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Hydraulic fracturing has been a controversial topic in the US for the past few years, but as the public has grown more accepting of the process itself, water reuse and disposal within fracking has emerged as a heated issue. On the back of severe droughts across the country and President Obama's re-election, which is likely to embolden environmentalists, the use of a resource as scarce as water is certain to become a larger part of the dialog surrounding domestic oil production.

As most readers probably know, fracking is the process of injecting pressurized fluid (90% of which is water) down an oil or gas well in order to fracture the host rock, helping release trapped hydrocarbons which are then able to flow out more easily. Fracking a single well uses anywhere from 3 to 8 million gallons of water; if you multiply that by 35,000 (the number of wells fracked per year), it becomes easy to see why water usage is such an important topic. Anywhere from 10-40% of fracking fluid flows back to the surface and must be disposed of or treated. Similarly, "produced water" is water that is produced along with oil and gas.

A Changing Landscape

Only recently has the recycling and reuse of produced water become part of the equation. As an example, this year 14% of "produced water" in Pennsylvania was recycled, up from just 1% two years ago. In other gas and oil producing regions, the amount of recycling is similarly in the low double digit percentages. I expect this trend towards reuse to accelerate in the coming years.

Produced water is primarily either injected on-site into a well or hauled off-site by truck and injected elsewhere. Certain states, Pennsylvania being one, are not amenable to local water injection and fracking companies in such locales are forced to truck water out of state to have it disposed of elsewhere. This is clearly not an ideal use of resources (water and equipment) and it is costly, ranging from $3 to $10 per barrel of water depending on the distance that needs to be traversed. Additionally, there is a heavy toll taken on rural roads, as well as noise pollution, and these two issues have become a significant argument for anti-fracking groups who have become increasingly vocal.

Companies such as Heckmann Corporation (HEK), who derive the majority of their business from hauling produced water off-site, look to be the most likely to lose business as the natural progression from off-site disposal to on-site reuse takes hold. Larger companies, perhaps sensing the shifting landscape, have begun to move to recycling their produced water. In fact, Chesapeake Energy (CHK), a leading natural gas producer, now recycles all of the water it recovers from its wells according to this recent article from the WSJ titled Drillers Begin Reusing 'Frack Water.'

The oil and gas industry simply won't be able to get away with the old method of water sourcing or disposal. Farmers and agricultural organizations are starting to make their voices heard in the debate and they are not on the side of the fracking companies. Expect this type of negative publicity to increase, forcing companies that utilize hydraulic fracturing to plunge headfirst into water recycling before regulatory authorities become more involved than they already are.

Politicians from both sides of the aisle have widely embraced the notion of energy independence. With the process of fracturing itself now part of the path forward, focus is likely to shift towards the ecological impact of water use as central to the ever evolving debate.

The Current Technologies

The offering of on-site produced water treatment is already broad, some estimates valuing the industry at up to $18b per year, with multiple conferences dedicated solely to the topic.

Vying for a place in the produced water treatment train are companies big and small, from Ridgeline Energy Services (OTCQX:RGDEF) to companies higher up the food chain such as Baker Hughes (BHI) and Siemens (SI). There is a veritable gold mine of revenues in this emerging specialty, and there is no shortage of technologies and processes on offer.

The majority of current treatments involve a significant usage of electricity, chemicals, or both. Until recently, the cost of on-site treatment was higher than that of off-site disposal. With the tide clearly turning in favor of on-site treatment due to lower costs, oilfield service companies and producers will be looking to use the products that save the most money and are the most environmentally friendly.

AbTech Industries and SmartSponge

AbTech's (OTCQB:ABHD) SmartSponge, a polymer sponge, can remove up to 99.99% of hydrocarbons and absorb (not adsorb) 3x its own weight in fluids while remaining oleophilic (it won't absorb water at all). For less than 10 cents per barrel, an onsite fracking/produced water treatment system is able to remove the last of the hydrocarbons, run its downstream process more smoothly and economically (fewer maintenance issues), and can then use the spent smart sponge as a renewable fuel source.

By adding SmartSponge into the treatment train, downstream processes can operate more efficiently and at less cost as their maintenance is reduced. The saturated sponge, loaded with hydrocarbons, can be used as a fuel source using off the shelf boilers, which helps reduce costs further. Since the sponge permanently bonds to hydrocarbons, it could also make an excellent tool in cleaning up after an oil spill.

AbTech has 17 US patents on the SmartSponge product and additional international patents, which they have only just recently begun to commercialize, has a significant advisory board (Robert Kennedy Jr. and former Pennsylvania Governor Edward Rendell), and won numerous awards with the most recent and prestigious being the 2012 Technology Innovator at the Third Annual World Shale Oil & Gas conference in September. Following that award, Forbes covered the company with an article highlighting its proposition to the O&G space.

On its Q3 conference call, the company stated that an oilfield operator, likely the same one that did extensive field testing in Wyoming last year, will be presenting industry data at a conference taking place at the end of November. This will be the first look at conclusive data regarding the cost savings associated with SmartSponge integration into the produced water treatment process. In addition, the company mentioned that it has opened an office in Houston to focus on this market segment, recently hiring a senior oil and gas sales executive. AbTech estimates that the addressable market opportunity for the produced water segment, in just the US, is $1.2 billion annually.

AbTech is no one trick pony. The company has a 5-year exclusive partnership with Waste Management (WM), a $15b company, to offer a solution to the increasing regulatory environment in the storm water remediation industry. Waste Management only began marketing this offering to a select handful of their 34,000 municipal clients in June and AbTech recently announced that the first 2 contracts are slated to close within weeks. After the first few municipalities move forward, the company has been told to expect an avalanche effect of follow on cities. The company is also working with an as yet unnamed Fortune 500 company, which it has been stated has 1,000 industrial sites that they aim to have remediated. For an excellent overview of AbTech's potential in these verticals, see here.

AbTech is quite incredible as far as opportunity goes, still being a sub-$50m market cap name. In my discussions with the company and in doing research, there is every indication that AbTech is the real deal and is quickly approaching an inflection point that will bring the company significant business beginning in 2013 and continuing to build for years to come.

AbTech is certainly not without risks. The company has yet to seal any contracts that generate material revenue. As such, the company will be dependent on debt and equity markets to fund operations if they are unable to close on any deals in the near future. Even though SmartSponge has been thoroughly tested by companies as large as Waste Management and is installed at over 15,000 locations (including the city of Long Beach, CA and at DOD bases) , that is not a guarantee that AbTech will enjoy commercial success.

With the cost of on-site treatment coming down, and the political barriers to off-site disposal going up, I believe that AbTech has an excellent chance of making a name for itself in the produced water treatment field. With the O&G potential comes the opportunity in the storm water segment as well as industrial waste remediation opportunity. The company has a solid partnership with a Fortune 500 company, management that impresses, an advisory panel worthy of any large cap company, a cabinet of awards, and a sponge that seems like it can do just about anything.

Source: Fracked Water, Meet SmartSponge