Highlands Water Resources

Hydraulic fracturing operations, which unlocked the potential of shale oil and gas trapped in tight formations of the ground, usually require vast amounts of clean water. The water used in these operations is then recovered alongside the hydrocarbon products extracted. The consequence is that operators can be left with considerable quantities of water to dispose of at the conclusion of each stage of their operation.

 

Water produced in fracking contains various chemical impurities. It therefore cannot be released onto the surface and must be safely disposed of, usually by being pumped into separately drilled disposal well either on site or having been transported to a suitable location. The logistics of this adds considerable costs to fracking operations.

 

Highlands estimates the average cost of acquiring and transportation of the fresh water for hydraulic fracturing operations to be around $2-3 per barrel in the Denver Julesburg Basin (“DJ Basin”) and the Company estimates that the average disposal cost for a barrel of water in the basin is a further $2-3. Inevitably the acquisition and disposal costs for the water will vary between regions but Highlands believes that this element of the fracking operations is an important component of profit margins of the operators across the United States. According to IHS Markit, the annual water management costs for the Permian Basin alone are expected to reach US$25 billion in the next five years.

 

Following the water shortages referred to above in Colorado, Highlands partnered with Epiphany Water Solutions to move two of its E10X modular water treatment solutions to East Denver Project to treat produced water from the operations. Highlands initiated this pilot project to verify the technical and economic merits of the technology for DJ Basin operations. Highlands was processing up to 500 barrels of water per day, receiving $3.50 per barrel.

 

Highlands has established a new subsidiary, Highlands Water Resources, and has subsequently become a distribution partner for the Epiphany’s technology across several US states and is now in discussions with other operators for the deployment of E10X machines. As an authorised distributor, Highlands could receive a sales commission on the machine or, more likely, a “per barrel” fee based on the water that is treated. Highlands believes that the environmental and logistical benefits offered by E10X could make a significant impact on the industry.

 

Highlands has discovered, during its dewatering operations at its Montana Project, that its interests there contain potentially billions of barrels of water suitable for oil and gas operations and specifically in the Powder River basin given its proximity. This is a longer term plan and clearly was not the original strategy for Montana. However, as explained below, any commercial development of Montana is going to require a significant dewatering exercise. If that dewatering can itself become a business line for Highlands, then it will considerably change the economics of that project.