Kendall Neukomm (00:00)
Hello everyone and welcome to Whitley Penn Talks where we give you valuable insights to help you make confident informed decisions and move your business forward. My name is Kendall Jones Newcomb and today we’re back with our recurring guest and star Buffie Campbell and we have a new face to the podcast today, Jim Bradbury. So we’ll let both of them kind of introduce themselves and then we’ll get into our questions. But Buffie, do you want to give the audience a quick blurb on who you are even though they definitely already know?

Buffie Campbell (00:57)
I should hope so at this point. ⁓ So Buffie Campbell, I am the Managing Director of Mineral Management here at Whitley Penn. And so we step in and manage mineral interests for mineral owners that don’t have the time, don’t have the capacity. Maybe they are an estate or an LLC that needs some help managing those mineral interests. So we actually step in and manage those on their behalf and ⁓ handle everything from ad valorem taxes to lease negotiations and everything in between.

Kendall Neukomm (01:26)
Awesome. Thank you, Buffie. And Jim, share a little bit about your background and all of that for the listeners today.

Jim Bradbury (01:33)
Great to join you. I know Buffie and her team have worked with them for many years, so it’s really fun to join you guys. About me and my practice, I practice here in Texas. I have offices in Fort Worth and in Austin and do a lot of work for ⁓ rural landowners in the space of real estate, oil and gas, minerals, and natural resources. I do a lot of water work and that’s what sort of leads me to this topic here and have been involved in, I don’t know more than a decade on these issues, kind of watching them grow. And then I have a handful of business and small corporations that I represent.

Kendall Neukomm (02:07)
Yeah.

Awesome, awesome. Thank you both. We’re super excited to chat today. So before we do dive in, you listening out there haven’t yet had a chance to read the article that we recently posted on our website, Buffie and Jim worked on this piece on produced water. So I highly recommend checking it out and reading it. The link will be below on this episode description. So if you want to pause this episode, go read the article, come back and then hear from Buffy and Jim. I definitely encourage you to do that. So check out the article, listen to the podcast, all of the above. They provide clear detailed background that will pair perfectly with again, our conversation today. So thank you both. ⁓ To dive into our discussion, we’ve got a few questions lined up for this episode. So I think to start, I would love for each of you to kind of discuss and reintroduce the audience to the timeline of produced water and where we stand now with this new asset class, specifically here in Texas.

Buffie Campbell (03:11)
That’s a broad question, isn’t it? I guess I can start off a little bit.

Kendall Neukomm (03:13)
It’s a big one.

Buffie Campbell (03:19)
I think ⁓ for anybody out there that doesn’t understand what produced water is, we can kind of start with just a definition, just a very, very generalized definition. And I kind of think of it as a two-fold type situation. So underground already kind of married in with oil and gas, there is water. And if you kind of look back at scientific diagrams two, 300 million years ago, it’ll show you that most oil and gas plays were underwater. So it’s kind of an oceanic system there.

And that’s what we’re seeing in like West Texas in the Permian area in a lot of oil producing areas is that you’re going to have salt water and that’s where it comes from. And then also when operators are drilling a well they’re going to be injecting water down as well to help with the drilling process. And so there’s two different types of water that’s really coming out of these wells and I think we kind of have to separate that out a little bit. The Texas Supreme Court recently kind of separated that out a little bit.

But those are that’s what we’re talking about when it’s produced water and then when it all mixes around underground and then comes back up, we have this one product stream of water, right, that we have to do something with. So that’s really what we’re talking about. ⁓ Jim, I’ll let you go into a little bit more detail on where we stand right now.

Jim Bradbury (04:31)
Yeah, sure. Before we get into that, I mean, I just say thank you guys for doing a topic or covering this topic on your podcast because I don’t know a single issue that I’ve seen on more people’s minds outside of the oil and gas industry. I mean, a lot of people still think this is an oil and gas topic, but it’s not, and I’ve done a lot of speaking and discussing, I think this medium is better than just pure writing to explain the color around produced water. Briefly, in terms of a timeline, I’d go back to say 2005 or so when we were just beginning to see the advent of horizontal fracturing taking place up in the Barnett Shale in Fort Worth. you know, the industry was evolving with that technology, but then everyone was watching and realizing that you had this large by product of produced water that was coming up with the gas or comes up with the oil and gas and how to manage that.

And at that time, almost 100 % of it was going down hole and injection wells down into deep strata. But there was some very early technological ⁓ efforts on the part of the industry way back that far ago to look at treating that water using reverse osmosis to pull those salts and nasty stuff out of there to try to reuse it. It fledgling technology not with much scale. But then as the Permian launched, by the time you got to the Permian, you had water scarcity combined with technological advancements to bring us to the point we’re at now where it’s no longer a waste product, it’s a valuable, valuable commodity.

Buffie Campbell (06:08)
That’s kind of an interesting aspect that now turning into a valuable commodity, because we’ve had water being a commodity anyway, ⁓ fresh water, and that being used by the oil and gas industry for the drilling process. But now that we’re going into recycling this kind of waste, it has been deemed waste at this point. So ⁓ now that they’ve done some recycling in that and potentially some desalination, potentially cleaning it up for other uses, interesting. So tell us about what you see, in the future where do you see it going?

Jim Bradbury (06:41)
Yeah, mean, I think, you know, this is our old friend technology, which has caused this headwhip because, you know, 10, even 10 years ago, no one, the royalty owners, the minerals or EMP companies really cared about this. was just a cost. But now everybody’s interested.

Outside of oil and gas, mean, you have the legislature has expressed deep interest in this policy makers looking for new waters. We’re struggling in Texas to figure out how to accommodate all the growth in population, agriculture, data centers, know, water for data centers is top of mind right now all across the state. Well, you know, this situation where produced water, that’s an inflow of water that we wouldn’t have otherwise.

You know, Chairman Perry from Lubbock, who’s chair of the Agriculture, Water, and Rural Affairs, he recognized this a long time ago and formed the Produced Water Consortium, which is sort of a think tank on produced water based up there in Lubbock. So I think you’ve got a lot of user classes out there right now, well beyond E &P, looking at this produced water, saying how can we get that transported to us to make it an input in our process?

Buffie Campbell (07:58)
Can it be used for data centers? I don’t know too much about the data center side of it. you, has has produced water been used in that source yet or?

Jim Bradbury (08:08)
I would really doubt that any data center, mean, of course, most of these data centers are under construction or under planning now, but you know, the key with produced water is just how clean do you want to make it? I mean, the technology will allow you to bring that produced water down to a drinkable quality. Obviously, it uses more energy. It’s more costly to do so. But if the end user is prepared to pay to clean it down to that level, I have every belief that this produced water, you know, could be used to supplement data center cooling. Of course, look at where some of these data centers are. They’re out around Abilene. They’re also out in very arid portions of the state that don’t have a lot of surface water. And there’s plenty of money in data centers, I’m told. So I think they could pay to bring that produced water down to a usable quality for them.

Kendall Neukomm (08:58)
Yep. And backing us up just a little bit, Jim and Buffie, talk a little bit more about what’s happened recently. So I know there’s now really kind of ⁓ more of a focus on this produced water as a commodity, but what changed recently to allow people to focus so intently there? Or did anything change?

Jim Bradbury (09:19)
It did. Buffie, I’ll take a swing at it. I don’t want to dominate all the time. Nobody wants to hear a lawyer talk all the time. I mean, the one thing that happened because you have this technology growth that brought us the produced water as a commodity, but that that created this uncertainty of like, well, okay, it’s a valuable commodity. But who owns that? Who has a right to it? Because out in the oil fields, you have, of course, the exploration production company sitting there on a lease, you’ve got mineral owners, and then you have surface owners and in Texas the surface owners own the groundwater underneath the property. Okay. And so it set up this very, very ⁓ poised debate as to does that produced water as an asset class really belong to the surface owner of the ranch, let’s say, or does it belong to the exploration production company? And that debate was going back and forth. It wound itself into a good old fashioned lawsuit out in the Permian.

And that went all the way to the Texas Supreme Court who last summer rendered a decision answering that question for us and a among other things very interesting decision, but they came down clearly and said look this produced water is incident to the oil and gas lease so the exploration of production operator is the one that has the primary right to that produced water unless the lease and the contract says otherwise.

So they answered that question, but they very clearly in their opinion said there are a number of questions that are still left open by our decision. But they instructed landowners, look, if you want to keep that produced water, you’ve got to write that into your lease or your contract.

Kendall Neukomm (10:50)
Mm-hmm.

Yeah. Is that something that historically people had already been doing or no? No. Okay.

Buffie Campbell (11:12)
No.

OK, historically, it had been considered a waste product coming out as a result of drilling. And so the operators took it, and they were actually given the responsibility by the Texas Railroad Commission, by legislature, several different statutory requirements ⁓ that they dispose of it properly. When we’re talking about produce water, we’re not really talking about something that you would want spilled out onto the ground. It would need to be cleaned up immediately in that situation. ⁓ There are some toxic chemicals that come up from it. There are some some radioactive that are naturally occurring, ⁓ minerals and elements that are held within it as well. So it’s not really something that we want to just kind of willy-nilly allow anyone to take ownership of. historically, the operator has been the one to dispose of it correctly. That’s been more itself. So it wasn’t really included in lease negotiations at all. It was just kind of considered that is the next step. The operator takes it and disposes of it. So this is a new thing to have the produced water actually carved out of the ownership or actually carved out of the lease itself, which is getting really interesting out there right now.

Jim Bradbury (12:31)
And you’re going to see it. I mean, Kendall, maybe to give your listeners some perspective on this, how big it really is, is you have very well-capitalized companies out in the Permian right now who they don’t do anything else other than produce water. This is well beyond the exploration and production companies handling this now.

Kendall Neukomm (12:31)
Yeah, definitely.

Mm-hmm.

Jim Bradbury (12:54)
The value in that commodity, they’re building multi-billion dollar plants out there just to handle produced water that are independently capitalized companies that are knocking on doors of landowners saying, we’d like to buy your produced water. So you’re to see this evolution in contracting going on out there where an owner is going to say, well, I’m leasing the oil and gas to you, but I am allocating the produced water over here to a water company that’s going to pay me for it.

Kendall Neukomm (13:08)
Yeah, super interesting. how, I know that now in lease negotiations, that conversation will look very different, but outside of that, does this ruling change anything else for people who own land in West Texas? I mean, what are our kind of thoughts there?

Buffie Campbell (13:37)
As Jim already kind of spoke about a little bit, it gives them another asset that they can potentially sell. So if they carve that out ⁓ and reserve that water for themselves and then can sell it, that’s an awful lot of money. Because when we’re talking produced water coming out of a well, you could be talking five to six barrels for every one barrel of oil that’s coming out of a well. Depending on your location, it could be upwards of 500 barrels of water for every one barrel of oil. ⁓ Probably not the most lucrative for the operator in that situation, but it does vary across the country on what you’re seeing for water content. And that’s a considerable amount of money for a landowner that can then turn around and sell that.

Kendall Neukomm (14:19)
Yeah, absolutely. And having that kind of ownership be in the landowner’s hands, what are the implications if, the landowner doesn’t do a good job in making sure that the produced water has a lease of its own and is taken care of? Are there any controls in place that anyone has been discussing there on making sure that if it is separate that both are accounted for in operating?

Jim Bradbury (14:20)
We’re at that crossroads right now. mean, what Buffie and I have described at this evolution, we’re right here at the moment where this is a new asset class, you know, for investors as well as for landowners. And it’s introduced a ⁓ new, very sophisticated analysis that landowners and their advisors have to be looking at. Like, look, this is not just minerals anymore. This is looking at revenue streams that flow from my property. I’ll throw one more ⁓ little wild card in here is in different parts of the state this produced water carries trace other minerals. ⁓ Lithium, we’re seeing lithium production picking up over in East Texas right now. There are other trace minerals in this produced water that’s another value that may be in that produced water that could be extracted by somebody else that’s not a hydrocarbon producer, it’s not a water entity, but it’s somebody that’s willing to pull those trace minerals. So from a landowner perspective it’s gotten very beneficial but very sophisticated in terms of your analysis.

Kendall Neukomm (15:51)
Yeah, absolutely.

Buffie Campbell (15:51)
That’s actually really interesting too, because at the Supreme Court oral arguments, one of the justices actually brought up gold potentially being in produced water. And I thought that actually opened up some ⁓ more language on that, just what is going to happen if there is something that’s more substantial within that produced water.

Jim Bradbury (16:12)
You’re right. I’m glad you watched that. was my favorite question of the entire argument. was a great question. It said, if there’s gold in this produced water, do you, the E&P company, own it? The lawyer said yes. Now, the court didn’t answer that question, but that’s what the lawyer said at the argument.

Buffie Campbell (16:15)
Mine too. I was like, that’s smart.

Yeah. I think the justice’s response to that though was, I think landowners would be really interested in hearing that. I like when they get a little snarky on the bench.

Jim Bradbury (16:42)
And it is, it’s still, you know, it’s understanding. mean, Buffie and I are relating to you where we are at this moment. But I want everybody to understand this is you know, evolving here as we speak. And they’re going to be, you know, how it looks today is going to be different a year from now and two years from now. That’s very exciting, I mean, for business, but it’s not like the answer. And we all just move on from the answer.

Kendall Neukomm (17:06)
Right. Yeah, it’s constantly moving.

Buffie Campbell (17:06)
Right. There’s a lot of potential here, especially as investors and private equity companies get involved. And I mean, there’s kind of scars the limit when it comes to where we can actually go with this.

Kendall Neukomm (17:18)
Yeah, definitely. And the benefits that it could potentially bring the state as well. can imagine that that level of interest and focus back in some of these kind of active parts of the state in oil and gas are going to continue to be on the map there, which is awesome.

Buffie Campbell (17:35)
Yeah, I wouldn’t be surprised if they start doing a severance tax on unproduced water at some point. Right?

Kendall Neukomm (17:39)
Right. Right. Always.

Jim Bradbury (17:41)
The tax man always comes, so that’s right.

Kendall Neukomm (17:43)
Well, knowing that it’s evolving too, I mean, Jim, we may have to have you back for another episode in a few months or this time next year and the conversation could be in.

Jim Bradbury (17:51)
I love doing these, so all you gotta do is knock and I’ll be happy to join you guys.

Kendall Neukomm (17:56)
Awesome. Well, we know where to find you for sure. ⁓ I love it. Well, I know that we kind of briefly talked about data centers and farmers and I went off script with a few of my questions last, but I was just curious. I think that this topic is very interesting and myself not having that level of knowledge of the oil and gas space quite like both of you do. I think I come from a layman’s perspective and just asking some of my follow-up questions. So I appreciate you both there.

When we think about data centers, farmers, cities, I mean logistically, where do we see the produced water if we had to guess and we’re just kind of saying I think this is where it’ll benefit people the fastest. What’s y’all’s take there?

Jim Bradbury (18:39)
I mean, let me, start here on a couple of thoughts that I have things that I’m looking at and aware of and then Buffy=ie can fill in. I mean, one, I do a lot of work in agriculture in Texas and I know this is very much on their radar. There’s a lot of testing going on by Texas AgriLife looking at using this produced water in a filtered, clean state for crops and doing testing on series of crop harvest to see is it beneficial? Is there any impact to that?

So far so good. It appears good in the Produced Water Consortium in Lubbock is kind of leading that. So agriculture itself, which is we’re in a drought, they very much need that water. So they’re very interested. The other category that’s sort of waiting in line is municipal use. You know, we have lots and lots of small cities, particularly out in the western portion of the state that very much need water aquifer running lean and looking at a ready source of fresh water that they could use for their their towns for irrigation and otherwise, they’re sitting right there too. It’s not just an oil and gas issue.

Kendall Neukomm (19:46)
Yeah, right.

Yeah, it’s a much bigger issue than that. ⁓ Lots and lots lots of people around Texas and beyond need water. And so it’s making sure that we’re putting the technology in and we’re researching at this time to ensure that when that is a more dire need down the road that we’ve got systems and plants in place there. So absolutely.

Buffie, anything you’d add there on your thoughts on where this will land and who will use the water first?

Buffie Campbell (20:17)
I definitely think there’s going to be more of an agricultural use for this kind of water. I can definitely see that, at least initially going that direction. I can see a lot of municipalities, especially much smaller communities, trying to take this on. My concern, though, is being able to get it clean enough and desalinated enough that it’s usable for humans. ⁓ I’m sure we will get to that point. Like have no doubt that we have brilliant minds out in this world that are able to accomplish that kind of a task. It’s just getting to that point and getting the filters in place that can actually get it down to that level. But seeing all the water loss and the water needs at this point, someone’s gonna have to start doing something in that level.

Jim Bradbury (21:07)
Kendall, I give just a little credit. I mean, a point to tell you how big this was. I mean, last legislative session, Chairman Charles Perry from Lubbock, who’s sort of on Senate side, at least one of the key leaders on water in the state, without a doubt. And the legislature passed record funding for water in Texas. Chairman Perry, when he presented this in the legislature as well as spoke about it, produced water was one of his very top sources for water for Texas. So he recognizes that. That’s tied to this substantial funding the state is putting forward for new water projects. So ⁓ again, that’s a pretty strong marker of how long this is going to go.

Kendall Neukomm (21:42)
Yeah.

Right, right. And the forethought there for sure.

Buffie Campbell (21:58)
From the legal side of things, it’s been a hot topic because we had the Cactus Water versus CAG case that actually came forth. But it’s nice to have that’s right behind that as well. So good to see.

Kendall Neukomm (22:14)
Kind of last question in wrapping up today, and this has been an awesome conversation. We’ve alluded to private equity entering the space a couple of times throughout this episode. before we wrap up, do want to know a little bit more, Jim, from your perspective. What has that looked like so far, and how do you anticipate that continuing on?

Jim Bradbury (22:32)
Yeah, I mean. Very good question because again as I said at the top of this lot of people who are not very deep into the issue think this is a purely oil and gas mineral production issue and it’s just not I mean it relates to it in part, but you have a an entirely new industry an entirely new asset class that’s been built here that they may be located in the same areas, but they are doing entirely different things so you know you have ⁓ PE funds now who are drawn to disparities that may exist in the market and opportunities there on the water side that might not be investing at all in exploration and production, but say, look, we want to see where this goes.

We think there are distortions in the market that we could take advantage of on the water side in terms of new customers or those trace minerals that may be in there. So it’s drawn a lot of attention ⁓ to investors that previously wouldn’t have participated in a pure oil and gas issue.

This is new. We can get smart on this really fast and and maybe be on the ground floor of something that’s going to get really big.

Kendall Neukomm (23:41)
Yeah, absolutely. ⁓ Buffie, Jim, anything to mention to our audience before we do wrap up here? This has, again, been an awesome conversation. So I know that this episode paired with the article will set people up for success to begin their own research. And I’m sure we’ll have you on in the future. anything before we do wrap that you want to mention?

Buffie Campbell (23:42)
I think just keep an eye on produced water. I think there’s a lot going to be coming out over the next couple of years with it, whether it be lithium based, whether it be reusing it and recycling it for some other means, whether it be just some new case all that ends up coming about. But I think it’s going to be a highlight over the next couple of years, definitely.

Kendall Neukomm (24:21)
Yeah, for sure.

Jim Bradbury (24:22)
Yep.

I would just add, mean, ⁓ you know, whether you’re a landowner or mineral owner or, you know, somewhere in between a private equity fund is, you know, this is an exciting time where you see a lot of change here and change can bring positive opportunities. So don’t think about these things in the old ways. mean, landowners should not be using the old leases, know, rethinking those agreements ⁓ in terms of investors. Look outside the box, if you will, in terms of how you’ve invested in the past, because things are really changing rapidly out there and it’s been fun to watch.

Kendall Neukomm (24:58)
Yeah, absolutely. Well, thank you both again for your time and your thoughts. And this has been a really interesting conversation. So I’m sure if people have questions, they’ll be reaching out to chat further on this issue. But ⁓ thank you both again. I appreciate your time. for those listening, if you enjoyed today’s episode, be sure to subscribe on YouTube, Spotify, Apple, listen right on our website at WhitleyPin.com slash podcast. If you’re interested in receiving future episodes of this series straight to your inbox, check the link in the description to sign up for our email list and you’ll get those right away.

Thank you both.

Buffie Campbell (25:34)
Thanks.

Jim Bradbury (25:34)
Great to be with you.

Buffie Campbell (25:35)
Thanks. Bye.