water technology unlocks future oil and gas reserves

October 2010 LRWI-R-10-02

Water Technology Unlocks Future Oil andGas Reserves

Manangement of produced water is critical to the profitability of the oil and gas industry, and isa key focus of technology development. This wastewater stream contains a host ofcontaminants – from oil and grease to chemicals, microorganisms, and radioactive elements,so simple reinjection or dumping is costly or prohibited. As such, a multitude of companies areclambering to insert new technologies to tackle the associated treatment issues. We ranked 33technology developers across 15 criteria to determine which are best able to address oil andgas company needs in treatment of produced water.

Table of Contents

EXECUTIVE SUMMARY 2

LANDSCAPEConventional hydrocarbon extraction produces massive quantities oftoxic wastewater, and the situation is set to worsen as unconventionalreserves are tapped.

3

ANALYSISA variety of technologies are applied in onshore and offshore treatment,with no clear winner in the market to deal with all produced watersources.

15

OUTLOOK 23

ENDNOTES 27

Lead Analyst

Reka SumangaliResearch Associate+1 (917) [email protected]

Contributors

Michael LoCascioMark Bünger

Lux Research Inc.Lux Research does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor inmaking their investment decision. This report is based on information obtained from sources believed to be reliable but no independentverification has been made, nor is its accuracy or completeness guaranteed. This report is published solely for informational purposesand is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments.

Lux Research Inc. 234 Congress Street Boston, MA 02109 U.S. Phone: +1 617 502 5300 Fax: +1 617 502 5301 www.luxresearchinc.com

executivesummary

landscape

analysis

outlook

endnotes

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Analysis

A variety of technologies are applied in onshore and offshore treatment, with no clear winnerin the market to deal with all produced water sources.

A Gulf Exists between Water Technology Providers’ Capabilities and IndustryPriorities In speaking with both technology providers and oil and gas companies, we found that while the management of producedwater is a priority, and often vital to the profitability of these E&P companies, there is a mismatch between the capabilitiestouted by the technology providers and the implementation of these solutions at the oil and gas company’s sites. Whenasked, “What is the main driver for produced water treatment?” the response from both providers and O&G companieswas unanimously, “Regulations.” But when asked, “What is the best technology to treat this water?” the answer was lessclear. With a plethora of technologies to treat the variety of contaminants in produced water, there are many good options,but no silver bullet and few that are able to address all the contaminants included in produced water around the world.And the variety of regulation and requirements all over the world complicates the ability to form a ideal global system.

Given rising water treatment needs and the growing technology gap, we evaluated technologies for treating producedwater and ranked and plotted them to better understand this varied market. In this evaluation, we included technologyproviders actively engaged in the produced water space. We also assessed technology providers working on otherapplications, which we believe could address the needs of this market. In our rankings and graphs, we note, rather, whichcompanies are best poised to gain market share and grow into the needs of the oil and gas companies. To rank them, weassessed technology providers covered in our ongoing intelligence service by market and technology value, with:

• Market value determined by competitive landscape, partnerships, and profitability. The Market Valueaxis was based on the weighted sum of the following seven criteria: 1) addressable market size, 2)competitive landscape, 3) partnerships and customers, 4) momentum, 5) profitability, 6) barriers to growth,and 7) an overall Lux take (see Figure 3). We established these criterion for all four applications (OnshoreConventional Oil, Onshore Unconventional Oil, Onshore Unconventional Gas, and Offshore) according to itsrelevance to adoption; for instance, the competitive landscape and addressable market size were given higherweights as measures of maturity. Placement on the horizontal axis represents the Market Value score, rangingfrom 1 (low) to 5 (high).

• Technology value driven by regulation and ability to address key contaminants. Our Technology Valuescore for a given technology was calculated by a weighted sum of the following seven criteria: 1) Technologysolution value, 2) Experience of management team in the application, 3) Regulatory factors driving adoption,4) an Application specific score for onshore versus offshore, 5) IP position, 6) Technology fit to oil and gasneeds, and 7) Contaminant focus of the technology (see Figure 4). Each criterion was weighted to account forthe different priorities in onshore produced water management and offshore. For instance, regulatory factorsand size of system are a higher priority in offshore E&P, driving a higher weighting than technical solutionvalue alone. Placement on the vertical access represents the Technical Value score, ranging from 1 (low) to 5(high).

Performance on Market and Technical Dimensions Results in Four Quadrants of Assessment

We plotted these companies’ scores on these two axes, and positioned them into one of four quadrants representing ourcurrent assessment of the company’s ability to successfully address environmental contaminants and economic demandsof the oil and gas companies:

Water Technology Unlocks Future Oil and Gas Reserves 15 Analysis

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Figure 3: Market Value Criteria

Criterion Description Weighting

Addressable market size Size of the market, in U.S. dollars, if the organization had 100% market share ineverything it is trying to sell

15%

Competitive landscape Number of other organizations operating in the same market, either with the sametechnology or something different

20%

Partnerships Strength of the organization’s partnerships – including research and develop,customers, distributors, and joint ventures

15%

Momentum Direction of growth – rapid forward progress, staying stagnant, or backsliding 15%

Profitability Scored based on the organization’s current status of profitability 10%

Barriers to growth Level barriers to the company’s growth and whether these can be overcome 10%

Lux Take Overall impression of the possibility of success for the organization in the targetedmarkets and applications based on current business model and market strategy

15%

Figure 4: Technical Value Criteria

Criterion Description Weighting

Onshore-Conventional

Onshore-Unconventional

Offshore

Technology/solution value

How strong is the organization’s technical solution taking intoaccount price, performance, and differentiation of technology

20% 25% 15%

Managementteam

Strength of the management team, experience in specific and/orrelated technology and ability to bring near-term growth andsuccess

10% 10% 10%

Regulatory factors Will regulatory factors speed up or slow down the organization 20% 10% 20%

Applicationspecific score

Factors in priorities of end user in the target application –evaluation based on overall technical scores

15% 20% 20%

IP position How likely is it that the organization’s patents and/or tradesecrets will be valuable; measures density of existing IP in thecompany, the level of overlap, and resources devoted to creatingnew IP

5% 10% 10%

Technology fit toO&G needs

Scoring based on technology grouping (filtration/separation,absorbants/adsorbants, advanced oxidation, other)

15% 10% 10%

Contaminantfocus

Organization’s focus on priority contaminants for oil and gasproduced water application (hydrocarbons/VOCs, dissolved solidsand metals, salts/minerals, and other

15% 15% 15%

• “Dominant players” are best positioned to treat O&G produced water, with industry help. Dominantplayers are technologies used today because of proven performance or promising performance in treatingproduced water. Because they are used and have solid partnerships, these companies score high on bothMarket Value and Technology Value. Note that in all three groupings, very few companies fall into thisquadrant, reflecting the complexity and the competition within the market.



• “Future stars” have great potential, but require a push before adoption. Future stars are those that arelikely to succeed given time, eventually moving into the Dominant category. These technologies exhibit highTechnology Value scores in technology/solution value and their application specific score, which includesmetrics such as experience and relevance to the application (e.g. size of platform for offshore). Thesecompanies frequently score lower on Market Value because as early-stage technology developers they are notyet profitable. But with strong partnerships leading to more deployments, these technologies have potentialto overtake the dominant players.

• “Long-shot” technologies tend to miss the mark in addressing key contaminants. Long-shots are early-stage technologies that, in our judgment, do not present enough potential value to merit O&G research anddevelopment today, given the high risks they currently pose. Some of these technologies may develop in-house enough to move up into the Future stars category, at which time they might be reassessed by O&Gcompanies, but Long-shots present an unfavorable risk–reward balance for O&G today.

• The produced water market is too new to be “Undistinguished.” Technologies belonging to the“Undistinguished” quadrant are very mature and are widely deployed, and thus have high Market Value score,but have Technology Values that are generally lower because they are not able to effectively handle the levelof contaminants in the influent stream and treat it to the level required by regulators. Note that in theproduced water market there are few companies or technologies that fall within the “undistinguished”category, because there are few technologies that that are understood well enough or deployed in large scaleapplications to determine that they are not a best fit for the application.

Benchmarking Produced Water Technologies for Long-term OpportunitiesIn our analysis, we evaluated produced water technologies within four technology categories to determine which specificcompanies are best positioned to address market needs: 1) filtration and separation, 2) absorbants and adsorbants, 3)advanced oxidation, and 4) other, which includes disinfection, dissolved air floatation, chemical processes, and phasechange technologies. We then plotted the companies according to four application areas: 1) Onshore – Conventional Oiland Gas Produced Water Technologies, 2) Onshore – Unconventional oil produced water treatment technologies 3)Onshore – Unconventional gas produced water treatment technologies, and 4) Offshore produced water treatmenttechnologies. The weightings for the different Market and Technology criterion vary based on these applications toaccount for the different priorities in technology adoption stated by technology providers and oil and gas companies.Unsurprisingly, GE Water, Siemens Water, and Veolia Water remain in the top and do not change much by application, butother companies pull ahead under varying conditions while others don’t make the cut. See the Appendix for a table withcompanies included in the rankings, a short description of the company’s technology, and the Lux Research Take based onthe briefing available on our client portal.

Overall, there are several technology trends we noticed irrespective of the application. For oil E&P, nearly all companieswe spoke with, technology providers and oil and gas companies, noted that removing dissolved and dispersedhydrocarbons was the primary concern and the main focus of the treatment train. Several technologies are used to removethis contaminant – hydrocyclones, plate coalescers, and adsorbants/absorbants – eliminating different sized oil droplets.In the natural gas extraction process VOCs and salts came up as the major contaminant to deal with, where filtration andseparation technologies and ion exchange rise to the top. Filtration and separation technologies generally fall in themiddle of the spectrum, and in this category we looked at a range of technologies from reverse osmosis and ultrafiltrationpolymer membranes to ion exchange resins, as well as hydrocyclones and plate coalescers. Other technologies – such asadvanced oxidation, chemical and electro-coagulants, ultrasound, and dissolved air floatation system addresshydrocarbons, VOCs, salts, and solids differently and therefore the placements of these depends largely on the fuelcategory. While these other contaminants are also important to address when treating produced water, there is lessregulation mandating the removal of salts and solids and as such there is less focus from the oil and gas companies onworking to remove these contaminants. Our rankings placed a greater emphasis on these needs when scoring the marketand technology values, and as such relegated those companies into the Future stars and Long-shot categories.



Figure 5: Onshore – Conventional Oil and Gas Produced Water Technologies

• Conventional onshore produced water treatments focus on basic contaminant removal. Conventionaloil and gas produced water in onshore sites are primarily concerned with the removal of soluble andinsoluble hydrocarbons, VOCs, and other organic material. The current treatment train for onshoreapplication includes primary and secondary separators, secondary and tertiary filters, and a final membrane,MBR, or evaporator polishing step. Because of the focus on removing dissolved and dispersed hydrocarbonswe see absorbant and adsorbant technologies rise to the top in Technical Value as Dominant players andFuture Stars (see Figure 5). Across the board both technology providers and oil and gas companies noted thatremoving oil and grease from produced water is the first step before other technologies can be considered.Veolia, MyCelx Technologies Corporation and Gradek Energy all have similar technology – porous polymerbeads for hydrocarbon removal - however Veolia’s MPPE (Macro Porous Polymer Extraction) system is theone most implemented today, and in fact was called out by oil and gas companies we spoke with. This is inlarge part because of the confidence in Veolia’s brand – a power the smaller start-ups lack.

• Unconventional oil extraction produces wastewater with high oil and grease content. Produced waterfrom heavy oil and tar sands is contains dissolved and dispersed hydrocarbons. Unconventional oil extractionalso uses water as steam in breaking up heavy oil and tar sands, which requires treatment. Our analysisshows that the removal of these hydrocarbons is captured using absorbants and adsorbants led by Veolia,MyCelx Technologies, Gradek Energy, and Abtech Industries. Of the many technologies we profiled,absorbants and adsorbants are preferred by oil companies, but the major disadvantage of this technologydisposal of the collected hydrocarbons. Abtech states that once its sponge technology is filled withhydrocarbons, it can be burned in a waste-to-energy facility. For Gradek, the hydrocarbons are collected viacentrifuge or solvent and then the beads are re-used up to 500 times. One of the important factors for thesuccess of these technologies is their ability to recover the hydrocarbons for use, which is why we seecompanies like Veolia and Gradek pulling out ahead (see Figure 6).



Figure 6: Onshore – Unconventional Oil Produced Water Treatment Technologies

• Produced water from unconventional gas water must be treated to potable quality. Unconventional gasextraction, especially hydraulic fracturing, is an extremely water intensive process – up to 6 million gallonsper fracture, a majority of which comes back to the surface as flowback water. When discussing the use oftreatment technologies in unconventional onshore applications, one large oil and gas company we spoke withnoted that reuse and treatment of water for hydraulic fracturing is gaining a lot of interest because the watervolumes needed for hydrofracture are high and in some regions have restricted the E&P company’s use oflocal freshwater sources. In these cases, the E&P company needs to capture and treat the produced water tonear drinking water quality in order to reuse it for fracing. This is promising for companies such as Aqua-Pureand more advanced treatment methods, like membrane filtration with Trisep or advanced oxidation withNeohydro (see Figure 7). However, E&P companies and technology providers noted that progress was slowand the few areas with these restrictions are not important enough to propel the technology’s market shareforward.

• Regulation and size drives technologies for offshore application. Offshore produced water treatment haswholly different priorities than onshore treatment. First, while onshore drill sites have large areas of landsurrounding the wells, offshore drill sites are extremely limited by the size of the platform. Technologies usedfor treating water must fit within strict confines and as such many large filtration systems are simply notfeasible in these locations. Second, offshore produced water disposal options are limited – generally it is justdischarged into the ocean, and regulation around contaminant levels are strictly enforced with E&Pcompanies required to send monthly discharge samples for testing. Regulation for offshore produced waterdischarge is mainly focused on the dissolved and dispersed hydrocarbon content, which again is why we seecompanies such as MyCelx Technologies Corporation, and Abtech Industries rise to the top (see Figure 8).Again Veolia’s MPPE systems were noted as being used in the North Sea, which has the most strict dischargelimits of less than 20 ppm of hydrocarbons allowed and a “no damage requirement,” which Veolia’s system isable to address. The challenge with absorbants is that they produce waste (sponge or beads) that also needsto be managed. For this reason, advanced oxidation is another technology applied to this market segment.



Figure 7: Onshore – Unconventional Gas Produced Water Treatment Technologies

Many technology providers noted that given the recent focus on offshore drilling, the EPA is expected totighten regulation on produced water management in the next few years, and companies are working withoffshore platform operators to stay ahead of impending discharge limits. Absorbants and adsorbants roseespecially high in the offshore application segment because their size and contaminant focus substantiallyraised the technical scores.

Produced Water Technology Will Shift Competitive Dynamics in the O&G IndustrySeveral seeming contradictions have held new water technologies back from adoption in the oil and gas industry. But wesee adoption accelerating based on O&G players’ competing, and sometimes conflicting, interests:

• National oil companies use water startups to catch up in innovation. Water technology requires a lengthytrack record of performance in the field before deployments take off. However, for any of the technologiesdiscussed in this report to establish a track record, there must be some level of adoption. In this chicken andegg situation, many smaller innovative technologies are left to the wayside. While international oil companies(IOCs) stated the water technologies they have looked at are “not good enough or reliable enough” for thebroad global adoption they need, national oil and gas companies (NOCs) are more willing to try newunproven technologies, further reducing their dependence on IOCs.

• Technology must meet regulatory metrics, but regulations take cues from technology. Our discussionswith oil and gas companies revealed that metrics to evaluate potential treatment technology are not refined.When asked to pinpoint a specific flow rate, cost, or contaminant concentration, many noted that those levelshave not been determined and in fact are still being developed based on changing regulation and theperformance of current technologies. When we spoke with technology providers to ask how they focus theirtarget performance metrics, they pointed to regulation – stating that eventually the oil and gas companies willneed to get to the level mandated by environmental protection agencies. With new technologies pushing the



Figure 8: Offshore Produced Water Treatment Technologies

boundaries of what is possible in water treatment, regulators will look to the innovative startups to setmetrics that bigger players will need to meet – by using the innovators’ systems.

• Partnerships presage plug-and-play solutions for service companies. Like any consumer, oil and gascompanies are looking for reliability and brand name – even when adopting new technologies to treatproduced water. While this report focused primarily on start-up companies operating in the space, there arelarge scale companies with some experience as well: Veolia’s MPPE system that BP uses, or Siemens’oil/water treatment technologies covering the entire treatment train including solid/liquid hydrocyclones,corrugated plate separators, induced and dissolved air/gas flotation separators, walnut shell, media, andactivated carbon filters, as well as more advanced systems. Those giants use partnerships to access emergingtechnologies: Filterboxx is partnering with GE to provide packaged treatment solution in the Alberta oil sandsin Canada, for example. In another partnership that provides a more complete treatment train, Gradekremoves hydrocarbons (using its polymeric bead technology), then Veolia removes any other dissolvedminerals and salts and suspends solids using flocculants. Partnerships present an opportunity to servicecompanies like Halliburton, Baker Hughes, and Weatherford that want to lock producers into their own end-to-end solution, since packaged offerings bring in more revenue than piecemeal technology choices. Ratherthan approaching GE and Veolia, they will favor smaller players they can control, providing start-ups withmarket access, while selling a more complete treatment train solution to oil and gas owners and operators.

• International oil and gas companies will see “rent to buy” as a financial play. Most oil and gas companiesdo not want to buy a technology – as in the water space in general, they prefer to buy services from a chosenprovider. Gradek Energy illustrates the business model: the company treats its E&P clients’ produced waterfor free, but earns its revenue by selling the collected oil back to the E&P company. Similarly, BioteqEnvironmental Technologies’ sulphate technologies recover metals from wastewater streams, which thecompany then sells. While this model of selling back the useful recovered contaminants is a viable model togive smaller companies visibility and a change to prove the technology, it does expose the company to



commodity pricing risk. As they are forced into ever-more extreme oilfields and unconventional reserves bypetropolitical realities, E&P companies will look to GE’s successful focus on service contracts and capitalfinance a decade ago as a model for future profits.



Outlook

The market for produced water technologies is as murky as produced water itself, challenging technology providers andoil and gas companies alike. Our analysis and discussion with both parties showed that the immense and sudden variationin produced water is a critical problem to solve.

• Accelerating membrane research drives a burst in water treatment innovation. A wide range oftechnologies, from membranes, to advanced oxidation, to coagulants, to UV disinfection address thehydrocarbons, salts, solids, and microbes in produced water. These technologies are all effective at a part ofthe problem, but because of the variety of contaminants in produced one contaminant can reduce atechnology’s effectiveness at treating another contaminant. One area where there is a great deal of researchbeing done is in membrane based treatment (see the report “Filtering Out Growth Prospects in the $1.5Billion Membrane Market”). In that report we saw that the use of ceramic membranes would be effective intreating produced water since they are more resilient to hydrocarbons, and also easier to clean for foulingthat does occur. Look to universities like Texas A&M to lead the efforts in membrane research that will form afull treatment train for recycling produced water for beneficial use.

• Recycling produced water to potable quality represents a $26 billion market opportunity. Given thevast volumes of produced water, many oil and gas companies jokingly refer to themselves as “waterproduction companies.” But given the world’s growing need for water, is that such a bad thing – and should oiland gas companies even seek to become water utilities? In Virginia, one treatment company treated itsproduced water to potable quality and sold it back to the local municipality. While this is an interesting model,it is currently only really viable for produced water from CBM, which has low contaminant concentrations andlow enough treatment cost to be economically viable. But as the global water crisis grows (see the report“Water Cultivation: The Path to Profit in Meeting Water Needs”), performance and affordability of producedwater technology will rise, enabling E&P companies to treat water inexpensively and produce potable watereven in fuel rich, water poor areas such as the western United States, the Middle East, and Australia.

• Produced water shifts global food security and industrial development politics. Produced water that istreated for hydrocarbons, VOCs, minerals and salts – nearly to drinking water levels – can be discharged anddiverted either to irrigation fields or for industrial usage. Water can be used for non-process applications,such as boilers and cooling towers. Recycled wastewater that is used for irrigation provides a new source offreshwater needed for agriculture, and in geographies that are freshwater constrained, like the Middle East,this could potentially provide the resource needed to support itself from an agricultural standpoint. While oil-producing nations seek to secure vast tracts of agricultural land in the developing world, better watertreatment technology could allow them to produce more at home, altering the global food import and exportbalance and long-term food security investments. And as they seek to modernize their economies with non-commodity industries ranging from specialty chemicals to solar panels, the availability of industrial-qualitywater will no longer be a constraint.

• O&G corporations and investors will drive water M&A. From our analysis and interviews with E&Pcompanies and technology providers we expect corporate partnerships to provide the most growthopportunity in the produced water space. Opportunity for strategic and financial investors lies in pushing theenvelope of the “future stars” and “long shots” companies. These companies have an established technologyand market values that can benefit from strategic investments with larger technology providers or frompartnership that allows the company to extend its treatment train – for example by merging a membranecompany like H2O Innovation, an ion exchange company like Purolite, and an absorbant company like GradekEnergy, Abtech Industries or MyCelx Technology Corporation.

Water Technology Unlocks Future Oil and Gas Reserves 23 Outlook


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• Oil and gas reserves remove the power from countries rich in traditional fuels. The development ofproduced water treatment technologies can unleash new sources of fuel around the world. For example, areasacross Europe have unconventional oil and gas reserves untapped today, while they relying on fuel piped infrom Russia. If Estonia and France were able to economically extract their oil shale reserves and manage theassociated produced water, Russia’s regular restrictions on gas shipments would be less of a problem. In theU.S., shale gas may quench the country’s thirst for fuel and lessen its dependence on the oil rich Middle East,while providing new rural jobs in E&P. As the extraction of unconventional fuels and the associatedenvironmental concerns find their way the forefront, water technologies will be key to the ensuinggeopolitical shifts.

Water Technology Unlocks Future Oil and Gas Reserves 24 Outlook


water technology unlocks future oil and gas reserves

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