“Whiskey is for drinking, and water is for fighting.”: The fight for North Dakota’s fracking-water market

Insight: The fight for North Dakota’s fracking-water market

12:48am EDT

By Ernest Scheyder

WATFORD CITY, North Dakota (Reuters) – In towns across North Dakota, the wellhead of the North American energy boom, the locals have taken to quoting the adage: “Whiskey is for drinking, and water is for fighting.”

It’s not that they lack water, like Texas and California. They are swimming in it, and it is free for the taking. Yet as the state’s Bakken shale fields have grown, so has the fight over who has the right to tap into the multimillion-dollar market to supply water to the energy sector.

North Dakota now accounts for over 10 percent of U.S. energy output, and production could double over the next decade. The state draws water from the Missouri River and aquifers for its hydraulic fracturing, the process also known as fracking and the key that has unlocked America’s abundant shale deposits. The process is water-intensive and requires more than 2 million gallons of water per well, equal to baths for some 40,000 people.As in all booms, new players race in to meet the outsized demand. At the heart of this battle is a scrappy government-backed cooperative, conceived to ensure fresh water in an area where its drinkability is compromised.

The co-op has decided to sell 20 percent of its water to frackers to help keep prices low and pay back state loans. That has not gone down well with the Independent Water Providers, a loose confederation of ranchers, farmers and small businesses that for years has supplied fracking water.

Since opening in January, the co-op has tried to limit the power of the confederation with an aggressive legal and lobbying strategy. The Independent Water Providers have fought back, arguing that the co-op shouldn’t be selling fracking water at all. The state legislature stepped in with a law last month designed to quell the tension and nurture competition, but industry observers expect the acrimony to continue.

“When all of us had nothing (before the oil boom), there was nothing to fight about,” said Dan Kalil, a longtime commissioner in Williams County, home to many oil and natural gas wells. “Now, so many friendships have been destroyed because of water and oil.”

Jeanie Oudin, an analyst with energy consultancy Wood Mackenzie, predicts the competition could push down North Dakota fracking water prices at least 10 percent in the next few years, or roughly $170,000 per well. That’s a sizeable savings in a state where fracking costs are the highest in the country (remoteness meant there was little infrastructure in place). The water accounts for 20 percent of the roughly $8.5 million it costs to drill a North Dakota oil well.

“Regardless of where operators get their water from, the growth in active water depots should increase the availability of raw water for hydraulic fracturing and ultimately bring down costs,” Oudin said. The depots are where energy companies buy most of their fracking water.

The North Dakota Petroleum Council, a trade group for Statoil, Hess, Exxon Mobil, Marathon Oil and other large energy companies, declined to comment on the fight or to forecast how much water prices could fall. The council acknowledged that it would prefer multiple sources for the state’s 8,300 wells.

Energy companies get most of their water in the state by trucking it from depots to oil and natural gas wells. Some wells require more than 650 truckloads to frack. Companies such as EOG Resources Inc and Halliburton Co are experimenting with ways to reduce their dependence on water.

Fracking water depots, which cost roughly $200,000 to build and can gross more than $700,000 per year, are typically small metal buildings on concrete slabs filled with pumps and small tanks connected to the Missouri River or local aquifers. They can have two to six hookups and fill water trucks with as much as 7,800 gallons of water per visit.

The government-backed co-op has nine water depots to hold the fresh water that is piped from the treatment plant in Williston, about 45 miles north of Watford. It plans to build four more depots throughout the Bakken and hugely expand its pipeline system to bring fresh water to more homes. Small lines from the new pipelines will connect directly to some oil wells.

On the other side, Independent Water Providers member JMAC Resources will build more water depots in the region and a massive pipeline just south of the Missouri River to supply oil wells. Other members of the group have also applied for depot permits.

North Dakota water suppliers do not pay for water, and the state legislature rejected a proposed water tax earlier this year. Each side’s plans will rapidly increase the options that energy companies have to access water, further depressing prices.

DANGEROUS TO DRINK

The co-op, officially known as the Western Area Water Supply Project, was designed to boost the quality of the water reaching western North Dakota homes. State studies for years had identified high levels of sodium, sulfates and magnesium in the aquifers.

In Watford City, a dust-caked community of 2,000 dotted with oil-workers’ run-down RVs, the sodium level of the drinking water had been 18 times higher than the level recommended by the U.S. Environmental Protection Agency. “You would drink (it) and get high blood pressure,” said Mayor Brent Sanford.

The high chemical content convinced Watford City officials in 2010 to support the co-op as it was being organized, Sanford said.

By selling 20 percent of its water to frackers, the government-backed co-op hoped to keep water prices for homes low and generate enough revenue to pay back $110 million in state loans for the project. The co-op sells water to frackers at roughly 84 cents a barrel, compared to 21 cents a barrel for homes. (One barrel equals 31.5 gallons, about 119 liters.)

Denton Zubke, the co-op board’s chairman and a credit union president, has defended the co-op’s right to sell water to frackers as the independent ranchers and farmers decry what they see as government overreach into a private industry.

“Free enterprise was never going to bring potable water supply to rural parts of North Dakota,” said Zubke, who also operates a private water depot. “The only way we foresaw putting these water pipes in the ground was to pay for them with industrial (fracking) water sales.”

More than 230 million gallons of water flow every day past the Williston plant, and the co-op itself doesn’t expect water demand from homes to exceed capacity until at least 2032, calming any shorter-term concern about fracking’s taking water away from human uses.

CLOSEST IS BEST

Steve Mortenson, the Independent Water Providers’ chairman, says he supports the co-op’s clean-water mission but believes private industry is best equipped to provide fracking water. “We don’t feel we should have state-backed competition,” he said. “We never expected they would use the leverage of government to oppose private business.”

Confederation members can chose at what price to sell their water; most sell at 50 cents to 75 cents per barrel. Mortenson sells at 65 cents per barrel at his depot in Trenton, a bedroom community on the state’s western edge.

Mortenson, a soft-spoken rancher, offers washers, dryers, showers and free snacks at his depot as a gesture to the truck drivers who bring him business. Energy companies typically choose water depots closest to well sites to save on fuel costs, even if the price is higher than rival sites farther away. That has driven the building of even more water depots around the Bakken.

Zubke disputes the Water Providers’ claim to be any better at selling fracking water. He fears expansion by the independents could jeopardize the co-op’s ability to pay off its debt. Using a complex Depression-era federal law known as 1926(b), he and other co-op officials have been sending cease-and-desist letters to some confederation members throughout North Dakota. They’ve also lobbied state officials – so far, unsuccessfully – to deny water permits to some independents.

Despite the contentiousness – call it fracktion – the Independent Water Providers and the co-op are sticking with their plans.

“We don’t want to profit from the water,” JMAC owner Jon McCreary said. “We want to profit by selling the infrastructure to deliver the water.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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