Will Lithium Disrupt the Oil Industry?
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Among the exotic new businesses emerging from energy transition, one that has the potential to disrupt the oil and gas industry — in a surprising way — is lithium. When it comes to lithium production in the oil industry, the question will be whether trace amounts of lithium can be extracted from produced water in commercial quantities. The answer will depend on whether direct lithium extraction (DLE) technology can turn a profit and attract the capital needed to scale-up. Along the way, a separate question is bound to arise, and that’s who owns the lithium. It’s this question, more than the production of lithium itself, that has the potential to disrupt affairs in the oil industry.
Lithium is the third lightest element on the periodic table, by far the lightest element suited for battery production. That means lithium-ion batteries won’t be displaced by competing technologies in applications where weight is a prime consideration, such as transportation. Worldwide demand for lithium is expected to grow from 720K metric tons per year in 2022 to 3,100K metric tons by 2030. At the same time, entrepreneurs and policy makers are looking for ways to meet this demand without political or environmental risk. There’s no shortage of lithium pioneers eager to try their hand at lithium production in the United States.
The two most productive regions for lithium today are in South America and Australia. In South America, lithium is found in brine reservoirs and has traditionally been extracted via massive evaporation ponds. In Australia, lithium is found in sedimentary rock and is extracted via strip mining. Neither technique is environmentally friendly. Most of the world’s raw lithium is shipped to China for processing into battery-grade lithium carbonate and lithium hydroxide. The need for clean extraction and upgrading technologies in the U.S. and allied nations is apparent.
The good news is that lithium is one of the more common elements found in the Earth’s crust. The challenge is that it exists, in the first instance, in low concentrations. Only those lithium atoms that are dissolved and delivered in a closed sedimentary system will reach concentrations in rock or brine that allow for commercial extraction. In Arkansas, for example, the sedimentary system that produced the Smackover formation also produced high concentrations of lithium (more than 500 mg per liter). In other sedimentary systems such as the Permian, concentrations can be as low as 20 mg per liter if not lower. If there’s going to be a shift in lithium supply that includes oilfield lithium in the U.S., it will be driven by new, environmentally friendly technologies that can profitably extract lithium from low-concentration produced water.
Most oilwells in the U.S. produce more water than oil. While the lithium concentration in produced water tends to be low, the cost (to the lithium pioneer) of bringing that water to the surface is nil. Compare this to a pure lithium-from-brine play, such as the Smackover formation, led by Exxon, where capital costs include the cost of newly drilled brine-producing wells. This capital-cost advantage in the oilfield has teams racing to develop technologies that might exploit “free brine,” albeit at much lower lithium concentrations.
DLE techniques vary in terms of solvents, adsorbents, membranes, ion-exchangers and catalysts and are run either in batch or continuous process modes; they consume varying amounts of fresh water, chemicals and electricity. If there is to be a successful lithium operator in the oilfield, they will have developed DLE technology that minimizes all of the above and produces a healthy return on invested capital. This will not be easy; 80 mg of lithium per liter of brine is considered by many to be the floor, while much of the produced water from oil and gas reservoirs is well below that. To say success in oilfield lithium will take persistence is an understatement.
Meanwhile, in the U.S. there is no shortage of lithium-bearing water. The Great Salt Lake in Utah, the Salton Sea reservoir in California, geothermal resources under development in many places, the Smackover formation in Arkansas and of course produced water in the oilpatch are examples. As one scientist told me, no two brines are alike; each contain minerals other than lithium, and these minerals impact DLE performance in varying ways. The challenge facing lithium pioneers will be to have the right DLE technology at the right brine source, a rather complex challenge suggesting there may be more than one winner in the technology race. It also suggests that a pioneer who masters DLE in, say, the Permian, might find they have the winning technology for a geothermal play in, say, Canada. This potential for cross-play applicability ought to motivate pioneers to focus on oilfield lithium despite very low concentrations.
When the going price for battery-grade lithium soared above $68,000 per metric ton in 2020, DLE research teams were flush with cash from venture and private equity funds, chemical and mining companies, government entities, universities and other sources. Hype also soared; technology teams were boasting of breathtaking results and headline-grabbing deals involving thousands of tons of potential production. Look more closely and you’ll see that much of the hype was around technologies that were still in the lab or in the pilot stage. With lithium now going for less than $20,000 per metric ton, investor enthusiasm, along with the hype, has cooled considerably.
That said, boom-and-bust is nothing new to oil industry veterans. A technology-driven, capital-intensive, boom and bust commodity operation is something we know well, and hype is often the enemy of an industry that calls for patience, persistence, relentless focus on innovation and cost, discipline, localized expertise and a little luck.
Which leads to the potential disruption DLE may have on the oil and gas industry. While DLE equipment operated at the wellhead or at the processing facility won’t likely be disruptive, it could very well turn land and leasing on its head. When processed water suddenly morphs from a worthless nuisance to something of value, businesses and mineral owners will start asking who owns the lithium. Is it the operator under an oil, gas and other minerals lease? Is it the successor-in-interest to the original mineral owner who didn’t conceive of lithium when the lease was signed? What about the disposal operators that today make money on skim-oil? Will they make money on skim-lithium? How about the midstream operators who handle produced water that drops out of their gas processing operations? Will lithium production hold oil and gas leases when all the oil wells have watered out?
Lease and other contract terms, legislation and industry norms guide participants along the oil and gas production chain in terms of who-does-what and who-owns-what. It’s based on a century of practice with oil and gas as the valuable commodity and produced water as the headache. If produced water suddenly becomes valuable, all bets are off. A new set of rules, driven by litigation and legislation, is likely to emerge. Determining who owns the lithium, and how the owner will be compensated, will influence the future of oilfield lithium as profoundly as the development of DLE technology.
Exxon has taken an early lead by securing a position in the Smackover and announcing a multi-billion-dollar capital plan to produce lithium. Exxon’s public announcements suggest this is a lithium-only play, not a side-by-side oil and gas play. It’s one thing to build a DLE plant on a lithium lease crafted for just that purpose; it’s quite another to build a DLE plant on a decades-old oil and gas lease.
If history is any guide, an oilfield DLE industry will emerge, and a few players — the ones with vision and persistence — will make a name, and possibly a fortune, for themselves. Corporate finance, M&A, tax structuring and tax-incentive policy will undoubtedly present unique challenges to lithium pioneers as they make a run at this potentially lucrative industry. So, if you need help making sense of this rapidly evolving energy landscape, Weaver can help. Contact us today to find out more.
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