Wastewater Midstream, Oil & Gas Production, and Leasing & Permitting Risks to a Midstream Company’s Business Model

The Request: Capstone advised a group of clients on their potential acquisition of a water pipeline network in the Permian that relied on production volumes and rig activity in the region.  Specifically, Capstone analyzed federal and state level regulations and legislation, along with potential policy changes as the result of federal elections, that could impact the company as well as upstream hydrocarbon producing assets and downstream water storage assets.  Our diligence focused on the shifting landscape of injection regulations in the state of Texas and New Mexico, the feasibility of the proposed federal hydraulic fracturing ban, permitting restrictions and timing for environmental reviews, and potential impacts of federal lands production moratorium on assets at various stages of their life cycle.   

Background: Increased regulatory scrutiny from local authorities along with risks presented by the U.S. Presidential election injected a degree of regulatory uncertainty into an industry and area that had experienced decades of certainty.  Newborn seismic activity in the region had raised concerns throughout the oil and gas industry that a strict and fast-moving regulatory response could limit wastewater disposal access, increasing costs across the supply chain as operators sought alternatives.  At the same time, the 2020 presidential election was beginning in earnest, and ‘frack bans’ and federal lands restrictions attracted headline coverage.  Precedent indicates that some of these proposals are quickly achievable, and could present a sizable risk to acquiring and developing resources on federal lands—a point of particular concern for Permian operators in New Mexico.

Our Process: Over three weeks, Capstone conducted a thorough review of the public record of existing and proposed regulation and legislation at both the state and federal levels. We combine this research with targeted conversations with relevant current and former regulators, policymakers and advisors, and other stakeholders to assess the risks and opportunities the companies face.  We used this information to quantify both the possible incremental costs for operators and possible additional delays for the siting and permitting of midstream assets.

Our Outreach: During our three-week engagement period for this project, we spoke with approximately two dozen key stakeholders, including:

✔ Bureau of Land Management & Environmental Protection Agency
✔ Senior Democratic Campaign Advisors & Various Environmental Groups
✔ Texas Railroad Commission
✔ Office of New Mexico Governor Michelle Lujan Grisham & the NM Oil Conservation Division
✔ Geology Experts at the University of Texas’ Bureau of Economic Geology & SMU

The Outcome: Through the iterative process, Capstone held interim update calls and presentations for our clients and delivered a thorough final report identifying and quantifying the policy risks and opportunities for the company, providing clarity for the deal team’s assessment of the future regulatory landscape.