Challenges For Produced Water Optimization In The Permian: An Analysis Of SWD Supply and Demand

Challenges For Produced Water Optimization In The Permian: An Analysis Of SWD Supply and Demand January 31, 2017

We Deliver Software Based Insights and Solutions For Digital Oilfield Water Management 2 2 W A T E R I N T E L L I G E N C E W A T E R P L A N N I N G W A T E R M A N A G E M E N T W A T E R M A R K E T P L A C E

Agenda 1. Recent Permian Basin Activity / Water Intensity Trends 2. Permian Water Production and Disposal Utilization 3. 2017 Water Production and Disposal Scenarios 4. Sub-Basin Deep Dives 5. Conclusion 3

WTI Price (USD) Henry Hub Price (USD) Oil and Nat Gas Prices are Recovering From Recent Lows 4 60 Henry Hub and WTI Price Indexes 4 50 40 3.5 3 2.5 30 4 2 20 10 1.5 1 0.5 0 0 WTI Price Index Henry Hub Price Index

Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 While New Completions Declined Over The Last Year, DUC Inventory Increased 1000 900 800 700 Rig Counts (Permian and US) 1400 1200 1000 Permian Reported Completions 1316 5 600 500 400 300 200 100 Permian USA 800 600 400 200 841 761 617 695 731 485 559 703 548 655 319 379 0 0 Basin 1-Yr Rig Count Change Permian -20% Total USA -40% Basin Permian -55% 1-Yr Completion Count Change Source: Digital H2O Analysis, Rig Data, Texas RRC,

Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Millions of Barrels Produced Water Volume Peaked and Began To Decline Faster Than Oil Production 6 400 350 300 250 200 150 100 50 Permian Produced Water & Oil Production 9 8 7 6 5 4 3 2 Permian Water to Oil Ratio 0 1 Water Production Oil Production 0 2013 2014 2015 2016 Linear (Water Production) WOR Linear (WOR) Source: Digital H2O Analysis, Texas RRC, NM OCD

However, This Trend Will Reverse With Increased Completion Activity 7 Water Production By Well Age (Barrels) First Year Permian Water to Oil (WOR) 30 25 20 15 10 5 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Well Age (Months) Source: Digital H2O Analysis, Texas RRC, NM OCD

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Barrels/Completion Horizontal Lengths (ft) Barrels/ft Water Total Water Intensity Use Is Per Is Increasing Also Declined Increasing While More Water More Water Used Per and Used Completion Produced and Per Has Produced Well Increased With Per Longer Well significantly With Horizontals Longer Horizontals 8 Average Water Use Per Completion Trend (2013-2015) Average Horizontal Length and Estimated 36 Month Production 200,000 7,000 45 180,000 6,800 40 160,000 6,600 35 140,000 120,000 100,000 80,000 60,000 6,400 6,200 6,000 5,800 5,600 30 25 20 15 40,000 5,400 10 20,000 5,200 5 0 5,000 2013 2014 2015 0 Avg. Hz Length Est. 36 Month Water Production Per Horizontal Foot Source: Digital H2O Analysis, Texas RRC, NM OCD, FracFocus

Disposal Capacity Is Constrained In Key Geographies 9 Source: Digital H2O Analysis

Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Median Pressure Utilization (%) Median Transfer Distance (Miles) Disposal Utilization and Transport Distances Are Highly Correlated Pressure Increases Drive Increased Distance & Cost 10 42 SWD Pressure Utilization and Transport Distance 12 41 10 40 8 39 6 38 37 4 36 2 35 0 Median Pressure Utilization Median Distance Source: Digital H2O Analysis, Texas RRC

Millions of Barrels Water Production Will Grow Significantly With Renewed D&C Activity 11 390 380 370 Forecasted Water Production at Different WTI Prices Water Production Forecast Scenarios (WTI Price) 360 350 340 360 342 363 344 346 Scenario 1: $30/bbl 330 320 334 333 Scenario 2: $50/bbl 310 300 Scenario 3: $70/bbl 290 Reported Production $30 WTI Price $50 WTI Price $70 WTI Price Source: Digital H2O Analysis

DUCs Provide a Good Geospatial Indicator for Future Production as Oil and Gas Prices Continue To Recover 12 Permian Drilled But Un-Completed (DUC) Wells (September 2016 January 2017) Mean time to complete a DUC = 30 Days Sub -Basin Sep t 016 Jan 2017 Recently Completed Dela ware 259 252 7 Central 196 183 13 Platform Midland 402 357 45 Total 857 792 65 DUC Well Delaware Region Central Platform Region Midland Region

Disposal Capacity Constraints Become Acute In Key Geographies With $70 Oil 13 Source: Digital H2O Analysis

Jul-14 Sep- Nov- Jan-15 Mar- May Jul-15 Sep- Nov- Jan-16 Mar- May Jul-16 Sep- Nov- Frequency Count of SWD Completions As DUC Driven Water Volumes Ramp, New Disposal Capacity Will Lag Growth In Produced Water Volumes 14 Mean Time from Permit Filing to First Observed Injection (N=74 in TX and NM) 10 Monthly Salt Water Disposal Well (SWD) Completions in Permian Basin 70 9 8 Mean time = 400 Days 60 7 50 6 5 4 40 30 3 2 1 20 10 0 0 Days Source: Digital H2O Analysis, Texas RRC

The Delaware 15

There Are Already Disposal Capacity Constraints In The Delaware 16 Delaware Produced Water Volume (July 2016) Delaware Pressure Adjusted SWD Capacity (July 2016) Produced Water (bbls) Available Capacity (bbls) Total Jul-2016 Water Production: 121 Million Bbls Jul-2016 Available SWD Capacity: 128 Million Bbls

At $70 Oil We Estimate A 15% Increase in Volume of Produced Water In Close Proximity to Highly Utilized SWDs 17 Est. Delaware Monthly Produced Water Change 2016-2017 DUC to SWD Geospatial Analysis For Delaware Basin 15% Increase in Produced Water at $70/ bbl Available Capacity (bbls) DUC Well Jul-2016 Available SWD Capacity: 128 Million Bbls

A 15% Volume Increase Would Likely Result In Multiple Disposal Bottleneck Areas in 2017 Primarily in Lea and Eddy 18 Estimated Delaware Basin Disposal Capacity Bottlenecks (July 2017) Discussion Likely bottle-necks in 2017 due to high disposal utilization Acute bottle-necks are most likely to occur in Eddy, Lea and Winkler counties We estimate that there will be ~35 Mbbls/month of produced water in areas with over pressured SWDs Available Capacity (bbls) Source: Digital H2O Analysis, Texas RRC, NM OCD

The Central Platform 19

While Not As Severe As In The Delaware, There Are Also Disposal 20 Capacity Constraints In The Central Platform Central Platform Produced Water Volume (July 2016) Central Platform Pressure Adjusted SWD Capacity (July 2016) Produced Water (bbls) Available Capacity (bbls) Total Jul-2016 Water Production: 106 Million Bbls Jul-2016 Available SWD Capacity: 80 Million Bbls

At $70 Oil We Estimate A 11% Increase in Volume of Produced Water in The Central Platform 21 Est. Central Platform Monthly Produced Water Change 2016-2017 DUC to SWD Geospatial Analysis For Central Platform 11% Increase in Produced Water at $70/ bbl Available Capacity (bbls) DUC Well Jul-2016 Available SWD Capacity: 80 Million bbls

An 11% Volume Increase Would Likely Drive Disposal Bottlenecks 22 in Parts of Cochran, Crane, Gaines, and Andrews Estimated Central Platform Disposal Capacity Bottlenecks (July 2017) Discussion Likely bottle-necks in 2017 due to high disposal utilization Acute bottle-necks most likely to occur in Cochran, Gaines, and Andrews counties We estimated that there will be ~12 Mbbls/month of produced water in areas with over pressured SWDs Available Capacity (bbls) Source: Digital H2O Analysis, Texas RRC, NM OCD

The Midland 23

There Are Disposal Capacity Constraints In Parts of The Midland 24 Midland Basin Produced Water Volume (July 2016) Midland Pressure Adjusted SWD Capacity (July 2016) Produced Water (bbls) Available Capacity (bbls) Jul-2016 Water Production: 107 Million Bbls Jul-2016 Available SWD Capacity: 126 Million Bbls

At $70 Oil, We Anticipate Produced Water Volumes to Increase to by15% YoY in The Midland Basin 25 Est. Midland Basin Monthly Produced Water Change 2016-2017 DUC to SWD Geospatial Analysis For Midland Basin Available Capacity (bbls) Source: Digital H2O Analysis, Texas RRC, NM OCD DUC Well Jul-2016 Available SWD Capacity: 126 Million bbls

An 15% Volume Increase Would Likely Drive Disposal Bottlenecks 26 in Several Areas of The Midland Estimated Midland Basin Disposal Capacity Bottlenecks (July 2017) Discussion Likely bottle-necks in 2017 due to high disposal utilization Most acute bottle-necks are likely to occur in Hockley, Howard, and Reagan counties We estimate that there will be ~22 Mbbls/month of water produced in areas with over pressured SWDs Available Capacity (bbls) Source: Digital H2O Analysis, Texas RRC, NM OCD

In Conclusion 27

Are You Ready? - Disposal Capacity Constraints and Increasing Costs Are Likely During The Price Recovery 28 1. Produced water volumes have recently declined, however this trend is reversing with the price rebound There is a large inventory of DUC wells Water intensity and horizontal lengths are increasing WOR trends will reverse with increase in D&C activity 2. Disposal capacity will likely be constrained in key geographies Produced water volumes likely to exceed disposal capacity in key areas As average disposal pressure increases so does average transport distance Longer transport distances and higher utilization result in increasing costs 3. Increased water reuse will likely be an operational necessity in a recovering oil price environment

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