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City OK’s Pioneer water deal - Odessa American: Inthepipeline

City OK’s Pioneer water deal

Sale of wastewater to help Odessa find new water sources

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Posted: Tuesday, July 22, 2014 8:57 pm

The Odessa City Council on Tuesday unanimously approved a long-term deal with Pioneer Natural Resources to sell wastewater to the company for oilfield production.

The arrangement that will net the city about $100 million to seek new drinking water sources during the next 10 years. The wastewater comes from a supply of about 1.5 billion gallons a year treated at the Bob Derrington Water Reclamation Plant that is not fit for residential users.

As it stands, that water is dumped into the Monahans Draw after treatment.

“The reality is water is so critical for our future growth and for today,” City Manager Richard Morton said after the meeting. “This agreement will bring us revenue that we haven’t had before to help us secure additional water sources.”

Industry experts say the scope of the wastewater arrangement between Odessa and the company — along with a similar arrangement the company is working on with Midland — appears unique in its size among the country’s energy basins.

Pioneer will build about 20-miles of pipeline to the east of Odessa, expected to come online in the second-half of 2015, Morton said. Because of that necessary build-out, the agreement calls for an increase of the volume of water it buys from the city after the first year.

The take-or-pay arrangement with Odessa requires Pioneer to pay the city for a base amount even if the company does not accept a base amount of water. The base amount in the first year is 3 million gallons a day at a rate of $6.33 per thousand gallons.

The city agreed to sell beyond that amount up to about a total 5 million gallons. Costs for water beyond the guaranteed amount are $6 per thousand gallons for the first year.

Pioneer spokesman David Leaverton declined to discuss the proposal before the city reached the agreement with the company Tuesday night, but said a primary reason for seeking the municipal wastewater is reducing fresh water usage.

The company has not said publicly how much the pipeline will cost the company or if they will have to further treat the wastewater to use it for oilfield production. Nor did city officials, who said they did not know. So it was not immediately clear if the deal will save Pioneer money from what it pays for water in the Permian Basin.

But the rate Pioneer will pay the city for water during the first year is less than what oil companies typically pay in the field for water — about 50 cents to $1.50 for a barrel of 42 gallons, according to estimates of the Houston-firm PacWest Consulting Partners.

The guaranteed volumes Pioneer agreed to buy from the city level off the second year at 4.2 million gallons per year. But the rate increases over time.

“We think the value of the water goes up over time.” Morton said.

After the fifth year, the company will pay $7.47 per thousand guaranteed gallons. Should Pioneer continue buying the wastewater through its second renewal option, the company would pay $9.85 per thousand guaranteed gallons for the amount in the final five years.

Pioneer’s interest also appears to be fueled in part by a desire to secure a long-term supply of increasingly competitive water resources, said Chris Robart, a partner with PacWest. Better water technology and more advanced techniques of oil and gas companies also enable such an arrangement.  

“Water is certainly a constraint,” Robart said. “And technologies and techniques and producers and service companies have advanced over the last few years in their ability to use dirty water as their base water, or carrier water, in hydraulic fracturing. It’s a combination of the technology to use dirty water and a social stakeholder license.”

The city generates about 6 million gallons of wastewater a day, expected to increase as more people move into the growing city.

The wastewater is relatively clean and fit for irrigation, said Tom Kerr, Odessa’s utilities director. But the city lacks the piping infrastructure to use the 1.5 billion gallons annually dumped, since state requirements prohibit using pipes that carry potable water.

Some of Odessa’s wastewater — about a million gallons a day — is used for irrigating places including city parks, golf courses and ponds, Morton said. But most gets dumped unused into the Monahans Draw.

The city intended to sell the water primarily to large water users: Flint Hills Resources, no longer active, and Odessa Electric Power Partners, which gets its water from elsewhere.

“It comes down our toilets, our showers, our drains, and we can’t turn around and drink it,” Morton said. “But what we can do is sell it to the oilfield.”

The city put out a request for bids to buy the wastewater earlier this year. The city received only one other bid, from Alpha Reclaim, a company that sells reclaimed water, but deemed it less attractive.

Pioneer is working out a similarly long-term deal with Midland expected to involve 10 million gallons of effluent per day. Midland would also want Pioneer to fund renovations of the city’s wastewater treatment plant in order to treat the water. The estimated cost range of those renovations, not needed in Odessa, are from $89 to $100 million.

It makes sense to seek water from both Midland and Odessa so that delivery sources of water are closer to points of demand through the Midland Basin, Robart said.

As the boom and drought continue, competition for water increases among the Permian Basin’s municipalities, oil and gas companies and other users, according to a research paper issued in February by Ceres, a sustainable investing consultancy that looked at usage from January 2011 through May 2013 and found 87 percent of oil wells in the basin are in “high or extremely high water stress areas.”

Buying wastewater means the oil company is less likely to compete for groundwater that Odessa and Midland use for drinking.

“It helps them to continue to do the work they perform and not be as much of a tax on good water sources,” Kerr said ahead of the meeting.

 

 

 

 

 

 

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