JAL, New Mexico, Sept 11 (Reuters) - Flying over the

desert landscape of southeastern New Mexico in a four-seat

helicopter, Stephen Aldridge could count around a dozen man-made

lagoons brimming with toxic wastewater glistening between drill

rigs and pumpjacks.

While it is a growing hazardous waste problem from the

region's booming drilling industry, the mayor of the tiny town

of Jal - nestled near the border with Texas in the heart of U.S.

oil country - viewed the sweeping scene as an opportunity: a

source of water in the second-biggest oil producing state

suffering from worsening drought.

"Our future is going to depend on the future of that

produced water," he said.

Aldridge is among a growing group of New Mexico politicians

who want the state to develop regulations allowing for the

millions of gallons of so-called produced water gushing up daily

alongside the Permian basin's prolific oil and gas to be treated

and used, instead of discarded, and who are encouraging

companies to figure out how to make it happen cheaply, safely

and at scale.

In 2022, the oil and gas industry in New Mexico produced

enough toxic fracking wastewater to cover 266,000 acres (107,650

hectares) of land a foot (31 cm) deep. While the state's

drillers reuse over 85% of their produced water in new oil and

gas operations, the rest is pumped underground.

With injection wells filling up, however, New Mexico has

begun restricting deep-underground disposal, which has triggered

earthquakes. The state is now expected to export over 3 million

barrels of that water per day by the end of 2024 - a strange

dynamic in a water-scarce state.

Around 10 wastewater treatment firms in New Mexico are

taking up the challenge under a state-supported pilot program

that has so far spurred projects to grow crops like hemp and

cotton and irrigate rangeland forage grasses.

While completed pilots have shown the technology works, it

is currently too expensive for widespread adoption.

The companies and their backers also face a tough political

battle. The debate over how this water should be used is one of

the most divisive political questions facing New Mexico, with

opponents mainly worried about the unintended human health

consequences and subsidizing the oil industry's waste issue.

New Mexico's Democratic Governor Michelle Lujan Grisham

introduced legislation late last year that would have created a

strategic water reserve out of treated produced water. The bill

was defeated by state lawmakers but will be brought up again in

the next legislative session in January.

Neighboring Texas is also dealing with growing problems

around wastewater disposal, including an epidemic of exploding

orphan wells as subsurface pressure rises, raising worries about

a potential crackdown there too. The Permian basin, which

straddles Texas and New Mexico, is the top U.S. oilfield.

"It's getting close to this point of criticality," said Rob

Bruant with energy consultancy B3.

Other states such as Colorado and California already use

treated produced water in small amounts for agriculture. But New

Mexico's situation is unique because the volumes are

overwhelming and the water itself needs much more intensive

treatment because it is unusually briny - three times saltier

than the Pacific.

CRYSTAL CLEAR FISH TANKS

Aldridge stands out in dusty New Mexico, with

shoulder-length white hair and a bushy beard, often wearing

bright West African tunics.

His chopper tour in late-July was part of a site visit to

one of the state's wastewater treatment pilot project run by a

company called Aris Water Solutions ( ARIS ).

At the mobile trailer field office of the Aris project,

Aldridge admired fish tanks on display filled with crystal clear

water run through Aris's treatment technology, and home to

around two dozen minnows.

Before it is treated, though, the water is dangerous.

Employees on site are required to wear flame retardant clothing

and carry portable monitors to detect deadly gases.

The untreated water is trucked in by local drillers and held

in two large storage tanks before getting piped through a

membrane filter to remove solids, and then distilled.

The process yields clear water, and leaves behind a highly

toxic rust-colored mud that is reinjected underground at a

registered saltwater disposal site.

The water, Aris says, is free of pollutants or

radionuclides, and fit for industrial and agricultural uses.

Starting next year, Aris will begin growing non-food crops like

cotton as part of a $10 million grant it won this year from the

U.S. Department of Energy.

"We look at the concept of desalinating produced water and

creating a new water resource for the Permian region in a

similar way to how the water industry was able to demonstrate

that municipal wastewater could be safely treated and used for

many purposes that society could become comfortable with," said

Lisa Henthorne, chief scientist at Aris.

The main problem for Aris and others is cost. A barrel of

Aris' treated water costs over $2 a barrel, many times higher

than what industrial or agricultural water users typically pay.

Aris says its goal is to bring costs down to $1 - still

representing a big bill for users.

Massachusetts-based Zwitter, which recently finalized a

separate water treatment pilot project in New Mexico, said

treated water may never be cheap, but could become viable if it

becomes cheaper than disposal.

"It is unlikely that agriculture or other water users will

be able to pay more than cents per barrel. Therefore, the value

of desalination will be driven by saving disposal costs and

could be from $2 to $3/BW (per barrel of water) in the future,"

it said in the final report on its project.

Disposal currently costs cents per barrel, but that could

rise as injection sites fill up and waste needs to be trucked or

piped ever further.

Aris has strategic agreements with Permian oil majors

including Chevron ( CVX ), ConocoPhillips ( COP ) and Exxon

Mobil ( XOM ) to develop and pilot technologies for treating

produced water for potential reuse.

Exxon subsidiary XTO has also partnered with Infinity

Water Solutions, another water treatment firm running a pilot

project in the Permian.

"I can tell you, the H2O molecule has no value until you

run out of it," Infinity CEO Michael Dyson added.

TERRIFIED OF GETTING IT WRONG

Avner Vengosh, a professor of environmental quality at Duke

University, said unknown safety risks are also a key concern.

Under federal law, U.S. producers are not required to

disclose all the chemicals they introduce to oil wells while

drilling, raising worries that water treatments and testing are

missing some dangerous components.

"There are a lot of technologies that can treat the water

but the question is how can we evaluate all possible

contaminants in produced water? I'm not saying it's impossible,

but I am saying it needs to be done correctly," he said.

Infinity's Dyson agreed the industry needs to tread

carefully.

"We know we're only going to get one real chance of

getting this right, and if anything, I think most of us are

terrified of getting it wrong," he said.

The state's environment department is updating its 2019

Produced Water Act with the aim of firming up water reuse rules

and expanding research and development for use outside the oil

and gas sector.

During a week of hearings on the effort in early August,

divisions were huge, with environmental groups and some

scientists questioning how safe the end-product could be.

Daniel Tso, a former Navajo Nation Council member, told

Reuters the Navajo had been stung before in New Mexico when

decades of uranium mining on their land in the last century led

to widespread radioactive pollution.

"Now the industry is trying to make this a public problem

and the public has to really scrutinize the effects," he said of

produced water.

James Kenney, New Mexico's environment secretary, told

Reuters that the advances in technology over the last five years

give him confidence that treated produced water can be safe, but

acknowledged New Mexico's poor record.

"We have to acknowledge our history of things like uranium

mining, the promise of wealth and the failure to protect health.

So communities are right to be skeptical," he said.

For Aldridge, though, the more he learns about wastewater

treatment technology, the more willing he is to fight for the

state to open up more uses for the water.

"Am I 100% convinced? No, but they're taking a step to

convince me and I need to take those steps with them," he said.

His own rural town of Jal, he said, could become home to

"industries of the future" like data centers or green hydrogen

projects, businesses that need ample supplies of water.

Or it could dry up, like the drilling industry will when the

Permian empties of oil and gas.

"I just can't abide by the idea that small rural communities

like Jal can just vanish."