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Global Risks Forecast™

Water risk or water opportunity?

Water risk or water opportunity?

Corporations are increasingly aware that the world is facing a water crisis.  The combined effects of climate change, a growing population, and the expansion of water-intense industrial processes such as fracking and washing coal are already starting to change the way water is used in industry, agriculture and even in our homes.

You might expect the energy sector to be well on top of the problem; after all, the sector consumes more water than any other industry apart from agriculture; the two industries account for around 15% and 70% of the world’s total water withdrawals respectively. This leaves the sector vulnerable to increasing costs and operational outages – and even shutdowns if water supplies are disrupted – as well as greater public pressure to act.

However, in a new research paper, Verisk Maplecroft and its sister company Wood Mackenzie, find that global energy companies are increasingly regarding water risk as an opportunity, as much as a threat to business.

Low energy prices forces rethink on water usage

Since Wood Mackenzie, Verisk Maplecroft’s sister company, analysed water risks in US shale, Chinese coal mining and emerging Middle Eastern markets in 2013, the global declines in both oil and coal prices have forced operators to make savings across the board, including cutting the amount spent on water.

Perhaps unsurprisingly, four in five energy sector respondents to a 2015 CDP survey identified water-related opportunities for their business. But are they acting on them? There are certain investments that can lower water risk, while enabling those companies that act swiftly to realise cost savings and strengthen licence to operate.

Take US unconventional oil and gas. The cost pressure on the sector is not expected to let up anytime soon: global oil prices are not likely to return to the $100 a barrel mark until 2029, while US natural gas prices are set to remain below $4/mmbtu until the mid-2020s (2024). Budgets need to be cut further and faster, and we expect the spotlight to fall increasingly on water costs, which currently make up around 14% of total well costs in the US lower 48.

Over the same 2015-2025 period, the volume of oil and gas production from areas identified by Verisk Maplecroft as being at high and extreme risk of water stress in the US is set to double. This raises the question as to whether companies can secure water supplies to meet these levels cost-effectively.

Water infrastructure offers key opportunities

Of particular concern is the lack of water infrastructure, which means water has to be trucked in to drill sites – and very often away for disposal as well. This is not only expensive, but also works to erode operators’ social licence to operate, as people living nearby become disconcerted with the traffic, noise and pollution. The visual reminder of just how much water drilling uses can also agitate residents in drought-affected areas.

One way we’ve seen US operators look to tackle the twin issues of cost and licence to operate is through investment in infrastructure. Earlier this year, Pioneer Resources started up a $25-million pipeline in Texas through which it will transport wastewater the company has purchased from the city of Odessa. The deal guarantees Pioneer access to water, while creating infrastructure and investment for the local area that might not otherwise have been put in place.

The risks surrounding the cost and supply of water open up extraordinary opportunities for service companies. The US sector already operates a $1.9-billion market for the management of fracked water and, while the global shale expansion has been slower than initially predicted, the long-term global potential for cost-effective recycling technologies is huge – and not just in relation to fracking.

The Chinese coal sector is likely to be one of the biggest markets for these recycling services. It is well-documented that around 80% of the country’s coal production takes place in high or extreme areas of water stress. Under some scenarios, water consumption in China’s coal sector rises by up to 63% over the next 20 years.

Chinese legislation boosts incentives for efficient water use

But the industry is not only facing cost pressures and water shortages, but also an ever-growing weight of environmental legislation. One aspect of the Chinese government’s self-declared ‘war’ on smog entails washing coal to ensure less ash is sent into the atmosphere from power stations. Alongside these measures, China is also working to recycle wastewater from mines, tackle water pollution, and limit water consumption. Importantly, it has also put incentives in place to encourage investment in these areas.

Coal operators accordingly have a clear signal to increase investment in efficient water use and wastewater treatment, or face higher fees for discharging pollutants and possibly higher water and environmental levies. We expect billions to be invested in improvements and new technologies as China looks to add 390GW of coal-fired power capacity by 2030 – creating a potential bonanza for well-positioned service companies.

Water risk could even prove a boon for renewable energy companies. Middle Eastern economies would much rather use solar or wind power to run energy-hungry desalination plants than feed in oil that could be exported.

Simply considering water risks is unlikely to be a secure long-term position for energy companies. They will have to embrace the opportunities thrown up by addressing the problem. And the faster energy companies can position themselves to take advantage, the greater the rewards will be.

If you have any questions regarding this analysis, or would like to explore the topic further, please do get in touch.

By Will Nichols, Senior Analyst – Environment and Climate Change team

To discuss this topic with an analyst or to request a Country Risk Report contact info@maplecroft.com
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Verisk Maplecroft is a Verisk Analytics business.