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<span/>It's been a few
months since the collapse of the Vienna Alliance talks and the
full, global extent of coronavirus (COVID-19) started to become
apparent. While oil prices have improved somewhat and some optimism
has emerged since then, it's clear that the damage wrought during
that short stretch of time will be severe and long-lasting.
<span/>This is certainly
true in US upstream activity, which will of course subsequently
affect the water market. Our research suggests that US land
drilling & completions (D&C) water demand will decrease 48%
during 2020 as a result of the capital spending reductions leading
to drastic reductions in D&C activity levels. However, with a
rebound in activity expected in 2022, the overall D&C water
market will in fact grow at a 7% compound annual growth rate from
2020 to 2024.
The Permian activity reduction will significantly affect its
market share in terms of drilling water demand. This basin
accounted for 41% of total US drilling water requirements in 2019,
but during 2020 it is expected to account only for 28%. The Permian
Basin and Mid-Continent will be the main drivers for the frac water
demand reduction, accounting for 56% of the volume reduction in
2020.
Relative to drilling and frac water, produced water always
dominates the total water volumes so it's constantly an area of
great interest for our clients. Looking ahead, we anticipate that
interest will be amplified this quarter by one very significant
twist in the narrative: shut-ins.
While oil prices have recovered since they turned negative at
the end of last month, "recovered" is a relative term and clearly
few operators will be making much - if any - money at sub-$35/bbl
levels of WTI. This has prompted a rush to shut-in wells without a
full understanding of exactly what the ramifications will be: there
is plenty of literature and historical guidance with regards to
shutting in conventional wells, but this course of action for
unconventional wells, on such a scale, is unprecedented.
Looking beyond the immediate technical considerations (still
being debated) required to select optimal shut-in candidates, there
seems to be a consensus that there will be two effects related to
water: an initial decline in produced water at the surface due to
flow stoppage, and a significant downhole accumulation of produced
water that will then need to be removed from shut-in wells if and
when they are brought back online.
We estimate that flowback and produced water volumes in the US
will decrease 13% in 2020, followed by a decline of 16% in 2021
mainly driven by conventional fields. As low oil prices persist, we
expect shut-in produced water volumes to exceed 5.3 MMb/d, and in
that calculation we presume that conventional well volumes will not
return fully (figure 1).
Figure 1: Estimated US shut-in produced water volumes
For companies with Permian operations, the timing of these
shut-ins will be critical. We estimate that most of the shut-ins
will be restarted during the second half of the year, meaning that
produced water volumes could see an increase exacerbated by
relatively higher water-to-oil ratios expected from these wells.
However, if operators delay the re-starting process, the Permian
will be poised to experience even further declines in produced
water volumes during 2020.
We provide full details on the upstream water market in our
WaterIQ report which is open to clients of IHS Markit's Onshore
Services & Materials subscription. Learn more about our WaterIQ
service.
Paola Perez-Peña is a Principal Research Analyst at IHS
Markit.
