Law and the Environment

Oil Companies Recycling Water and Using Saltier Brackish Water in Drought Stricken West and South Texas

Water, some say, may be worth more than oil.  Well, today, water is necessary to produce oil.  With the technology breakthrough of hydraulic fracturing and horizontal drilling, water is crucial for producing oil in the tremendously productive Permian Basin and Eagle Ford Shale in West and South Texas.   But the hitch is these areas are drought stricken, and have been for many years.  As a result, a great deal of pressure has been placed on oil companies to reduce the amount of freshwater that they use for fracing wells.  The oil companies have responded with technology and water management innovation to find ways to lessen their use of freshwater.

While there may be plenty of water for the oil companies to use, public pressure is intense, and public companies tend to respond to this pressure.  As a result, a great deal of time, money, manpower, and equipment have been focused on ways to reduce water use in the Texas oil fields.

One means of doing this is to reuse water.  A great deal of effort has been placed on recycling water that comes back up the well after fracing.  This water may have high salt content and gels that are used to enhance the fracing process.  The oil companies discovered that the water did not have to meet freshwater standards for reuse for fracing.  Thus, the water does not have to be cleaned up as much to allow reuse. 

At times, however, certain amounts of salts, metals, or gels need to be removed before the water can be used for another frac job.  Many startup companies have developed various technologies to remove these materials and chemicals from water in the oil field and to provide a competitively priced solution to the oil companies.   Oil companies are trying these technologies and evaluating which ones may provide a reliable means of producing water that is useful for fracing.

One of the challenges is that the needs of a particular well or geology, the contaminants in the water produced after fracing, and what chemicals are used to frac, may vary significantly from one well, one location, and one field to another.  This means that one water treatment technology or process may work in one location, but not in another, and that one type of treatment is needed for a particular well, that is not needed for another.

This complicating factor makes selecting technologies or companies to provide water treatment more difficult.  Some companies remove certain materials while others do not.  The costs of one technology may be higher than another. 

In all of this, the question is what is the cost to reuse water compared to use of freshwater.  Economics still apply to oil drilling and the expense of treating water for reuse has budget limits. 

As a result, oil companies have started considering other water sources than the traditional fresh water wells used to provide frac water.  In West and South Texas, as in many parts of the country, the aquifers, or water-bearing geologic zones underground, may be saltier depending upon location and depth.  Typically, the freshwater that has low levels of salt is found in the upper reaches of the ground, nearer to the surface, while the water found deeper in the ground tends to be saltier.  The saltier water is called “brackish” water.  Typically brackish water is not very palatable to drink or too salty for agricultural purposes, so it generally has gone unused.

But for the oil industry, it may be perfectly fine for fracing.  This opens up a significant possibility for a source of water that can be used that does not offend local citizens and farmers who are concerned about current and future supplies of freshwater for drinking, showering, farming, and other uses. 

A great deal of effort is now being focused on how brackish water wells may supply water for fracing.  The testing of this water in terms of its chemical content and its potential use in fracing is well underway.  Companies are finding that it may be sufficient without any treatment in many cases.  In other cases, some level of minimal treatment may be necessary.

The use of brackish water is new to the oil business.  The regulator in Texas, the Railroad Commission of Texas (RRC), had not reviewed this issue.  In considering use of brackish water, the RRC conclude that it would be regulated in the same way as freshwater in makeup pits for either use in drilling oil wells or for injection for water floods to produce more oil in secondary or tertiary recovery operations.

Brackish water use may present a lesser concern for now, but this may be changing.  Cities are now using brackish groundwater as a source of drinking water.  A few cities have drilled wells into brackish aquifers and used desalination technologies to remove the salts and other chemicals to produce drinking water.  Several bills were filed in the last session of the Texas legislature to define and clarify regulation of brackish water use.  None of these bills passed, but future bills are expected in next year’s legislative session as brackish water is seen as a future source of water supply.

The use of brackish water may present in a few instances challenges for oil companies.  Even so, the use of brackish water is far less controversial than use of fresh water.   

Water and oil are critical to our economy and to our lives.  While water may not cost as much as oil, it is certainly of critical value in drilling for oil now that fracing is a key component of the most productive oil fields in Texas.  The recycling and reuse of water and use of brackish water will reduce the amount of freshwater that is used by the oil companies in producing oil.  As the droughts continue, these innovations by the oil industry provide a means of conserving a scarce resource and will hopefully allow oil companies, farmers, landowners, and citizens of towns and cities in West and South Texas to coexist as water continues to be a critical resource to the life and economies of Texas.

Energy Reform in Mexico: What Does It Mean?

The following summary of the recent changes in the energy laws of Mexico was prepared by Miriam Grunstein of Thompson & Knight's Mexico City office and Gabriel Ruiz of our Monterrey office. 

 

The political turbulence has dissipated. On October 27, 2008, the Mexican Energy Reform Bill of 2008 (“the Bill”) was approved by the lower house in Congress, and, once it is published by the Federal Executive, it will become the new energy law in Mexico. The Bill’s package presents a blend of amendments made to existing law as well as the creation of entirely new legal bodies. The partially amended bills and newly issued bills will be the following:

 

• Ley Reglamentaria del Artículo 27 Constitucional en el Ramo del Petróleo (“The Oil Act,” amended);

• Ley de Petróleos Mexicanos (“PEMEX Law,” newly issued);

• Ley de Obras Públicas y Servicios Relacionados con las Mismas (“Public Works Law,” amended);

• Ley de Adquisiciones Arrendamientos y Servicios del Sector Público (“Procurement Law,” amended);

• Ley de la Comisión Reguladora de Energía (“Energy Regulatory Commission Law,” amended);

• Ley Federal de Presupuesto y Responsabilidad Hacendaria (“Federal Budget Law,” amended);

• Ley Federal de Derechos (“Federal Duties Law,” amended);

• Ley de Ingresos de la Federación (“Federal Fiscal Revenue Law,” amended);

• Ley Orgánica de la Administración Pública Federal (“Federal Public Administration Organic Law,” amended);

• Ley de la Comisión Nacional de Hidrocarburos (“National Hydrocarbons Commission Law,” newly issued);

• Ley para el Aprovechamiento de Energías Renovables y el Financiamiento de la Transición Energética (“Renewable Energy and Energy Transition Financing Law,” newly issued); and

• Ley para el Aprovechamiento Sustentable de la Energía (“Law for Sustainable Energy Consumption,” newly issued).

 

Those who endured the many months of political debate concerning the reform will not be surprised to see that the original objectives of the reform were overshadowed by the weight given to the changes made in the internal structure of PEMEX. While the motives of the initial Bill launched by the Federal Executive were the restitution of national reserves (by way of creating innovative contractual modes other than pure service contracts) and the satisfaction of the growing domestic demand for fuel (by allowing public-private participation in the construction, ownership, and operation of refining

infrastructure), such motives were consumed by the political heat brought on by the intent of widening the spectrum of private participation in the oil and gas industry.

 

As expected, the central focus of the reform is on the internal structure, operation, auditing, budget, and corporate governance of PEMEX. The principal changes included in the new PEMEX law (“the Law”) are:

 

• Concerning contracts related to productive activities of the hydrocarbon industry, procurement shall be subject to the rules established in the Law and to the rules issued by the Board of Directors, rather than to the general procurement framework applicable to other public entities.

• The public bids carried out in accordance with the Law shall include stages in which contract prices may be negotiated pursuant to the rules issued by the Board of Directors.

• Contracts may include clauses that allow amendments to such contracts in order to include price adjustments as a result of the inclusion of more advanced technology in the project, variations in market prices of supplies and equipment, and the acquisition of new information that may increase efficiency in the project.

• Clauses concerning prices may establish additional compensation when the contractor saves time in the performance of the works as a result of PEMEX benefiting from better technologies or from greater value in the project.

 

This notwithstanding, the text of the Law affirms and clarifies the well known prohibitions that circumscribe private participation in E&P in Mexico to mere service contracts. Contractors may not gain any form of title on the reserves, and price compensation shall be paid strictly in cash, barring the possibility of agreeing on payment by way of percentages of production, sales take, or oil revenues of PEMEX. In accordance with these prohibitions, the Law expressly bars production sharing agreements, risk service, and other similar agreements.

EPA Denies Texas Governor's Request to Reduce by Half the Renewable Fuels Mandate

The Environmental Protection Agency (EPA) denied a Texas request to reduce the national biofuels mandate in half for a year, EPA Administrator Stephen Johnson said today.

Texas Gov. Rick Perry requested that EPA lower the 2008 renewable fuel standard from 9 billion gallons to 4.5 billion gallons.  He claims that the mandate is causing higher food and feed costs, and therby hurting the Texas economy.

"The [renewable fuel standard] is strengthening the nation's energy security and supporting America's farming communities," Johnson said. The mandate "will remain an important tool in our ongoing effort to reduce greenhouse gas emissions and lessen our dependence on foreign oil in aggressive yet practical ways."

President and Chief Executive Officer of Thompson & Knight Global Energy Services to Serve as Program Chair of World Petroleum Congress

Houston, Texas (June 25, 2008) – Houston’s Renato Bertani, president and chief executive officer of Thompson & Knight Global Energy Services, LLC, is serving as program chair for the upcoming World Petroleum Congress (WPC), the most influential meeting place of the global oil and gas industry. The WPC meets every three years and will be celebrating 75 years this June 29-July 3 in Madrid, Spain.

"This is the largest and most prestigious meeting of energy leaders from around the world, and we have now confirmed representatives from more than 52 countries to attend this year, including more than 120 ministers, CEOs, and other high level authorities who will address the current issues in the energy sector," says Bertani. "The petroleum industry is facing its biggest challenge since the first time oil was drilled in 1859. As professionals, we must come together and find, develop, and produce increasing volumes of oil and gas to ensure sustainable development of the world’s growing economy."

The official theme for the upcoming WPC is "A World in Transition: Delivering Energy for Sustainable Growth," reflecting the ongoing concerns of the global industry. Discussions will include the phenomenal rise in the demand for oil and gas, the current high prices, and how the industry will continue delivering reliable and affordable energy for sustainable economic growth.

Bertani is the former president of Petrobras America Inc. and held a number of senior-level positions during his 30-year career with the Brazilian-owned energy conglomerate. Launched in 2007, Thompson & Knight Global Energy Services offers a wide range of specialized services to the industry including risk assessment and mitigation evaluations, portfolio management, asset evaluation, and analysis of exploration and production opportunities around the world.

About Thompson & Knight Global Energy Services, LLC

Thompson & Knight Global Energy Services, LLC (TKGES), a subsidiary of Thompson & Knight LLP, offers a wide range of specialized services to the energy industry, including the identification, assessment, and capture of exploration and production investment opportunities around the world, asset evaluations, and portfolio optimization. TKGES serves clients throughout the energy industry and works closely with clients to assist in optimizing business operations in areas such as business development, portfolio management, risk assessment and risk mitigation, fiscal optimization, asset evaluation in connection with acquisitions or divestments, preparation of packages to raise debt or equity, business modeling with long-term projections of key performance indicators, and other related services. For more information, please visit www.tkges.com.