Water management is big business in unconventional oil & gas fields.
Operators have to deal with the water and usually it ends up as an expense, they truck it off the lease or sometimes water pipelines connect to water treatment facilities where it is recycled or disposed of.
Today we talk about produced water and things to consider if you are approached to sell or lease your land for a saltwater disposal well. Generally speaking, what we are talking about applies to the surface rights associated with a tract of land. As with any agreement, it is important to consult with a qualified attorney who is familiar with oil and gas law in your jurisdiction. With that, this episode is for informational purposes only and should not be construed as legal advice.
If you would like some help in negotiating a Saltwater Disposal Well Agreement, my all-time favorite book on negotiating is Never Split the Difference by former FBI Hostage Negotiator, Chris Voss.
But as with any agreement that you would sign, it is important to consult with a qualified attorney who is familiar with oil and gas law in your jurisdiction. With that, this episode is for informational purposes only and should not be construed as legal advice.
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Why do operators dispose of water associated with oil and gas production?
When we talk about saltwater, what we are referring to is the produced water or wastewater that is produced as a byproduct from oil and gas wells.
A saltwater disposal well or SWD for short, is a well that is drilled or converted for the purposes of injecting fluids, primarily produced water, underground.
- In many cases, it may be cheaper to recycle the water by treating it and re-using it for hydraulic fracturing new wells.
- In other cases, it may be more economic to dispose of the water by injecting it deep underground. The water injection wells where the water is ultimately disposed of is often referred to as a saltwater disposal well. That’s what we are focusing on today.
If you are approached with a saltwater disposal well agreement, what does this mean? What types of facilities might be installed on your land?
To help you understand what is typically involved when a saltwater disposal facility is built, we’ll go through the typical facilities and equipment that might get installed on your land if you agree to a saltwater disposal agreement.
What types of facilities are installed with a SWD?
- Well
- Pumps
- Truck unloading facilities
- Water storage tanks
- Water treatment facilities
- Gunbarrel tank – gravity separation of oil & water
- Skim oil tanks
What are some of the pros and cons of allowing a saltwater disposal well to be drilled on your property?
Pros
- Recurring monthly rental income for the use of your land
- Recurring revenue less impacted by the price of crude oil or natural gas
- Upside potential from the sale of skim oil. It’s like a well that never declines!
- Upside potential for sharing in revenue generated for water injected underground.
Cons
- May have an impact on how you can use the surrounding land
- Potentially more invasive than a typical oil and gas facility that is producing oil & gas.
- There may be regular truck traffic due to water trucks transporting the water to the facility (assuming the unloading facility is on your land as well).
- There is the potential to have more of an environmental impact than an oil or gas well. This is because if produced water is spilled on the ground it is difficult to clean up because of the salts and other compounds dissolved in the water.
- There may be potential environmental liability that you would have to deal with after the facility is removed (check with your attorney).
What types of terms can you negotiate for in a saltwater disposal well agreement?
- Negotiate terms just like any other oil and gas lease
- Many operators may want to simply purchase a portion or all of your property outright. That may also be an option.
Terms may vary but some things you could try to negotiate for include:
- Fixed monthly rent. For example, it might be $1000/month or some other fixed amount that the lessee would pay, even if water is not being injected underground.
- $/bbl for water injected. You can sometimes also negotiate for what is essentially a royalty on the water injected in terms of either a price per barrel (usually cents per barrel) or a percentage of revenue from water.
- $/bbl for skim oil that is sold, again you might be able to negotiate a price per bbl or percentage of revenue for the skim oil that is sold.
Before we go on, you may be wondering what is skim oil?
Skim Oil is crude oil that is mixed in small amounts with the produced water. Oil and water is separated on the well pad but some oil still gets by. It needs to be removed before the water can be injected downhole, plus it is where a good amount of money is made with SWD’s.
To put it in perspective, on the conservative side skim oil to water ratio can be around 1%. If a SWD disposes of 200k bbls of saltwater per month, this would mean that it would generate around 2000 bbls of skim oil that would be sold per month. In many cases the skim ratio is 2-3 x that amount so for the same 200k bbls you could have 6,000 bbls of skim oil per month.
Royalties for the sale of skim oil are much lower than the landowner royalty you might get when leasing your minerals. With water disposal or skim oil “royalties”, they are typically well below 10%, usually on the order of 2-4% but you may be able to negotiate a higher amount. For comparison, the statutory minimum royalty in most states for oil and gas is 12.5%.
How much bargaining power do I have in negotiating a SWD Agreement?
Like when you negotiate an oil and gas lease, there are certain factors that can impact how much bargaining power you have. With an oil and gas lease, if you are in an area with a lot of drilling activity that gives you more bargaining power, in other words, what is important is the location of your property relative to where the activity is. The closer the better. With oil and gas leasing, the size of your mineral interests also comes into play. You would have less bargaining power if you own 1 Net Mineral Acre vs. 100 Net Mineral Acres.
With a SWD lease, similarly, it boils down to location location location. If you are nearby an activity with a lot of oil & gas production and drilling activity, that is good. Also, the existing saltwater disposal capacity in the area plays into it as well. In terms of supply and demand, if there is a lot of demand for SWD wells but not much supply you have more negotiating power.
Plus, the amount of produced water the wells in your area generate will play into this equation. For example, in the Permian basin, produced water is a hot topic.
Water Management is a multi-billion dollar business in the Permian Basin
According to a study by Wood MacKenzie for the Wolfcamp formation in the Midland Basin, “An initial water-to-oil ratio of roughly 2:1 can increase to nearly 5:1 by year four and eventually reach 7:1. In the Delaware Basin, water-to-oil ratios are often twice as high as in the Midland Basin, and, in some cases, can reach as high as 10:1.”
With production around 4 million barrels per day, this mean that we are talking on the order of 20 million barrels of water produced, PER DAY. Now, in parts of the Permian, especially in New Mexico where water rights come at a premium, a lot of that water is recycled. But we still are talking about a lot of water that is injected underground in SWD’s.
Know who you are dealing with
Finally, some of the other things to consider with saltwater disposal well agreements is the quality of the operator. In this case, it is even more important to deal with a reputable operator that has a good record when it comes to health, safety, and environmental responsibility.
You can search your state’s oil and gas commission website for notices of violation and wellsite inspections to see what the company’s records are like in this area.
This excellent presentation talks about some of the testing requirements and how water injection rates are determined for saltwater disposal wells.
Wrap-up
- It is important to get help from a qualified attorney with any agreements related to oil and gas facilities, especially saltwater disposal well agreements.
- Like with oil and gas leasing, do your homework on the activity nearby and do some research on water disposal in your area
- Try to negotiate for fixed monthly rent plus a percentage of revenue for water injected and/or a percentage of the revenue from the sale of skim oil.
- The future outlook for the water disposal market is good. Produced water will continue to be an issue and companies will likely look to invest in water treatment infrastructure to help bring operating costs down in a low oil price environment. This could mean more opportunities to lease or sell land for Saltwater disposal wells in the future.
- Water is a big issue and in fact
Resources Mentioned in this Episode:
- Never Split the Difference by former FBI Hostage Negotiator Chris Voss is my all-time favorite book on negotiation (plus, it is a really good read!). Whether negotiating a Saltwater Disposal Well Agreement, an Oil & Gas Lease, the sale of a property, or buying a new car, it has some amazing tactics you can use.
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