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New Pioneer water deal longer, brings in more money for city

Company gets option of two-year delay amid low oil prices

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Posted: Thursday, April 30, 2015 5:00 am

The Odessa City Council agreed to allow Pioneer Natural Resources to defer purchase of effluent water from the city with a Tuesday vote that city administrators said will ultimately net the city more money and a pre-payment of up to $6 million.

The oil company sought the deferment of up to two years in January after executives determined they would need less water for drilling and completion operations because of the collapse in oil prices. Two weeks ago, the Council tabled a contract with Irving-based Pioneer, citing ongoing negotiations.

But the contract approved Tuesday changed little from the draft being considered at the time.

It includes a pre-pay provision that requires Pioneer to pay $3 million for every year the company defers taking the water, up to two years. Pioneer also agreed to lengthen the term of the deal from 10 years to 11 years.

“They hope that they won’t use two years,” Morton said. “We hope that they won’t use two years. But to get to that, they agreed to adding an eleventh year to the take-or-pay.”

Morton said the amended deal could mean a windfall of an additional $17 million for the city, up to a total $120 million over the life of the deal. After that, the company can extend the contract for two five-year periods.

Now, Odessa can issue debt against the anticipated revenue from the oil company, and city administrators plan to do so to pay for improvements to Odessa drinking water.

Those could include greater treatment at Odessa’s water plant, such as reverse osmosis, to improve the notoriously chalky taste created by a high amount of total dissolved solids. The city in recent months began fielding candidates that could offer improved treatment, Morton said.

Another option would be using the money to shore up drinking water supplies through means such as expanding access to Ward County water well fields, Morton said.

“The contract with Pioneer allows us to do these things without impacting the rate payers,” Morton said. “That’s the beauty of that contract. We have done this deal, taking our wastewater and selling it to Pioneer, which creates a resource for us, a revenue source for us to go and improve our system without impacting the rate.”

In return, Pioneer gets to delay major expenditures on building a pipeline system that includes a feeder line from Odessa to a main north-south line that spans several counties where the company operates, said Steve McNair, president of Pioneer Water Management and Power, the unit of the oil company that reached the deal with the city.

“It gave them an extra year of water sales, and in return, we added some financial flexibility to protect our business during this downturn,” McNair said. “But we are fully committed to resuming in the right market and we continue to be excited about the long-term water deal with Odessa.”

The pre-payments Pioneer must pay under the new contract amount to less than what the company would have had to pay when the first bill game in August of 2016. That take-or-pay amount, outlined in the original contract, required a minimum of about $7 million at the end of the first year.

Plans initially called for the company to start taking city water in August.

The city and Pioneer reached the initial deal for the wastewater in July, when oil prices were more than twice what they are now. But in February, as the company reported a cut of 45 percent to its capital expenditures for the year, executives announced the company would also scale back a $500 million plan down to about $100 million to build up water supplies and infrastructure.

President and COO Tim Dove told investors at the time “we have plenty of water today, at today’s activity levels.”

Morton said the sticking point in negotiations with Pioneer was that the company wanted its pre-payments to count as credit toward water volumes bought beyond the guaranteed take-or-pay amounts.

The amended contract also allows Pioneer to use pre-payments to cover water purchases before the 11-year deal begins if the company decides it wants city water, without triggering the start of the take-or-pay period.

That provision grants the oil company more utility from what would otherwise amount to a potential $3 million deferment free.

The pre-payment still might not benefit Pioneer beyond making the deferment possible if the company does not end up using more than the bare minimum of city water it’s guaranteed.

The rate Pioneer will pay for Odessa’s wastewater did not change with the amended contract.

Pioneer contracted to buy three million gallons per day guaranteed during the first year of operation at rate of $6.33 per thousand gallons.

But Pioneer contracted to buy a greater volume of water in later years — a minimum 4.2 million gallons at a rate of about 27 cents per barrel, or every 42 gallons, of water. Pioneer also has an option to buy more water at a higher rate.

The water rate increases in the final years to $7.14 per one thousand gallons plus a 33 cent maintenance fee.

That still reflects a lesser rate than what oil companies commonly pay per barrel of fresh water — a range of 50 cents to $1.50 per barrel when the company first reached a deal with a city last summer, according to previous articles citing research from PacWest Consulting Partners, now a part of IHS Energy in Houston.

Those savings, and the steady supply, mean the water project remains a long-term priority for the company in coming years as it works through 20,000 identified oilfield locations, Pioneer representatives said in an interview Wednesday.

The company also plans to sell water in years to come.

Pioneer’s CEO Scott Sheffield told Reuters at the CERAWeek Conference last week in Houston that the company might begin increasing drilling at a rate of two rigs per month, believing that prices bottomed weeks ago but waiting to see if record stockpiles find relief.Pioneer is still discussing a deal with the City of Midland to buy effluent water “when drilling activity increases,” according to an investor presentation earlier this month.

Negotiations have involved buying up to 10 million gallons of wastewater a day from Midland, but the project is also more complex because it involves spending up to $100 million on a treatment facility for the water.

Construction on the treatment could take about two years, said McNair, who declined to comment specifically on the negotiations with Midland or the timeline of a deal.

“We plan to have the water appetite for both of them by the time it comes on,” McNair said.

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