Will Water Shortages Shut the Fracking Boom Down?

Water is one of those things that you just can't do without. That's been a problem for California, which is in a severe drought. That pits families, farmers, and oil and gas drillers against one another for what is an increasingly scarce resource. Of the three, the drillers look like the most likely losers.

How much water?
According to oil and gas industry trade group Western States Petroleum Association, "The average amount of water used to hydraulically fracture an oil well in California in 2012" was 116,535 gallons. A family of four uses 146,000 gallons of water a year. Providing water for either a family or to drill another well seems like a no-win situation for hydraulic fracturing. Add in farms, which need water to feed that family of four, and it's no wonder that the drought is causing some concerns in California over drilling.

That concern is gaining traction in the state's government, which is considering an outright ban on fracking. That would put drillers like Occidental Petroleum (NYSE: OXY  ) in a bind. The company is one of the largest oil and gas producers in California. It grew production in the state 4% last year and plans to spend nearly $2 billion of its over $10 billion capital budget in the state this year.

Looking to the future, Occidental is projecting its California production to increase about 15% annually between 2013 and 2016. The company specifically states that, "Water & steam floods will contribute 80% of production growth," calling California, "one of the lowest risk growth profiles in the industry." With the California government looking at banning fracking, Occidental may find that drilling in the state is riskier than it thinks.

Water for the masses
The drought has also been an issue for water suppliers like California Water Services Group (NYSE: CWT  ) . The company proclaimed it was, "prepared to meet customer demand despite continuing dry conditions" following California Governor Jerry Brown calling a "drought emergency." Still, Robert Guzzetta, a VP at California Water Services, stated that, "water is a precious resource that should never be wasted, and we encourage our customers to continue using water as efficiently as possible."

The company's conservation efforts have resulted in a 15% decline in average water use across its territories since 2007. California Water Services spent over $30 million on conservation over that span. Essentially, the company was paying to stop its customers from buying its product. While that's an oversimplification of the dynamics, it shows why the drought might be more difficult than hoped even if the company is prepared: If you ask people to use less water, you sell less water.

(Source: Tudor, via Wikimedia Commons)

California Water Services isn't the only one calling the shots, either. For example, the city of Livermore recently enacted water use restrictions that impact California Water Services customers. The Governor obviously sees a problem, too.

To put a number to that, California Water Services lost $0.11 a share in the first quarter. To be fair, water is a seasonal operation, with more demand during the hottest months. However, the first quarter loss last year was just $0.03 a share. A big part of that was the fact that revenues were down nearly 1% year over year while water costs rose nearly 9%. The company's current goal is for its customers to reduce water use by 20%, so the top line could remain weak despite rate mechanisms that will help offset the company's financial pain.

How do you justify that?
While California Water Services Group is asking its customers to trim their water use, companies like Occidental are pushing water underground to bring up oil, a commodity that's arguably plentiful in the United States right now. While the environmental impact of hydraulic fracturing has been the go-to argument, providing clean water to citizens and farms might end up being the winning fight. Keep a close eye on California's drought if your oil companies drill in the state.

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Reuben Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

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