A saltwater disposal well is very similar in structure to a producing oil or gas well. It has production tubing and casing like any other well. Instead of extracting hydrocarbons and water, these wells are used to dispose of the saltwater from other producing wells. The saltwater is injected into porous zones deep within the earth. These zones are able to absorb large amounts of water at reasonable injection pressures.

Disposal wells are a critical component of the entire oil and gas industry. Most wells also produce large quantities of water in conjunction with the oil and gas that is produced. This water has to be disposed of in an approved facility. Water transport trucks load water from the storage tanks and haul the contents to a nearby disposal well.

A disposal well is different from a producing oil well because it does not deplete in production over time. A disposal well can improve over time because the wells around it will extract more water the longer they produce. The amount of water a disposal well receives can increase as more wells are drilled in the area. Rising oil prices can make the disposal well more profitable since skim oil prices fluctuate with the price of oil. Longevity is a bonus for a disposal well operation.

The oil well operator will separate the oil and water at their site, but the effort is not 100% efficient. At the SWD well, the operator will use a more sophisticated technique to skim the remaining oil. The average oil cut from the water is .25 to 1% per bbl.

The Rail Road Commission of Texas is the regulatory agency that controls all of the oil and gas drilling and production in Texas. A permit must be filed with the RRC in order to obtain a permit to establish a disposal well. The permit process takes about 90 days to complete. The prospective injection zone must be approved by the RRC and there is a limit to the amount of water per day that may be injected into the zone. There is also an injection pressure limit.

Disposal wells can operate as long as the injection formation will take water below the maximum allowed pressure. If the injection formation should pressure up at some point, another zone in the well can usually be located and permitted. It is not uncommon for disposal wells to operate for more than 40 years.

As of June 2011, the rate for disposing of water averages $.50 cents per barrel. The rate can be discounted for customers who provide large amounts of water on a daily basis. For example, there are some cases where customers lay pipelines from their fields directly to a facility. The TSWR Fund already has a commitment from one customer to supply 20,000 bbls of water per day to a facility in development. Historically disposal rates are fairly consistent but can rise with the price of oil and gas.

Most disposal facilities pay a 10% royalty to the mineral owners. This is much lower than the average 20% to 25% royalty that is paid to mineral owners for an oil and gas lease.

There are different sized facilities depending on the location and number of producing wells in the area. The larger disposal facilities have at least seven 1,000 barrel water storage tanks. There are normally six downloading stations at a larger facility. High volume centrifugal pumps at each station can unload a 130 bbl water truck in seven minutes. The speed is important because time = money. Most disposal well firms bid projects by the barrel, so the faster they can download without waiting, the more money they make. It is important to have enough capacity and available off loading lanes to keep things moving during peak periods. If the storage tanks at the facility fill up faster than the injection pumps can pump the water down the well, a flashing red light comes on and signals the truckers that the facility is full and they must wait for the tanks to be pumped down. They will usually go to the next facility because there is no way to tell how long the wait might be. 7,000 bbls of storage is usually enough to keep the red light off. The injection pumps can move about 10,000 bbls of water per day into the well. Each facility is monitored with numerous cameras. Each driver and company has an ID card similar to a credit card. Each driver must use his ID card in order to gain access to the facility. The card reader monitors the time, driver, company and amount of liquid that is off-loaded. A field attendant is monitoring the well operations during the day.

Disposal operators are very careful to place new wells in an area that is not serviced by an existing disposal facility. Extensive research is performed before a disposal well is placed. Typically, if there is an established well in an area, others will not locate nearby. The reason only two to three new high volume disposal wells can be placed per year is because the best way to develop these larger facilities is to be located in the middle of the next big oil or gas field. In order to do this you have to really be ahead of the curve and know where the oil companies are going to be drilling and developing new wells. Developing relationships with the numerous water hauling companies is important as well. They are a good source of information on where to locate future disposal wells.

Natural disasters can affect a site’s ability to perform; however it is rare. Lightning recently struck the Delhi facility causing major damage. Although the insurance reimbursement will pay for a facility that is better than the one destroyed, a month of revenue was lost due to the strike. Trucks have been known to haul non-approved fluids into the facility, (i.e. drilling mud) which can plug the well and cause non-performance while it is being repaired. Safeguards are in place to prevent these events (i.e. the ID card system). Of course, there may be issues related to equipment failures, which can generally be repaired but cause non-performance while being repaired. Please refer to the Private Placement Memorandum for a complete list of the risks associated with investments.

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For more information, please contact:

Trevor Gordon

Jack Bixler

(864) 679-4701

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