By Jesse Backstrom

PhD Candidate, Dept. of Agricultural Economics
Texas A&M University

Abstract

The Permian Basin in west Texas is located in a primarily semi-arid to arid environment. In 2011, it was estimated that the hydraulic fracturing occurring in this region relied solely on groundwater with between 0-2% of the water volume for fractures coming from recycled hydraulic fracturing wastewater (Nicot et al. 2012). Using a unique data set, our analysis over the time period after that (2012-2016) indicated similar trends for water types used in 26,914 hydraulically fractured wells in 46 counties in the Permian region. Over this period of time the vertical depths and lateral lengths of new hydraulically fractured wells also increased, meaning that groundwater demands (which can be any combination of fresh, brackish, and or produced water) per completed well have become significantly greater in a relatively scarce water region (Peters 2017). With these trends projected to continue, it is important to understand the localized effects of potentially greater freshwater withdrawals in the region and therefore examine the transparency of water use reporting in the industry. In this paper we outline existing groundwater management and regulation strategies for the state of Texas, which delegates management to local entities such as groundwater conservation districts, and analyze spillovers of these localized groundwater regulations on hydraulic fracturing activities. Our preliminary analysis provides some descriptive evidence that in areas where a localized groundwater management plan exists, hydraulic fracturing operators are more likely to report less detailed information on water use per stimulated well. A similar relationship was found as less detailed information on water use was reported for a marginal increase in total water volumes used in hydraulic fracturing stimulations. These findings are important for groundwater management as they provide some information on the reporting tendencies of hydraulic fracturing operators of wells located in groundwater conservations districts in Texas, and allude to several policy options aimed to help make water use reporting more transparent.

 Introduction

Hydraulic fracturing activity has increased rapidly in the U.S. over the last decade, where the Permian Basin in west Texas has seen some of the largest growth. A growing literature in economics has studied many of the impacts of the “shale boom,” which have included effects on: the housing market (e.g.Muehlenbachs et al. 2015; He et al.2017); employment, wage, and tax and royalty revenues (e.g. Feyrer et al. 2017); crime rates (e.g. James and Smith 2017); health (e.g. Currie et al. 2017); increased truck traffic and accidents (e.g. Muehlenbachs and Krupnick 2013; Rahm et al. 2015; and Muehlenbachs et al. 2017); and others such as attitudes and risk perceptions toward hydraulic fracturing (e.g. Schafft et al. 2013; Boudet et al. 2014; and Boudet et al. 2016) and cost-benefit studies (e.g. Fitzgerald 2013; Jackson et al. 2014; and Mason et al. 2015). Aside from these more ‘general’ economic studies, there is also an increasingly expansive literature on the localized environmental effects of hydraulic fracturing. These include many qualitative review papers on environmental risks associated with shale development (e.g. Krupnick and Gordon 2015), as well as studies that are more specific to effects on: air quality and greenhouse gas emissions (e.g. Howarth et al. 2011; Knittel et al. 2015; and Holladay and LaRiviere 2017); induced seismic activity associated with wastewater disposal (Ellsworth 2013); and agricultural production (e.g. Hitaj et al. 2014; Farah 2017).

A large volume of water in a short period of time is needed to hydraulically fracture (or stimulate) a well drilled for hydrocarbon production from shale. In our sample, a median of 11,779,194 gallons of water was used per well stimulation in 2016, which is the equivalent of supplying ~73,000 average 2-person U.S. households with water for a day (USGS 2016). Although informative to understanding general trends in water use by the hydraulic fracturing industry and identifying potential externalities, previous economic studies of the effects of hydraulic fracturing on local water quality and availability have generally come from a qualitative narrative (e.g. Burnett 2013; Muehlenbachs and Olmstead 2014; Olmstead and Richardson 2014; and Kuwayama et al. 2015). Outside of a study on the effects of hydraulic fracturing activity on surface water quality by Olmstead et al. (2013), the only quantitative studies on these issues (that we are aware of) have come from a purely scientific perspective (e.g. Nicot 2012; Nicot and Scanlon 2012; Mitchell et al. 2013; Scanlon et al. 2013; Nicot et al. 2014; Scanlon et al. 2014a; Scanlon et al. 2014b; Small et al. 2015; Vengosh et al. 2014; Barth-Naftilan et al. 2015; Kondash and Vengosh 2015; Horner et al. 2016; and Scanlon et al. 2016). Quantitate studies on water quality and availability issues have largely escaped the economics literature, which we believe is primarily due to data limitations, among other barriers,

Another issue in the oil and gas industry that has led to an inability of economists to study water quantity and availability issues is the relatively poor transparency of water use reported. In Texas for example, it was not until 2012 hydraulic fracturing operators were mandated by House Bill 33282 to report water and chemical ingredients in hydraulic fracturing fluids to the FracFocus national chemical registry. Even then, operators were still not required to report detailed information on the type of water used in well stimulations, nor the source of that water, which has led to a nontrivial amount of variability in the detail of reporting by operators. Without clear knowledge on water use, the impacts of withdrawals for hydraulic fracturing on water resources cannot be studied credibly, which limits the ability to create new policies aimed at incentivizing alternatives to freshwater. The only studies we are aware of that investigate how different regulations impact withdrawals took place in the Susquehanna (SRBC 2015) and Ohio (Braun 2015) River Basins, where surface water is the primary water source for the industry. Although, on average, these areas might be more water rich, transparency of water use is still important because if many new wells in a particular area are due to be stimulated and their operators obtain water from the same or a connected source, there is potential for drawdown. This potential becomes even more pronounced during drought, the summer months, or if the source is a groundwater aquifer with little or no natural recharge.

In this paper we investigate an issue that, to our knowledge, has yet to be studied in the economics and natural science literatures. Using a unique data set3 of hydraulically fractured wells, we examine trends in the volume of water used in well stimulations in the Permian Basin in west Texas from 2012-2016 and analyze spillovers of localized groundwater management regimes on hydraulic fracturing activities. Specifically, we investigate how water use reporting by operators of wells located within the jurisdiction of a groundwater conservation district (GCD) varied relative to water use reporting for wells not located within a GCD. The impacts of groundwater management on hydraulic fracturing activities are particularly challenging to tease out because management tends to be local (compared to river basins) and can vary greatly between management areas (within the Permian Basin there are 29 different management regimes). We hypothesize that operators of hydraulically fractured wells located in a GCD area might be more likely to be less detailed in their reporting of water use in order to limit the potential for interaction with local regulatory authorities and, since freshwater is the cheapest source of water, possibly to prevent future legislation of water use by leaving less of a paper trail.

We start by outlining how groundwater is managed in Texas, how it has evolved, and how hydraulic fracturing has introduced new challenges to a region tasked with the management of scarce groundwater resources. Next, we explore water use reporting by operators of hydraulically fractured oil and gas wells within the Permian Basin due to their location in a water scarce region and reliance on groundwater. Our preliminary analysis provides descriptive evidence that in areas where a localized groundwater management plan exists, hydraulic fracturing operators are more likely (by about 1.5 percentage points) to report less detailed information on water use per stimulated well. A similar relationship was found as less detailed information on water use was more likely to be reported for a marginal increase in total water
volumes used in hydraulic fracturing stimulations, and for horizontally-drilled wells versus vertically drilled wells, as the former require more water to stimulate a well. These findings are important for groundwater management as they provide some information on the reporting tendencies of hydraulic fracturing operators of wells located in GCDs in Texas, and allude to several policy options aimed to help make water use reporting more transparent. We believe that relevant policy questions might center on creating GCDs where none currently exist, and possibly expanding the water use reporting requirements of House Bill 3328 in order to better understand water sources and types used in hydraulic fracturing stimulations and incentivize the use of alternatives to freshwater.

2 House Bill 3328, Texas Legislature. September 1, 2011.
3 Data set provided by Primary Vision in Houston, Texas (http://www.pvmic.com/).