Wood Mackenzie: Lack of Water is a Risk to Global Energy Industry

Water poses a variety of business risks for the energy industry, and could play an influential role in shaping the future energy supply mix, according to Wood Mackenzie’s latest research report “Troubled waters ahead? Rising water risks on the global energy industry”, which utilizes data and maps from the World Resources Institute (WRI).

Working with WRI’s Aqueduct Water Risk Atlas, Wood Mackenzie identified that water risks could have the greatest impact on (1) shale gas in the US and with global expansion, (2) the upside for Middle East oil, and (3) China’s future coal mining and coal-fired power plants. Aqueduct mapped key energy production centers over baseline water stress levels (measuring the ratio of total water withdrawals to available supply). The analysis identified areas more likely to see high competition amongst local water users, increased depletion of the resource over time, and growing concerns over contamination of dwindling water supplies.

“The key water-driven business risks to the global energy industry include limited accessibility to new sources of supply, delays on project developments, increasing costs and asset downtime,” said Tara Schmidt, Manager of Wood Mackenzie’s Global Trends Service.

Almost all forms of energy production and power generation are dependent on water, and risks vary greatly by fuel type and asset location.

“Water is a risk to the energy industry. By progressing with innovative technologies, advanced water management practices and public policy engagement, the industry can rise to the challenge of reducing shared water risks,” explained Paul Reig, Associate with WRI’s Aqueduct project.

Overall, the energy sector is the world’s largest industrial water user, at more than 15 percent of global supply and growing. The industry is under increasing scrutiny from the government and public on how it uses freshwater supplies.

“Some of the solutions to reduce water-driven risks include new technology implementation to improve operational environmental performance, and most importantly, early stakeholder engagement in the river basins, particularly with governments, to identify opportunities to collectively reduce water risks,” added Reig.

Around the globe, access to water varies greatly depending on where assets are located, and thus on the local climate and socio-political conditions. The largest production locations for unconventional gas, oil and coal are in the US, Middle East and China, in areas of those countries that also happen to be some of the most water stressed.

Shale Gas in the US and with Global Expansion

If shale gas production is really to take off globally, government and public concerns over water use and contamination need to be addressed.

“The research shows that more than half of shale and tight gas reserves in the U.S. – as well as the top 10 countries by reserves volumes outside the US – are located in medium to extremely high baseline water stress areas, where competition is high with other local water users and concerns over water quality exist,” explained Reig.

As a result, energy companies operating in these areas face risks of limited access to new sources of supply, and potential well cost increases of up to 15 percent, or sometimes substantially more.

However, across the global energy supply mix, unconventional gas holds some of the most promising opportunities to halve or altogether eliminate its water use with saline water sourcing, recycling and ‘green completions’ – and potentially offset well cost increases as a result

Likewise, some companies are beginning to address public concerns over water contamination with water impact assessment reporting and via collaborative public policy consortiums to more openly engage on shale gas production standards.

“Wood Mackenzie expects this trend in increasing transparency and public engagement to continue, as companies move into international markets with more pressing water concerns,” added Schmidt.

Upside for Middle East oil

Middle East oil production is already facing constraints from inadequate water infrastructure for asset developments, and growing oil demand for local desalination needs will only exacerbate the situation.

“Inadequate water infrastructure contributes to significant project delays, and constrains opportunities to maximise production in the longer-term with more water-intensive enhanced recovery, completion techniques and recent shale gas exploration (such as in Saudi Arabia),” added Schmidt.

Lack of water injection for some of Iraq’s biggest oil fields in the south is costing the region’s largest growing oil producer hundreds of thousands of barrels of oil per day.

With the central issue being the region’s lack of water, both governments and energy companies are working to improve water management in the region by improving water infrastructure, conserving resources, and leveraging more efficient desalination technologies.

China’s future coal mining and power plants

China’s coal mining and coal-fired power plants could face increasing water risks in the future, due to expanding operations in the water-stressed north and western provinces. According to Aqueduct, over 70 percent of China’s coal-fired power generation capacity is already located in areas of medium to extremely high baseline water stress.

Exacerbating the water challenge, coal production in these water-stressed areas is expected to increase 50 percent by 2030 while power output is expected to more than double.

“With the vast majority of China’s water resources in the south, and the vast majority of new coal production coming on-stream in the north, the country is likely to face significant water constraints and conflicting water interests between population and industry,” concluded Reig.

“Consequently, coal mining and power companies are likely to face future cost pressures in responding to government aspirations to minimize water use – be that from addressing regulatory changes, accessing water supplies and/or mitigating potential operational disruptions,” said Schmidt.

In response to the challenge, coal companies are starting to mitigate their exposure by investing in water recycling and more water-efficient technologies – as well as working with other water users in search of collective solutions. For instance, some power companies are installing air cooling systems which could reduce up to two-thirds of their overall water use, while some coal producers are investing in waste water recycling.

Technology, Transparency & Engagement

Water risks could be leveled out in the future with technology, transparency and engagement offering opportunities to minimise risks for all fuel types. Companies can successfully deliver on these opportunities by:

Better understanding their operational water requirements, Identifying their own water-driven business risks, and Developing a clear and publicly available water strategy.

The big questions for energy companies are what future regulatory uncertainty they could face, where assets are located in water-stressed areas, and how they respond to rising water-driven business risks. If companies fail to rise to the challenge, there could be troubled waters ahead – posing risks to companies’ growth and the future energy supply mix.

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Source: Wood Mackenzie, November 08, 2013