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Who says oil and water don't mix? Gary Evans, CEO of US upstream independent Magnum Hunter, is taking his knowledge of the shale boom to craft a dramatic strategy shift for GreenHunter Energy, the renewables company he also heads.

GreenHunter Energy, which once touted ownership of the biggest biodiesel plant in the US, is transforming itself into GreenHunter Water, a company specializing in treatment and disposal of frac water.

The biodiesel plant, which opened to much fanfare a few years ago, is now being used for transloading and bulk storage. A combination of a direct hit by Hurricane Ike, uncertainties about biodiesel mandates and expiration of the biodiesel blender's tax credit halted operations there after only a short time.

"Unlike others who could afford the loss, we opted to not operate [without the biodiesel tax credit]...and then of course a lot of the fuel we were selling was going to go to Europe and Europe imposed a $1/gal tariff on the American-made biodiesel. So it truly was the perfect storm," said GreenHunter President Jonathan Hoopes in an interview.

But things are looking up thanks to the shale boom and water issues it has created, he says.

The typical 15-20 billion barrels of produced water from North American oil and gas operations has been raised by another 3-4 billion barrels due to fracking operations, according to Hoopes.

"The infrastructure is getting overwhelmed because what you were previously using as disposal capacity for production is just not sufficient for disposal capacity for the production plus now the new frac flowback," said Hoopes. "We have realized this is a significant opportunity."

Magnum Hunter is active in the Marcellus, Eagle Ford and Bakken shales "and so they see this [frac water] challenge daily," said Hoopes.

In 2011, the Marcellus Shale represents a $1.3-$1.7 billion water disposal business, while the Eagle Ford Shale, which has more infrastructure in place, is a $500-$800 million market, according to Hoopes.

Over a 10-year time frame the water disposal market for the Marcellus is $15-22 billion, while the Eagle Ford is valued at $6-$9 billion by GreenHunter. In the Bakken Shale, the company sees a $10.6 billion market over the next 20 years as more wells are drilled there.

In the Marcellus, which is found in Pennsylvania, New York, Ohio and West Virginia, an operator will pay $3-$5 to dispose of one barrel of produced or frac flowback water. On top of that, the company will pay about $1/b per hour of road time to transport it.

"Given that the state of Pennsylvania only has six commercial disposal wells and the bulk of the Marcellus production originates in Pennsylvania and winds up in Ohio or West Virginia, you're hauling anywhere from three to seven to eight hours one way and then typically those guys get charged for the backhaul even though it's empty," said Hoopes.

In the Eagle Ford, the disposal fee is in a range of $0.80-$3/b and the hauling fee $3-$6/b.

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Is the additional cost to hire GreenHunter worth it to operators?

"All operators have been doing water, but they'd prefer to put their focus on geology and their drilling program," said Hoopes, adding that companies are seeking to eliminate the "headline risk" associated with the water used in fracking. That risk includes allegations of tainted water supplies from the combination of water, sand and chemicals used in those operations.

Once GreenHunter gets its hands on the water, some can be treated and sold as "clean brine" for up to $4/b to be used again in fracking, according to the company.

GreenHunter is considering acquisitions to move its strategy forward and is targeting 2% of the water disposal capacity in the Marcellus. It is also considering the purchase of water treatment technologies. There are "a couple dozen and growing" water treatment companies with technologies developed from industries such as pharmaceuticals, municipal water, food processing, or the chemicals industry, said Hoopes.

"We're finding an opportunity now to go in and acquire existing operations, or even more importantly acquire locations that are suitable for greenfield projects and get those qualified to do business with the major operators," he said.

All of this is taking place against a fast-moving regulatory backdrop. In May, Pennsylvania asked Marcellus well operators to voluntarily stop sending frac water to municipal water treatment centers. "Literally overnight, cold turkey, [companies] stopped sending water to public water treatment works," said Hoopes. The water was then sent out of state, prompting regulators to ask for tracking information. "The operators are all...trying to figure out how they're going to provide cradle-to-grave tracking," something GreenHunter will offer, said Hoopes.

The company hopes to keep pace with regulatory changes so it can provide services to meet them. "A lot of this is going to change based on regulations as they kind of pop up," said Hoopes.--Beth Evans in New York

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