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Resource Extraction: Water Due Diligence

If you trade or invest in resources stocks (whether mining or oil and gas) you ought to ensure that you have due diligence questions organized with respect to current and prospective water permitting and supply. This because an adequate supply of water is of fundamental importance in both mining and oil and gas operations. Water is of particular significance in shale oil and gas extraction.

A recent Mineweb article sets out a number of facts and observations that suggest going forward from here issues around water will delay resource projects, increase resource extraction costs, and in some cases preclude resource projects from proceeding. These include statements:

  • that water infrastructure annual costs have more than tripled from 2009 to a spend of $11.9 billion in 2013. My Comment: While interesting, that statistic is not as meaningful as would be if information on how much would have been spent in 2009 to develop exactly the same water infrastructure that is ongoing and being planned for 2013 was available. Only then would the real incremental cost of water infrastructure over that comparatively short four year period be identified. About all that can be said based on the stated statistic is that water infrastructure costs are almost certainly escalating - and likely escalating quickly;

  • miners are looking to expensive options including seawater desalination and sewage treatment plants to acquire water for both themselves and the communities geographically close to them;

  • local communities are becoming increasingly demanding of resource companies, and fresh water infrastructure that continues to serve the local community after the resource extraction process is completed is becoming a 'major bargaining chip' for companies with those communities; and,

  • in February Moody's warned of risks to resource company credit ratings as a consequence of "poor environmental risk management (that) will increasingly lead to production stoppages, protests, fines, and license withdrawals - all factors which may directly impact mining companies profitability and credit risk profiles".

Water and issues related to water are things that going forward are virtually certain to delay natural resource projects, and increase both their capital and operating costs. Viewed in isolation, in coming years this ought to negatively impact natural resource supply, and positively impact natural resource prices.

I suggest you read Water: critical resource and costly risk for miners to learn further detail as to water impacts that are almost certainly in coming years going to negatively impact natural resource project:

  • timing by way of delays, and in some cases curtailment;

  • capital costs, operating costs, quantity outputs; and,

all other things equal, push natural resource prices higher.

You might also want to read Fracking Creates Water Scarcity Issues in Michigan that discusses concerns related to the use of groundwater on a massive scale in Michigan, citing one instance where 8.4 million gallons of water are expected to be used to frack a single well.

Reference: Water: critical resource and costly risk for miners, from Mineweb, Julie Gordon, May 30, 2013 - reading time 4 minutes. Also see Fracking Creates Water Scarcity Issues in Michigan, from Resilience, June 6, 2013 - reading time 3 minutes.

 

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