BIG SPRING, Texas (Reuters) - Mike Christensen strides among rows of gleaming steel tanks, pointing to pipelines that arrive from miles around to this corner of former farmland near Midland, Texas, the heart of the largest oil patch in the United States.

A wastewater injection well is seen at a facility operated by On Point Energy in Big Spring, Texas U.S. February 12, 2019. Picture taken February 12, 2019. REUTERS/Nick Oxford

His company is one of dozens opening sites like this one that handles, not the lucrative oil, but the shale industry’s dirty secret: wastewater.

While U.S. oil production has reached record levels on account of the shale revolution of the last decade, much of the supporting infrastructure has failed to keep up, including how to transport the large quantities of water used in the hydraulic fracturing process and the water that is produced from wells alongside oil and gas.

Once managed individually by energy producers, the job of supplying, collecting and disposing of water is a rising cost, and has spawned a $34 billion a year business in the U.S. that has lured investors including TPG Capital, Blackstone Energy Partners LP and Ares Management Corp to back these firms.

Oil production in the Permian basin that spans West Texas and southeastern New Mexico is expected to rise to rise 35 percent to 5.4 million barrels of per day (bpd) by 2023, requiring even more water supply and disposal, said analysts. In two New Mexico counties, firms produced 505 million barrels of oil from 2016-2018, and five times that in water, a Reuters analysis of state production data showed.

“You can’t bring production online until you have a solution for the water,” said James Lee of Riveron Consulting.

There are 5,500 Permian wells to be drilled, requiring 2.75 billion barrels, or 115 billion gallons to complete, a Morgan Stanley report estimated.

While much of the water in the Permian is transported for high fees by trucks, which also exacerbate traffic congestion around production sites, midstream companies build and use pipelines which energy producers pay to utilize.

Christensen’s company, On Point Oilfield Holdings, owns a water disposal network that this year will take up to 375,000 bpd of wastewater. Some of that water will be recycled, but millions of gallons will eventually be sunk deep underground in West Texas. “Water was always an afterthought for producers,” said Christensen, who stretches him arm and draws a 360-degree arc to show the locations of lines carrying oilfield bilge to the site. “Now it’s a business plan in itself.”

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Raising cash at a time when the industry is under pressure to restrain spending and improve returns has also fueled the trend, prompting some producers to cash in on their water projects.

In December, Hess Corp got $225 million for some of its water handling assets from a joint venture with Global Infrastructure Partners, while Halcon Resources received $200 million in cash and up to another $125 million over five years from WaterBridge Resources LLC for its water infrastructure assets.

“When capital discipline is higher on the priority list, it’s very attractive to monetize” water management assets, said Benjamin Shattuck, an analyst at consultancy Wood Mackenzie.

$14 BILLION WATER BILL AND RISING

The average frack job now consumes 13 million gallons (49 million liters), up 40 percent in two years, according to a Reuters analysis of Permian producers’ data reported to FracFocus.org.

That translates to water bills in the Permian Basin soaring 17 percent this year to $14 billion, according to consultancy IHS Markit, more than three times what North American producers spent last year on sand to frack their wells.

That lure is attracting investors who once viewed oil and gas as the prize.

TPG last week agreed to pay $930 million for a majority stake in Goodnight Midstream’s water pipeline network, which consists of more than 420 miles (670 km) in three U.S. shale basins.

Other private equity firms, including ARM Energy Holdings and Ares Management, have committed $4 billion to buy or start water management firms over the last four years, according researcher Global Water Intelligence.

Water management at this scale is in its infancy compared with the business of moving oil and gas by pipeline, but more private equity firms are looking for investments, said Jim Summers, chief executive of Houston-based water company H20 Midstream.

A FRACTION OF THE COST

Acquiring and disposing of water costs between 50 cents and $4 per barrel, depending on whether it moves by pipelines or more expensive trucks, and can be a steep cost for producers when oil dips as low as $40 a barrel in the Permian, as it did late last year.

The cost has inspired some companies to shift gears.

ARM Energy formed a company, Salt Creek Midstream, to gather oil and gas and was quickly pulled into offering water management, said CEO Zach Lee. By hiring Salt Creek, shale producer Lilis Energy expects its water disposal costs to fall to 48.5 cents per barrel from $2.

Not all producers, however, want to let go of their water management.

Diamondback Energy Inc is considering selling shares in a subsidiary that manages its water, oil and gas transport, but would retain control of the subsidiary.

“If I have to wait on somebody to get a pipeline built or a saltwater disposal system put in place, that is going to be a bad day. I need to be in control of that, not the other way around,” said Diamondback’s CEO Travis Stice.

Parsley Energy Inc spent $150 million to develop a water system that can handle up to 1 million bpd, which helped cut its wastewater costs by two-thirds, to 50 cents per barrel, CEO Matt Gallagher said.

“If you want to be a good shale operator you have to be excellent at water sourcing and management,” said Gallagher. Otherwise, “the whole operation could come to a screeching halt,” he said.