Privatization and pricing of water resources is likely one of the touchiest subjects today, second maybe to scooters. But we’re doing it.
Water is the lifeblood of the commodities industry. In California — the largest farm state in the U.S. — agriculture uses 80% of the water going to homes and businesses (including farms). And the shale boom is continually pumping larger amounts of water into the wells. Every other input in these markets has a cost. So why not water?
Without a cost on water, municipalities hiring contractors to fix leaks — major and minor — won’t be able to recoup costs of those services.
But even the mention of privatizing water sources conjures images of evil corporations stealing precious lifesource from innocent villagers, with the classic Nestle villain typically catching the heat after the CEO at the time mentioning water needs a market value.
So could privatizing, setting a price on water, and creating markets improve a few areas heavily reliant on water?
Across the U.S. West, subsurface water is fairly unregulated. Following multiple years of extreme drought where surface water all but disappeared, farmers drained many aquifers throughout California, causing water tables in many areas to drop by dozens of feet. Many newly drilled wells went completely dry and had to be re-drilled within a year or two. But new regulations passed in Sacramento aim to regulate the pumping and usage of groundwater, requiring farms to reduce water use by 2% per year for 20 years, for a total of 40% reduction. NPR’s Planet Money recently did a show on how these new regulations are causing major stress for farmers across the region, but opening up opportunities for farmers to have better information about their usage, create efficiencies in their operations, and have the option to sell excess water allocated to them but unused.
While farmers initially worried, and likely continue to express anxiety about the regulations, creating a price point on the water will allow it to flow to the more efficient crop land while reducing long term strain on the entire region.
Statistics From PPIC:
- More than nine million acres of farmland in California are irrigated, representing roughly 80% of all water used for businesses and homes.
- Farm production generated 38% more gross state product in 2015 than in 1980, even though farm water use was about 14% lower.
Texas Water Boom
Another major battle escalated recently on the edge of the Chihuahuan Desert where many of the landowners depend on selling water to cities and oil and gas companies for income. WSJ reported that one influential family is suing the public water commission to prevent another influential family from pumping as much water as they want out of the aquifers sitting under the desert to the Permian. “Under Texas law, they can pump water from under their land and use it for whatever commercial purpose they choose, with few limits.”
If the public utility allows the rancher to pump however much they want, it could cause neighbors to pump as much as they can before the aquifers are depleted, accelerating the process.
Texas Produced Water Problem
Traditionally, produced water — the water that comes back up out of a shale well as the well starts producing hydrocarbons — is disposed of in saltwater disposal (SWD) wells, but new permits for SWD’s are becoming harder to acquire as stricter regulations and fear of seismic activity is a concern for the cheap disposal methods. As this becomes more relevant, well operators will continue to look at alternative destinations for disposal as these SWD wells aren’t a long term solution. And now, new laws in the New Mexico and Texas – the two states the Permian straddles — aim to encourage reuse and recycling of water.
Houston Chronicle reports that, “companies have made more than $2.5 billion of water-related mergers, acquisitions, private equity investments and other deals in the oilfield.” So could there be an electronic marketplace for produced oilfield water?
Marketplace for Water In Permian?
Over the past few months, we received interest regarding the trading and price assessment of oilfield water as a commodity. This interest caused us to take a deeper dive into the oilfield water sector. Oilfield water is an emerging sector in the industry as U.S. crude production continues to grow, and produces more frac water than ever before. This is especially true in the Permian, particularly the Delaware basin, where the oil to water ratio is 1:5 coming out of the ground. This has become a logistical nightmare for operators as they work to dispose of the water as efficiently as possible.
When it comes to produced water as a commodity and price sensitive product, we believe that it will not become a robust market in the short term, and that there are a number of prerequisites that need to happen. The first is the current overall industry mindset of frac water as a waste product (operational cost) and not an asset. Water disposal is currently a midstream and supply chain issue for operators where disposing it as efficiently as possible is the main goal, not price sensitivity of the produced water.
As disposing of water becomes more difficult, which is currently happening with reduction of SWD’s, operators’ mindsets will begin to change and they will look for alternative destinations for produced water, including an online trading venue. However, before one can consider water as a commodity, we need to see market infrastructure such as treatment facilities and cost-efficient recycling so that there’s breathing room in the conversation to discuss price, rather than just acting out of urgency to get the produced water away from my drilling pad.. Until then, online portals to find outlets to dispose of the water will be valuable, but water will remain viewed as a cost center for operations versus a profit opportunity wherein price becomes the leading factor for the purchase and sale.
Blockchain for Water
In the Planet Money show we mentioned earlier, this exchange with a representative from The Freshwater Trust on their project in the Sacramento area perfectly explains the sentiment around blockchain:
JOHNSON: The prototype that we are testing is a blockchain prototype and…
VANEK SMITH: Sorry. I feel like my brain starts to shut down when I hear the word blockchain.
JOHNSON: It’s important for me to note blockchain is not bitcoin. Bitcoin is…
VANEK SMITH: (Laughter).
JOHNSON: Bitcoin is built on blockchain.
GARCIA: Alex says blockchain is a way to establish ownership that can be done anonymously. So it’s a way for a farmer to put water up for sale and set a price anonymously, and another farmer to buy that water, also anonymously.We looked over the high level details of the project in conjunction with IBM Research and IoT sensor company SweetSense. The IoT sensors make sense – you need some way to quantify and track the water you are using and saving. But the value add of the blockchain piece is yet to be clarified.
Blockchain for Water
Searching for Blockchain Water was not disappointing. Endless white papers about how blockchain can save water and even a Water Token ICO. Let’s see how successful that was at watertoken.io
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-Editor in Chief, Josh Yanus