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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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West Texas Fracker Uses Toilet Water To Cut Cost

It is no secret that fracking companies across the U.S. have been turning over every rock in the supply chain looking for ways to cut costs and improve efficiency. That’s what the business requires in a downturn. But now Pioneer Natural Resources seems to be going a step further in the name of price cuts and efficiency. The firm is finding an efficient, if somewhat unconventional, source of water for use in its fracking operations – the neighbors’ toilets.

Pioneer recently signed an 11-year, $117 million deal with the city of Odessa, Texas giving Pioneer the rights to treated sewage from toilets, sinks, and showers across the city. The firm will start getting waste water deliveries by the end of the year. Of course, since the water is treated, it’s actually perfectly safe and would likely even be potable with, at most, a little more treatment. After all, most cities more or less run on the basis of using the same water over and over again. But Pioneer’s move is a clever one in that people don’t like to think about reusing waste water and this is a good way to get access to large quantities of water in the dry region. Related: “Supersize” Fracking Could Keep Natural Gas Prices Low For Years

The Odessa-Pioneer deal actually makes a lot of sense given that Pioneer needs the water and places a high value on it in light of its economic usefulness. In contrast, Odessa city officials indicated that the treated water was mostly just used for irrigation, so diverting it to Pioneer makes more sense economically. In addition of course, by giving Pioneer access to waste water, the company can now avoid using the potable water it previously relied upon. Overall then the agreement gives Pioneer lower quality water supplies that it has a lot of use for, and frees up higher quality water supplies for other uses.

The deal could be the start of a trend. EOG is looking at its own wastewater deals, while Anadarko uses waste water from the city of Aurora, CO. Related: Oil Prices Might Dip Over This Bearish News

But is this mostly a publicity stunt or does it have real value economically and ecologically?

Water costs in fracking are expensive, but most major firms including Pioneer have been working on improving efficiency on that front. Pioneer’s deal with Odessa has been in the works for a while now and has evolved over time especially as oil prices plummeted. Related: Why Did Oil Prices Just Jump By 27 Percent In 3 Days?

The firm looks set to buy water for around $6.33 per thousand gallons in the first year of the deal. By the end of the deal, the rate increases to $7.14 per thousand gallons plus a $0.33 maintenance fee. That means that Pioneer will receive roughly 18 billion gallons of water (18 billion gallons * an average price per thousand gallon of about $6.75 = a total of $120 million) over the next 10 years. Since Pioneer would have had to get that water from somewhere else if it didn’t get it from Odessa, the deal is the equivalent of annually freeing up about 16,000 gallons of water per person in the city of 110,000.

By Michael McDonald of Oilprice.com

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