Fracking Bonanza Eludes Wastewater Recycling Investors

Fracking Bonanza Eludes Wastewater Recycling Investors

After two years searching for a blockbuster investment in oilfield water management, fund manager Judson Hill is still holding on to his money. Hill’s NGP Energy Capital Management saw potential in what looked like a hot growth area in energy: treating and recycling the 21 billion barrels of wastewater flowing annually from U.S. oil and natural gas wells — particularly from shale.Instead, it found the market “too fragmented and too frothy,” said Hill, a managing director at the private equity firm in Texas whose latest fund has invested $3.6 billion. “It’s not as though we look back and say, ’Wow, half the ones we passed on were just home runs.’ They weren’t.”

Cleaning up water in the oil patch is a tougher slog than many expected. Geology and water chemistry vary so much by location that no one has devised a cheap, one-size-fits-all technology to convince most producers to recycle. While NGP and its peers have successfully invested in U.S. shale producers, picking a winner in water treatment eludes even Schlumberger Ltd. (SLB), the world’s largest oilfield services provider.

Schlumberger jumped into water recycling years ago envisioning a fast-growing, vibrant new specialty.

“We’ve spent millions and millions of dollars evaluating virtually every available and reasonable-looking technology out there, always hoping we’d find the silver bullet,” said Mark Kidder, who runs Schlumberger’s oilfield water management unit. “At this point, we found nothing.”

Recurring Losses

Other investors that sunk hundreds of millions of dollars into companies that promised to solve water concerns spawned by the shale-drilling boom have yet to see consistent returns for treating water. Publicly traded targets including Nuverra Environmental Solutions Inc. (NES), GreenHunter Resources Inc. (GRH) and Aqua-Pure Ventures Inc. (AQE) have reported a succession of losses since 2011. Shares of the three companies have fallen an average 46 percent during the past 21 months.

Shale drillers use a method called hydraulic fracturing, or fracking, which pumps millions of gallons of chemically treated water down a well to crack rock and release oil and gas. Some of that contaminated liquid comes back to the surface.

Oilfield veterans and rookies burst onto the scene with inventions aimed at helping. General Electric Co.’s recycler is called the Mobile Evaporator, a stainless steel boiler on wheels. Baker Hughes Inc. sought to cut 96 percent of the water used in fracking with a nitrogen-based foam, “like fracking with shaving cream,” the company said in May 2011.

‘Tough Business’

The geology of shale deposits are varied enough to thwart a cost-effective, single solution originally envisioned by some recyclers. Of the $31 billion spent each year on managing water resources in U.S. and Canadian oilfields, $2.8 billion, or less than 10 percent, is spent on recycling, according to PacWest Consulting Partners LLC.

“A lot of people had really perceived this as a great business,” David Rose, an analyst at Wedbush Securities Inc. in Los Angeles, said in a phone interview. “It’s an okay business for some. It’s a really tough business for others.”

In Pennsylvania last year, operators cleaned and reused 85 percent of fracking and produced water because state rules, as well as geology, makes water disposal more expensive there. In most other regions, where disposal wells are more plentiful, recycling amounts to 10 percent or less, according to PacWest estimates.

Cost Factor

One big obstacle to more widespread recycling is the high cost. The old-fashioned way is to throw away the dirty water by injecting it deep into the Earth’s crust through wells drilled just for this purpose. In Texas, producers spend about $1 to $3 a barrel to use and dispose of water that way, said Laura Capper, founder of the Houston-based industry consultant CAP Resources.

Most recycling or treatment options are significantly more expensive, including distillation and evaporation, which costs anywhere from $2 to $6 per barrel, excluding “costly” hauling services, according to PacWest.

Today more than half of U.S. shale and tight-gas reserves are in areas where competition for water with other local users ranks between medium and “extremely high”, according to a Nov. 7 report from industry consultant Wood Mackenzie Ltd. About 95 percent of all fracking in the U.S. last year used water as a base fluid, according to data compiled by Bloomberg New Energy Finance.

New Toolbox

For those who recycle, a toolbox stocked with several basic technologies, such as filtering, chemical treatment and evaporation, is winning out over one ubiquitous technology, said Annie Lane, a chemical engineer at the nonprofit technology research and development company Battelle.

“We’ve weeded out a lot of the things that just don’t work or are maybe too next-generation,” Lane said.

Schlumberger is among companies trying a different route, working on technology that will allow producers to use dirtier water, tainted with minerals such as salt, to frack wells.

Hill, whose fund is still looking to invest in a water company, sees value in contractors providing “cradle-to-grave” water services to operators. The water companies themselves see a profitable future in the oilfield and are planning additional projects to help get them there.

Aqua-Pure is forecasting its first-ever profit by the first half of next year, said Brent Halldorson, chief operating officer at Aqua-Pure. GreenHunter expects a doubling of annual revenue this year, though a 33 cent adjusted loss per share is expected in 2013 for a stock trading at about $1.34, according to the average of three analysts’ estimates compiled by Bloomberg.

Expanding Business

Jonathan Hoopes, Greenhunter’s interim chief executive officer, is considering mergers and joint ventures to expand its business.

“We’re open to partnering with any or all of the water technologies that work,” Hoopes said.

At Nuverra, where water management is no longer the sole focus, the company is partnering in North Dakota’s Bakken shale with Halliburton Co. (HAL), the world’s largest fracking service provider, to use recycled water for fracking, CEO Mark Johnsrud said in an interview.

“The size of the opportunity is huge,” he said. “It just takes a while for new ideas and new concepts to be adopted.”

To contact the reporters on this story: David Wethe in Houston at dwethe@bloomberg.net; Peter Ward in New York at pward41@bloomberg.net

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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