Water Is Almost as Precious as Oil in the Permian Basin

(Bloomberg) -- Toby Darden stomped on the ATV’s gas pedal, carving through blustery winds to reach the far northern corner of his 37,000-acre West Texas ranch. He wanted to show off the crown jewel.

This wasn’t the spectacular views of the Davis Mountains or the herds of aoudad rams with their distinctive curved horns. It was a big hole in the ground, the first cut at a well -- not to bring oil up but water, the precious commodity of the Permian Basin drilling play.

Water Is Almost as Precious as Oil in the Permian Basin

The ranch’s water rights were front-and-center in marketing the property, which just went into contract for a hefty $32.5 million. Broken down per acre, the price is higher than any similar sale in the area for at least a decade. Not many who are familiar with these parts were surprised.

“Water is the new oil,” said Laura Capper, a Houston-based oilfield consultant. “The value of water has changed.”

The reason is fracking, a technique that helped kicked off the shale revolution a decade ago. It is the last major step to completing a well, and it is a massive consumer of water. Ranches that can sell excess supplies get a steady revenue stream, which is having an impact on rural real estate appraisals.

That was reflected in the price fetched by the KC7 ranch, named after the family that settled on the land in the 1800s and Darden’s lucky number. The property was opened to pre-bidding before an auction that had been scheduled to take place this week. The auction was canceled when none of the parties that expressed interest was able to match the offer from Paul Foster, co-founder of Western Refining Inc., which was acquired by Tesoro Corp. in 2017. Foster didn’t respond to requests for comment.

Water Is Almost as Precious as Oil in the Permian Basin

In the Permian, America’s busiest oil patch, a producer needs to blast as much as 60,000 barrels of water into a well every day, along with sand and chemicals, to complete the fracking that cracks open the tight, oil-bearing rock about a mile underground. The process takes about 10 days.

Demand for water to use in fracking in the Permian has more than doubled from 2016 levels, according to industry consultant Rystad Energy. Demand should grow to more than 2.5 billion barrels by next year, accounting for nearly half of all U.S. oilfield needs.

Back in 2005, when Darden and his family bought the ranch, he figured the value was in petroleum reserves he might find. The land is, in fact, close to a massive trove of energy deposits discovered in 2016 by Apache Corp. that’s called Alpine High. “We really thought it was going to be an oil-and-gas development,” said Darden, the former chairman of natural-gas explorer Quicksilver Resources Inc.

Then he commissioned a study from Schlumberger Ltd., which showed the ranch could pump out as much as 400,000 barrels of water a day -- for 20 years. Darden, the son of a water-flood engineer, changed plans and started Wolfcamp Water Partners LLC.

Legal battles -- a conflict with his family over ownership and another with a lender -- ended in bankruptcy protection in late 2017 for the ranch. Thus the sale. Darden said he hopes the new owner will agree to a partnership that will allow him to lease water rights and keep his business going on the property.

Water Is Almost as Precious as Oil in the Permian Basin

There’s some concern that aggressive sales of water from the ranch could deplete the Capitan Reef Complex Aquifer that individuals and businesses in the region depend on.

“We don’t want it to be pumped dry,” said Greg Perrin, who runs the Reeves County Groundwater Conservation District. “You don’t want to see it being able to produce a world of water and then just use it for the oilfield industry.”

According to the Schlumberger study, 400,000 barrels of daily water production from the ranch would reduce the capacity of the aquifer under the property by less than 5 percent.

Bernard Uechtritz, a Dallas-based broker brought in by the bankruptcy court to fast-track the KC7 sale, said he knew the water rights would help make it a quick process. Water, along with landscapes suitable for wind farms, are the hot selling points in West Texas.

“It used to be you’d get a great cow ranch that had good grass for your cattle, and hunting or recreation was an add-value revenue stream and discovery of oil or gas was also this cream on the cake,” Uechtritz said. “Now, it’s wind and water.”

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