Where will the water-energy nexus go in 2017?
Published January 26th, 2017
Oil matters in two big ways and numerous little ways to the international water business. First, it matters directly because the oil industry is a big producer and consumer of water, and it has specialist treatment needs which are a lucrative niche for many water technology companies. Second, it matters indirectly because some of the biggest oil reserves are in regions facing the biggest water challenges, and higher oil prices usually lead to higher water spending. The most pertinent little reason should really be more important than the other two, but it isn’t. It refers to the fact that managing water consumes a lot of energy: in the US, 20% of electricity production and 30% of non-power plant natural gas production goes towards treating, transporting and heating water. Rising fossil fuel prices should lead to greater demand for energy-efficient water technologies and practices (such as conservation, anaerobic wastewater treatment, leakage reduction, low-energy desalination, and water reuse). In reality, it is difficult to correlate the oil price and spending on reducing the energy footprint of water, in part because electricity prices do not follow the oil price directly, and in part because water users are still slow to make the connection between rising energy costs and rising water costs.
I was in Houston for the Produced Water Society’s annual seminar last week. It brings together everyone involved in managing water in the onshore and offshore oil industry. GWI took over the organisation of the event three years ago, and it is a good place to consider how oil might help or hinder the water industry over the next year. In terms of the direct market for water management, the fact that the cheapest sources of oil are also the ones which require the least amount of water does suggest that we are not going to see a strong increase in demand for high-end water treatment systems such as evaporators for water recycling in the Canadian oil sands, or sulphate removal in the Atlantic offshore industry. There will be more activity in the shale plays, which will benefit water technology sales in West Texas (where scarcity is an issue) and in Pennsylvania and Oklahoma (where access to disposal wells is an issue). This will be balanced by the impact of OPEC’s promised production cuts elsewhere in the world, although rising water cuts (i.e. the amount of water that comes up with the oil) in the GCC countries and North Africa do offer some opportunity.
Higher oil prices, or rather stable oil prices, are more important for the impact they have on water spending in the Middle East and North Africa. Saudi Arabia, for example, is on the verge of a massive restructuring of its water sector. Iran has major investment plans which can only become a reality with higher oil prices. A key question for 2017 will be whether stable oil prices will hinder or assist peace in Libya, which is probably the market with the single greatest unmet water demand.
In terms of energy costs as a driver of water spending, the price of natural gas is the key. Natural gas overtook coal as the most important feedstock for power generation in the US during 2016, but largely as a result of the increased availability of associated gas from the unconventional oil industry; the Henry Hub natural gas price traded at its lowest levels since the late 1990s last year. The picture going forward looks a bit rosier, largely because of increased exports (both through pipelines to Mexico and through the LNG port facilities that are under construction), but globally we could encounter a glut of gas by the end of 2017 as a result of Japan restarting its nuclear power plants, and Russia exporting as much gas as it can in order to close its budget deficit. Together with President Trump’s attitude towards global warming, it could mean that energy consumption is a less compelling selling point in 2017. The exception would be in the developing world, where energy costs remain the largest contributor to the cost of water.
The water industry has benefited from two big energy-related themes in the past decade: global warming (which brings with it the threat of intense droughts and floods), and the resource-constrained economy (water, like fossil fuels, might “run out”). Together, they made the water-energy nexus meaningful. With natural resource availability no longer constraining the global economy and the political consensus on global warming falling apart, what are the new global themes that ensure water’s place on an increasingly fractious political agenda? Perhaps that fractiousness is the key: water is probably the only thing that we all now have in common.