Russ:  Hi I’m Russ Capper and this is The EnergyMakers Show coming to you today from WorkFlourish where my guest is Jim Summers, Founder and CEO of H2O Midstream.  Jim welcome to the show.

Jim:  Thanks Russ, good to be here.

Russ:  You bet.  Tell us about H2O Midstream.

Jim:  So H2O Midstream is a what I would call traditional oil and gas midstream company, but focused exclusively on water.  So for us that means gathering systems and produced water, distribution systems for fresh and brackish water, storage, reuse, treatment facilities; really the whole value chain associated with water in the oil and gas field.

Russ:  And water has become a real big deal right since we’ve been doing hydraulic fracturing?

Jim:   It’s been a huge deal.  And it’s really gone almost unnoticed since really 2009.  With oil prices where they were – north of $100 – really people didn’t care that much about the cost side and what was happening with water.  Over the last couple of years people have come to realize that both the amount of water that’s being used for hydraulic fracturing has almost doubled since we started the shale development focus and then the produced water coming back from those wells – places like the Permian Basin – can be 6 to 8 times larger than the amount of oil that we get back off those same wells.  So it’s really become a major problem in the oil patch.

Russ:  Wow, and moving that is a huge problem.  I remember when hydraulic fracturing first started we heard of all the damage done by the trucks that were hauling in and hauling out water, but there are still places that are using trucks to do that.

Jim:  I think trucks will always be a part of the equation but really the paradigm shift from when we started shale development in the early days – and as you know a lot of that was very experimental in terms of where the development was going to occur and the development plan for that – now that volumes are so large that it would take thousands of trucks to move the water both to the frack site as well as away from the frack site.  So really the majority of the producers that we’ve talked to have moved away from trucking, replacing those truckings with pipelines for base load operations where trucking really is more a peeking service or for maintenance and the like.

Russ:  Okay so there are a lot of places where there’s a new well that there are no pipelines there are there not?

Jim:  that’s exactly right and it’s very similar to if you look back on the development of oil and gas in general the infrastructure is really lacking around water.  So again, it’s now like when natural gas was considered waste and flared in the early days because there was just no take away infrastructure.  We’re seeing similar challenges, particularly in places like the Delaware Basin which are more frontier areas, there’s just very limited pipeline infrastructure.  So a lot of our business model is predicated on putting capita to work to develop that infrastructure, those pipeline networks in particular.

Russ:  So there’s really in my mind – maybe I oversimplify this – but there’s two parts to the water formula here.  You’re bringing in the water to actually do the fracturing, but then you have all the produced water that you said you’re taking away.  Are you going to be handling both sides of that formula?

Jim:  We handle both; they’re a little bit different business model.  So if you think about the source water side of it anywhere from 30% – 50% of the cost to drill a well nowadays can be water and it’s within a very short period of time.  In other words you might do a frack job with multiple wells behind a well pad in a 30 day time period, so it’s an enormous amount of water in a very compressed amount of time.

Russ:  And that’s what you’re calling source water.

Jim:  That’s what we call source water.  So that could be fresh water, it could be brackish water, could be reused or recycled produced water.  So it’s in a fixed period of time, a tremendous logistical challenge to manage that and again it’s maybe a third of the cost.  The other side of the equation is a problem that will stick with you for 10 – 15 years, it’s the produced water; not just the flow back water that comes in the early stages, but produced water for the life of the lease.

And that’s where we really begin to look at permanent infrastructure to manage that water to central locations and either for disposal in some cases or to be treated for reuse for hydraulic fracturing or potentially for other uses as well.  And those costs are 50%+ of the ongoing operation costs associated with water, so very critical parts of the value chain but a little bit different in terms of their business model.

Russ:  But when you’re talking about permanent infrastructure you will create permanent infrastructure for both produced water and source water?

Jim:  Absolutely.  So when we think about moving water by pipeline versus truck for example, you’re now talking – with the size of water flows and fracks – 10” pipe, 12” pipe or larger for a single frack job just to move the volumes of water.  So when we go to put permanent infrastructure in place – and we’ll put a broad network in – that may be moving different qualities of water.  So I may have 2 pipes in the same ditch, I may have a single pipe distribution network that can redeliver back to a central treatment facility, so it really becomes a full web of services that we provide both on the source and the produced water side, but again it may be common pipe network or it may be overlaying with different water qualities in different pipes.

Russ:  Would you ever get into the business of taking produced water and cleaning it up and turning it into source water?

Jim:  Absolutely.  In fact we think about that similar to how a midstream gas gatherer would add processing to their gathering business.  So they would add in addition to just the pipe to gather the gas, they would treat it to remove contaminants; they would process it to remove liquids to get it to market.  We think about water the same way.  So there’s treatment that’s required, even for disposal there’s some minimum level of treatment as well as capturing of the skim oil that you do even to go into disposal, and then you add additional treatment as you go for reuse.  So that might be filtration for solids, that might be removal of irons or other contaminants; we think about that just like you would think about gas processing but instead it’s water processing for basically reuse in the market and the market begin hydraulic fracturing.

Russ:  So it seems like a very interesting potential sweet spot for you is a dense play like the Permian Basin, is that right?

Jim:  It is.  One of the things we like about the Permian Basin is as you say the density and the reality there is we can put in a significant amount of pipeline to service multiple producers at one time.  So that’s really where our business model gets significant economies of scale relative to what a single producer can do.  So you can imagine in your mind if there are 5 producers each building their own complete gathering system right on top of each other versus a single gathering system to service all 5 of those producers, so the denser that acreage, the more producers nearby; there’s very good economy scale.  On the flip side though places like the Delaware Basin where there’s less density there’s still a need for infrastructure, it’s just what I think of as more frontier.  It’s the base sort of backbone of the infrastructure that needs to go in and as additional producers come into the region over time they can then utilize that pipe.  But we certainly like areas with lots of producers.

Russ:  So what’s the status of the company today?

Jim:   That’s a great question.  We just closed on our first acquisition of assets so we’re now up and operating in the Permian Basin.

Russ:  Congratulations.

Jim:  Thank you very much.  We went from sort of business development focus to now operational focus.  We are operating a system in the Permian Basin; we just bought the system from Ecana Oil and Gas in Howard County – 80,000 barrels a day of disposal capacity, 100 miles of pipeline.  We will probably triple the size of that system over the next 18 months or so to serve not only Ecana’s needs but as well as we’ve actually signed up our first additional customer on that system.  So we’ve already started to expand that with not only more pipe but more disposal capacity as well as really state-of-the-art reuse facilities which will have storage and treatment onsite.

Russ:  I envisioned a lot more of building the infrastructure, but there are assets in existence today that it makes business sense for you to buy?

Jim:  There are.  There are a lot of producers that have recognized the real value of infrastructure, I think most of now the producing community in places like the Permian in particular where the scale has just gotten so big that the economics are there to replace trucks and put permanent infrastructure in.  And so they’ve begun to build out those systems.  They tend to be built a little bit smaller for their own needs and they don’t necessarily want to build for the next 10 – 15 years because that’s a significant amount of capital.

So a great opportunity for us to work with a producer that’s got some of that infrastructure in place, acquire that on day one it puts us into operations.  We couple that with an acreage dedication for the life of the lease typically and so now we have assets to start with, an existing contract and then we just expand that system as opposed to starting completely from scratch in a region.  So we’re seeing a number of opportunities like that.

Russ:  Do you see in the future – your long term strategy – that you’re going to end up probably building 60% or 70% of what you use or is it less than that because you’re able to accomplish a lot of it with acquisitions?

Jim:  Those are probably good ratios.  We will probably I would say – again, the system that we’re looking at it the Permian Basin we’ll probably triple the size of that – so you might say we could acquire 25%- 50% maybe but we have a lot of capital.  The Permian Basin, I heard another producer quote the need for close to $80 billion of investment in infrastructure in the Permian Basin.

Russ:  For water alone?

Jim:  For water alone.  And so we see just a tremendous need to match the development plans of producers with new infrastructure.  So even though it’s nice to go in and acquire those assets the reality is there’s a significant amount of infrastructure to be built.  We’d love to be a big part of building that out for the industry.

Russ:  Do you even get into disposal wells or do you just deliver to disposal wells?

Jim:  We do.  In fact there was a lot of discussion early on within our business whether we wanted to own and operate disposal wells and again, we ended up owning a majority of disposal wells, but we think about it a little bit actually like an electric distribution system where we have base load units and peeking units.  So for us having base load disposal capacity that a producer knows that we have that available to them, we’re not relying on a third party for reliability, those are often more expensive because now it’s marking up through two different counter parties there.

We have base load disposal that we manage, we operate but then when we have peeks we’re able to connect our gathering system to third party disposal wells and manage the peek flows without necessarily investing in all of the disposal capacity necessary.  But we do feel it’s important to be able to bring a full stop solution to the producer so we take that liability, we take the reliability commitment on on behalf of the producer.  So we do manage a significant disposal operation.

Russ:  Interesting.  I’ve had quite a few water guests on the show and been around a lot of the water handling challenges in the industry, this seems like a real mature one, but what trigger the idea to take this big step?

Jim:  That’s a great question.  So I grew up in the midstream world, I was part of what Conoco called Natural Gas and Gas Products as really an engineer building pipelines and compressor stations 30 years ago and so that’s sort of in my DNA is how that works.  And I saw natural gas evolve from where Conoco did that really just to serve their own E&P needs and they built their systems for themselves to where ultimately they divested our business into a pure third party business.  And as you saw midstream unfold to where I think by last count there were 92 private equity backed midstream teams, we didn’t really want to be team 93.

So about 5 years ago I began working with another water company more on the technology side, so began to see what was happening in water and really just put 2 and 2 together and said I love the midstream space, it’s what I know, I understand the business, I’m now starting to learn what’s happening in water and recognize there was a new market emerging.  And so I think what’s unique about our business is it’s taking that professionalism, the experience that all of the management team has on the midstream side – because we’re all midstream gas guys primarily – really applying that to the challenges we see in water.  So it was putting the two together to create a vision for a company and that’s really how the business came together.

Russ:  Wow.  Well Jim I really appreciate you sharing your story.

Jim:  Absolutely.

Russ:  It sounded like you guys have something really cooking there too.

Jim:  Well we’re having a lot of fun.

Russ:  That’s great.  And that wraps up my discussion with Jim Sum.ers, the founder and CEO of H2O Midstream and this is The EnergyMakers Show.