note that the word “local” will vary
from project to project, its radius is determined by the distance commonly
traveled by water trucks in the area):
- Number
of producing wells making water in the area. This count can be made from
government records, either by county or by an easily-defined polygon. Active
and shut-in wells are usually listed so that tabulations can be made.
- Change
in the number of producing wells in the past 10 or 20 years. Depending upon the
agency, monthly or annual totals can be retrieved and plotted in a simple graph
to identify changes and current trends.
- Number
of new wells drilled this year. New wells will involve large volumes of drilling
waste needing to be managed. Older wells will show increases in the amount of
water produced every day.
- Number
of SWDs in the area and the changes in the past 10 or 20 years.
All
of these trends have their own causes and implications for the current and
future SWD market. The SWDI specializes in the interpretation of market trends
and can help investors.
Potential Problems: There are issues that can exist
in area or that can happen in the future that will have a significant effect on
the economics of the SWD project:
Inadequate
injection zone. The injection zone is one of the most important aspects of the
SWD; it needs capability (the ability to take fluid at a given pressure, as
measured by permeability) and capacity (the ability to store fluid over a
long period as defined by porosity). Without both properties,
the SWD may not be a suitable candidate. If the well exists and has a history
of injection, certain forecasts can be attempted but if the well has not yet
been drilled, the forecast will need to be extrapolated from nearby wells.
Scale
and fouling in the well. Some injection zones are sensitive to certain
saltwater chemistry, their permeability can be fouled with precipitating scale;
this must be removed by periodic flushing with acid. At other times customers
can submit waste water that contains drilling mud or cement, fluids that can
permanently damage the injection zone. The SWD might need to be re-perforated
or re-drilled.
Seismic
activity can of course happen anywhere in the United States on any day of the
year but an earthquake near an SWD has a certain implication for the news media
and people who are exposed to that media. This subject has been dealt with in
other blog-posts so details are not needed here. It appears to be true that some
SWDs cause some earthquakes in some areas of the country. If a string of quakes
is linked to an SWD, the operator may wish to perforate a different zone, cut
the rate of injection, or drill a new well at another location.
Impact
to nearby water well can have a myriad of causes but an SWD is a common target.
Analyses of the impacted well and surrounding water wells are a must in order
to identify the contaminants. The contaminants can then be related back to the
impacting source which might be percolating fertilizer run-off or oilfield
brine. After the point-source of the contamination is traced down, the SWD operator
might want to drill a new private water well or another solution.
Loss
of mechanical integrity within the SWD well implies corrosion or crack in the
casing, a hole in the injection tubing, or leak in the packer. In any case it
must be repaired before injection can resume. Repairs can shut-in the well for
weeks waiting on repairs.
Due-Diligence Considerations: Prior to investment or purchase, the investor would
do well to consider a number of factors involved in the subject SWD project:
- Market
analysis to determine current market status and future market.
- New
drilling plays in the general area.
- Condition
of current SWDs in the area.
- Newly
permitted SWDs in the area.
Appropriateness
of the selected site:
- Easy
road access.- Adequate surface area for planned facilities.
- Separation
from residences.
- Dates
and locations of any previous spills or leaks.
- Capability
of the injection zone in the area.
- Regional
subsurface problems such as faults and corrosive groundwater.
Investors
considering a SWD project must investigate the pros and cons of the specific
project whether it is in operation or is meant to be drilled and the surface
facilities built from scratch. An experienced, full-service contractor such as
SWDI can help evaluate the project.
The
Authors:
Marian M. Smith, Ph.D.,
University of South Carolina (Geology) is a partner in Odin Oil and Gas, LLC,
in Oklahoma City, OK. Dr. Smith has expertise in reservoir geology and image
analysis. For most of her career she was an educator at all levels from
graduate school geology courses at Michigan Technological University to the
teaching of science in middle school in South Carolina. At present she is
combining her background in research and teaching to work as a consultant with
Dr. Langhus at Odin Oil and Gas, LLC.
Bruce G. Langhus, Ph.D.,
is a petroleum geologist with over 45 years' experience in oil and gas business
including water-flood design and operation; Class I, II, and III disposal well
location, permitting and operation; and injection well remediation. Dr. Langhus
has been the Class II Program Manager in Oklahoma, the second largest UIC
program in the country. He was a founding partner of ALL Consulting, a
successful geotechnical consultancy in Tulsa, OK. Dr. Langhus is now part of
Amerex Resources, operators of disposal facilities in Texas, Oklahoma, Montana,
and North Dakota.
