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A West Texas Duopoly’s Huge Play In The Permian Oil Fields
I saw his leg rise up from the bed and I saw his skin begin turning blue. It started from the ankle and started spreading up his leg. It was like watching somebody pouring a blue liquid into a glass, it just began filling up.
Alfred Thornhill, the young ambulance driver, would never forget that day in May 1953 when he saw 20-year-old Ronald Maddison die.
And he wouldn't talk about it for another 50 years.
When Alfred rushed to the scene for an emergency call at Porton Downs, Britain’s top-secret chemical weapons lab, he was just in time to see Maddison turning blue from the feet up. The young man was also vomiting up a substance Alfred described as like "fish eggs or tapioca."
Ronald had volunteered to test a new type of cold medicine. Instead, it was later discovered, the research chemists at the lab had purposely given him a lethal dose of the world’s deadliest nerve gas, sarin.
Originally designed as a pesticide by mild-mannered German chemist Dr. Gerard Schrader in the late 1930s, the odorless, tasteless gas killed off every animal in Schrader’s lab and quickly caught the attention of Adolf Hitler. By 1943, Hitler had commissioned a full-scale sarin factory outside Berlin and cranked out a stockpile of “G-series” nerve agents including tabun (“tabu” for “forbidden”) and the four-times-more-deadly sarin.
Then he just sat on it.
Apparently, there were some lines even the Führer wouldn’t cross. Sarin was so deadly that Hitler refused to use it in warfare.
The Allies had no such qualms. After intercepting a barge full of G-series during the war, they captured and then granted amnesty to several of Hitler’s top scientists in order to get the recipe. The chemists discreetly settled in England and America to whip up batches of nerve gas for the Allied cause.
Before long, both countries had their own top-secret chemical-weapons factories – England’s was Porton Down, where poor Ronald Maddison turned blue. (Under pressure, ambulance driver Alfred signed a gag order and didn’t speak up about what he’d seen for half a century.)
As for the Americans, they built their own clandestine sarin lab in 1942 – the Rocky Mountain Arsenal, a 20,000-acre complex just north of Denver.
That lab would soon generate its own breed of deadly fallout.
Trying To Manage Deadly Sarin Gas
For a while, the Rocky Mountain Arsenal’s chemical lab was neatly contained in two big concrete buildings with five-foot-thick walls. But as World War II wound down and the Cold War loomed on the horizon, the Arsenal started to run out of room.
Preparing for a showdown that never came, Army scientists filled the concrete bunkers with an ever-larger stockpile of deadly substances – in addition to sarin, the roster included napalm, mustard gas, lewisite, chlorine gas, and white phosphorus.
For every vial of chemicals, there was a vat of chemical runoff. Noxious fumes began to drift from cracks in the walls. Wildlife died. Citizens in nearby Denver protested.
So the Army started offloading chemicals into ever deeper holes in the ground... which was where the trouble really began.
At first, the worst of the toxic sludge was contained in six asphalt-lined lagoons, fed by an increasingly complex series of trucks and pipes. But the corrosive substances eventually ate through the pipes, then through the asphalt, and contaminated hundreds of acres of surrounding farmland, destroying crops and livestock.
At a loss for what to do, in 1962, the Army dug a well.
Injection wells – deep underground wells to store toxic wastewaters – have been around for almost 2,000 years, though they didn’t catch on as a widespread waste-disposal method in the U.S. until the 1930s. The wells are drilled beneath the “basement level” of rock, as much as 12,000 feet down.
It seems like an elegant solution at first: out of sight, out of mind.
Until you inject waste at the wrong time... or in the wrong place.
The Rocky Mountain Arsenal well was just over 12,000 feet deep and held at least 1 million gallons of putrid poison water. It was also drilled directly on top of the Derby Fault line, adding an incredible amount of fluid pressure – called “pore pressure” – on a weak spot in the crust.
And that’s how the earthquakes started.
Between 1962 and 1967, more than 1,500 quakes, many at a magnitude of 4.0 or higher, rocked Denver. The worst – a 5.3-magnitude temblor that caused $8 million worth of damage in today’s money – caught the attention of U.S. Representative Roy McVicker (D, Colorado), who launched an investigation into the secretive chemical activities at the Arsenal. A 1966 U.S. Geological Survey report shortly determined that the well had indeed caused all the earthquakes.
Amid the resulting outrage, the Army hastily stopped injecting fluids into the well, started a massive cleanup operation in the 1980s, and shut down the base altogether in 1994. Today it’s a bald eagle refuge – albeit still one of the most contaminated sites in America. Sarin-filled mini-bombs were found there as recently as 2001.
It was the first known case of an injection well causing an earthquake, but it wouldn’t be the last...
The Magnificence Of The Permian
The Permian Basin is the most valuable energy production zone in the world.
If the Permian were its own country, it would rank as the fourth-largest oil producer globally, just behind all of Russia.
With all that oil comes a lot of associated natural gas. At 25 billion cubic feet per day (Bcf/d), the Permian is America’s second-largest gas basin, responsible for a quarter of total domestic output. Along with the massive growth in oil production, associated gas from the Permian is the fastest-growing source of new gas supply in America.
The pace of growth in Permian gas production is so great that it routinely exceeds pipeline capacity. This causes West Texas gas prices to routinely dip into negative territory, meaning shale producers must pay pipeline operators for the privilege of taking the gas off their hands because they have nowhere to put it. Over the last three years, Permian gas prices have averaged $0.51 per thousand cubic feet (Mcf), or a discount of more than 80% versus the U.S. national average.
It’s not much of an exaggeration to say… In the Permian energy is free.
That’s made West Texas one of the premier locations for the construction of new data centers underpinning the artificial intelligence (“AI”) buildout.
Big Tech companies are flocking into the area in order to capitalize on low-cost, natural-gas power generation to fuel these energy-hungry facilities.
This includes OpenAI’s flagship data center for the $500 billion Stargate Project, along with dozens of additional endeavors currently in various stages of development. This has led to a record jump of 60 gigawatts (“GW”) of new gas-fired power plants added to the development queue in the Lone Star State last year alone. That’s more than the next seven states combined:
What this all adds up to is one of the most obvious and powerful trends of the next decade: a whole lot more energy production in the Permian Basin. But we’re not recommending an energy company in this issue.
There’s an even bigger bull market being unleashed from the Permian energy and AI gold rush: a bull market in water.
The Permian Water Boom
Before the shale revolution, Permian drillers used conventional production methods that didn’t result in a lot of produced water. The volumes were small enough to be disposed of with water hauling trucks.
But everything changed with the shale revolution. Fracking created 10x more produced water.
Water is less viscous than oil, meaning it moves through underground rock formations with greater ease. So as wells age and the oil in the reservoir depletes, water begins flowing into the remaining spaces left behind by the extracted oil. This causes the percentage of water production to increase as the well ages.
In order to maximize current cash flows, drillers target the most “oil rich” locations of their acreage before moving on to second- and third-tier locations that contain higher water concentrations. As the Permian shale boom enters into its second decade, high-quality inventory has been depleted, forcing drillers to move on to lower-tier acreage that contain higher proportions of water.
We can see these trends at work through the water-to-oil ratio (or “water cut”) of the Permian Basin over time. Note that the Permian’s water-to-oil ratio has steadily increased over the past decade, from 2.6 in 2016 to 3.4 last year.
As a result of these trends, Permian produced water is significantly outpacing the basin’s oil-production growth. While oil production has increased 230% to 6.6 million barrels per day (“b/d”) over the past decade, produced water volumes have risen 330% to 22.4 million b/d.
The Biggest Choke Point In The Permian Basin
Dealing with all of this produced water is the core challenge to energy production today.
If shale drillers can’t dispose of their produced water, the entire operation shuts down.
Produced water is highly toxic. During the Permian’s formation, a series of evaporative water cycles left behind thick layers of salt deposits throughout the layered rock deposits. The end result: the subsurface water in the Permian is a dense brine, containing about 4x more salt than surface-level ocean water.
In the early days of the Permian shale boom, disposing of this waste product was easy. Drillers simply injected produced water deep underground into salt-water disposal wells (“SWD”) – about 12,000 feet deep, below the oil shales.
But after billions of gallons of water injections, this eventually led to a dangerous increase in pressure within the gaps of the underground rock, creating, as we saw from the Army’s operations above, significant earthquakes that rippled out hundreds of miles into towns like Dallas, El Paso, and San Antonio.
In 2021, Texas regulators began cracking down on issuing new permits for deep disposal wells. This forced shale drillers to pivot to shallower SWDs, “only” about 3,000 to 7,000 feet deep. While this solved the earthquake problem, it quickly created a new one.
West Texas contains thousands of post-production “orphan wells” that have no legal owner. The billions of gallons of water injected into this layer of rock caused pore pressure to rise. And you’ll never guess what happened… Toxic water, explosive blowouts of long dead oil wells.
In 2022, a 100-foot geyser of reservoir water burst through this abandoned well, blanketing the ground with super-saturated saltwater that resembled a fresh patch of snow:
The well was plugged after gushing for two weeks, but it was just a band-aid on a bullet wound. Plugging the well did nothing to address the root cause: a continuous build-up in reservoir pressure from injected water.
The ground literally gets pushed up as reservoir pressure builds. Engineers measure this through a metric called surface displacement, which shows how many inches the ground has risen above a reference point. In the area near the Tubbs Corner well pictured above, surface displacement rose by about four inches before the blowout. After plugging the well, surface displacement shot up to about 17 inches over the next two years, ultimately resulting in a second blowout of another nearby orphan well, as shown in the chart below:
The second blowout leaked toxic saltwater for 53 days before the Texas Railroad Commission – the key energy regulator in the state – could plug it, for a cost of $2.5 million. And within weeks, surface displacement near the second well began rising once again. Plugging orphan wells is a whack-a-mole solution. The water has to go somewhere.
Researchers monitor pressure levels in the basin, and they consider 0.5 pounds per square inch to be a critical threshold. Anything above this level means water can begin migrating through open pore space and find its way into orphaned wells, triggering more saltwater blowouts.
The chart below shows that a wide swath of land running through the heart of the Delaware basin in West Texas – the most prolific oil and gas producing region in the Permian – is now at or above this the 0.5 pounds per square inch level that researchers consider a critical threshold:
The situation came to a head in 2025 after the alarming rise in saltwater blowouts from orphaned wells across the Permian. In response, the Texas Railroad Commission slashed new permit approvals for SWDs by nearly 50%.
Drilling new oil or gas wells in the Permian is no longer about finding attractive new drilling locations. The biggest constraining factor is finding a place to put the wastewater.
Based on a 2025 survey from the Federal Reserve Bank of Dallas, 74% of oil executives operating in the Permian expect to face drilling constraints over the next five years due to insufficient water-disposal infrastructure.
But there is one company that saw all this coming and began investing heavily into water-disposal infrastructure more than a decade ago, in 2015. Even better, that company also had the foresight to scoop up the property rights to some of the most valuable land in the Permian Basin for disposing of this wastewater.
That, in a nutshell, is the bull thesis for the two companies we’re introducing in this issue.
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