Business Breakdowns
· James Davolos, Matt Reustle
Beyond royalties within the surface acreage world, your surface acreage can be monetized in any number of ways, primarily easements: easements for pipelines, easements for power, easements for access roads, power lines, et cetera. But we've also honed in on the infrastructure side of it with water. And up until very recently, there was really only one pure-play water infrastructure company, which was Solaris, which was sold to Western Midstream, which coincidentally, going back to your comments about Union Pacific and Anadarko, Western was the midstream assets of Occidental, who acquired Anadarko, which was very contentious but supported by Berkshire Hathaway. A big part of those assets that was bought by Anadarko is actually something we might talk about later in the sour gas window as you get to the eastern edge of the Delaware Basin. Anyway, going back on topic. So again, we look at it really, okay, surface acreage, and then within that surface acreage, royalties, where we're very active in a variety of companies, and now also companies that can be very dynamic in monetizing that surface acreage, LandBridge, whether through water or other types of easements, and then the water infrastructure that's operated, which is the WaterBridge business model. [00:00:00] S0: Maybe we can get into a bit on what's happening with the production of those four barrels of water for every one barrel of oil in this region. Can you just talk about what that looks like in practice and what WaterBridge is actually doing as a service with that water?
· James Davolos
[00:00:00] S1: So maybe a little history, just to bring people up to speed on exactly how this works. So the Permian Basin is the largest oil and gas producing region in the U.S. around 11 to 12 million barrels of energy equivalent, which includes natural gas, natural gas liquids. I mean, relative to a little over 100 million barrels a day of global production, 10% of global volume is enormous. It's even higher when you look at just oil. So these are the oily wells in the U.S. and so the broader U.S. production is influenced by gas and these natural gas liquids. But so the reason the Permian Basin in West Texas has hydrocarbons is that it's an ancient seabed. Decomposing carbon is where you have hydrocarbons over hundreds of millions of years. So it shouldn't be surprising that when you break up this shale rock, where there's oil and gas molecules trapped in that, that there is water. What should also not be surprising given that it's an ancient seabed of decomposing carbon, is that it's very high in salinity or salt content, just like the ocean. So now that we've established that, so you're going down in some cases, 3,500 feet, other cases 10,000, 12,000 feet deep, you're breaking up one, two, three. Now you're getting beyond three-mile fracs of rock, you have all of this water that's going into the wellbore and coming out with the oil and gas. So first thing you need to do is you need to separate your oil and gas from this water. And as I mentioned earlier, in the Delaware Basin, you're getting about four barrels today, about 3.7 to be exact, based on the last data of this, what's called produced water with your oil and gas. So now this water is not water seawater. It's actually many magnitudes more saline than seawater. It also has a variety of corrosive compounds and then very high total dissolved solid content. So in every sense of the word it is a waste product and so it needs to be remediated. And in the days of vertical wells, so you just drill down vertically, it's a pressure system. There was nowhere near as much water because you're not breaking up rock. But also you could take this produced water and then re-inject it into the well to increase pressure called enhanced oil recovery. So it didn't exist. This industry was completely non-existent before the shale boom. Call it 2014. So to be generous it's about a decade.
· James Davolos
But then as the water increases, you need to dispose of it. And early days you're a large E&P. Maybe you call up a rancher next door who has some scrub land and say, hey, can I inject this water? I just got to get rid of it. And generally it's found money to the rancher, they don't care. Early days, as you started getting more and more volumes, they were going deeper and it makes sense to go deep below the shale. So yes, it's more expensive to go deeper, but you don't have to worry about interfering with the oil and gas formation. So if you think about the shale a layer cake, you injected above that layer cake, somebody has to drill through that to get to their oil and gas. So that presents issues in and of itself. The problem with going below the oil and gas is that down there is where there's natural fault lines and it's more susceptible, it's higher pressure. So bookmark this concept of pressure and pore space and porosity. But these deep injections started creating seismic events or earthquakes that caught the attention of authorities in Texas. It's the Railroad Commission. So more recently, about 75% of these disposal wells have been shallow. Shallow also has issues. A, you do not want to interfere with your oil and gas formation. If you interfere with somebody's ability to extract their minerals, you can be held liable, which is a huge liability relative to what you might be getting 10 cents, 12 cents a barrel for water disposal. But more recently as you've had this pressure increasing, you've had sinkholes and you've had interference with these old legacy wells. So remember those vertical wells I talked about? Vertical production peaked in the 70s and some of these wells have been capped for decades. But now you're injecting all of this water into these shallow formations and if you're not responsible with your pressure, it invades these wellbores. And in some cases you can have a blowout of this brackish brine water with all of the nasty associated chemicals and solids and compounds. So as you sit today, we are running out of quote pore space. And so operators need to be very thoughtful about how to transport and how to remediate that water. Because it's no longer just as simple as calling up your neighbor and saying hey, what is it going to cost for me to dispose of this water?
· James Davolos
You need somebody who can guarantee that you are not going to be shut in on your well because you can't get rid of your water. So a company WaterBridge, so enter a third-party operator versus something that used to be just handled internally by maybe the midstream and marketing team who can say, look, I can guarantee your billion pad drilling plan if you're going to need 50,000, 100,000, even a couple hundred thousand barrels of disposal. Here's my injection wells, here's my pipelines and then okay, if this gets filled up, I've got these long haul pipelines to even take it out of the basin. So now you don't have to worry about something that A, could completely curtail your ability to produce, B, is getting increasingly expensive and prohibitive. I mean if you're paying a dollar a barrel to get rid of water and have 4 to 1 water cuts, it's $4 of your LOE and you're lucky if you're netting $40 in the Permian when you take into account the NGL and gas mix of that barrel. So it's a big deal. The point is third-party companies that specialize in doing this can guarantee that disposal and that flow, can do it in a way where you're not jeopardizing environmental or regulatory issues. Are now absolutely critical infrastructure points for the entire U.S. energy ecosystem.
· Matt Reustle
[00:00:00] S0: Yeah, it just feels like they're solving a pain point and removing one of the logistical things that a producer would need to worry about. I would imagine WaterBridge owns the infrastructure. Like you mentioned pipelines. There might be wellbores, but just talk about that. What infrastructure they have to own to facilitate this service and how are they finding ways to dispose of this? Is it just a network of wellbores from other producers? What goes into mechanics of them having the capacity to dispose of this.
· James Davolos
[00:00:00] S1: So going to be if you start at the life cycle, they need an ability to take control of that water at the wellhead which is operated by the E&P Company separate the skim oil. So a very small part of WaterBridge's business is there is some residual oil in that stream. But then the two critical parts of infrastructure is pipe. And so anywhere from 16 to 24 inch diameter pipe, just like an oil and gas pipeline needs to transport that. In some cases you're talking a matter of yards, in some cases you're talking hundreds of miles if you need to get it out of basin. So the next part is okay, you need land and in some cases you're just getting easements from third parties where you're paying an easement across their land. In other cases with LandBridge you own the land. And LandBridge obviously is a symbiotic relationship where they lease that to WaterBridge. But then a critical component after that easement is you then need the saltwater disposal well. And a saltwater disposal well is owned and operated by the company. As you can imagine when I explain these are pretty complex. You're drilling fairly deep. Even going into the shallower formation of the Delaware Mountain Group, you're still going thousands of feet deep. And this is pretty nasty waste products. So it needs to be encased in steel and concrete. And the WaterBridge of the world have a lot of technology to monitor that downhole pressure monitor to make sure you don't have leaks, monitor the flow rates. And so I guess to answer your question in a PP&E sense, your PP&E is the land, the pipe and the actual disposal wells themselves. But the limiting factor today, which is making it harder and harder, is the land. So the pore space and then the easements where there's any number of ability to drill these saltwater disposal wells. If you're—so for people familiar with Texas, if you're way out in the middle of Culberson County or you're up in the Panhandle in Crane County, sure there's plenty of pore space, but it's the ability to take a pipe and get it there. The areas around state line where New Mexico and Texas meet, it's very scarce. So having incremental disposal capacity there is incredibly valuable, as is the ability to have offtake, which is going to get it out of the basin.