One Big Fracking Problem for Oil and Gas Industry

Legislation introduced this week that targets hydraulic fracturing -- a technique used to access vast new fields for drilling -- is pitting the oil and gas industry against environmentalists in a debate over public health, federal versus state regulation and the protection of industry trade secrets.

Here's what the legislation also will do: deliver massive lobbying firepower to Capitol Hill. In the lead up to the long-anticipated bill, lobbying against the measure was already well underway. In the first quarter of 2009, the American Petroleum Institute spent $1.8 million lobbying for a variety of issues including hydraulic fracturing.

The concern is that underground water could be contaminated during hydraulic fracturing or fracking. In the process, drillers pump millions of gallons of water mixed with chemicals and sand under high pressure into horizontal wells. The pressure cracks shale deposits and releases the gas. Most of the mixture is removed, although some remains. The mix is then put into open pits for evaporation and eventually trucked to a disposal site. The exact chemical mixture is considered a trade secret, although many including benzene are considered highly toxic.

It is a considerably valuable process for drillers because it allows them to reach more gas and oil than a conventional well. Environmentalists and public health officials believe it should be regulated because of concerns that water supplies could be threatened by the chemicals left underground or in the open pits. Water contamination has been documented near drilling sites, but a definitive link between drilling and contamination has never been made. Environmental Protection Agency officials investigated and ruled regulation was unnecessary. [Clarified thanks to reader input]. However, EPA scientists have said they can't adequately investigate cases of pollution or determine whether fracturing might be to blame because it is exempt under the Safe Drinking Water Act.

What will the legislation actually do?

• The standalone bills in the House and Senate for the Fracturing Responsibility and Awareness of Chemicals Act -- deemed FRAC ACT -- would end an exemption for hydraulic fracking within the Safe Drinking Water Act. This exemption known as the Halliburton loophole was provided under the Bush administration's Energy Policy Act of 2005;
• The EPA would regulate the high-tech drilling process. This authority currently falls to state governments;
• The oil and gas industry would have to disclose the chemicals -- which are considered trade secrets -- used in the fracturing process.

Regardless of its merits, the bill will impact the oil and gas industry. I'd certainly don't go as far as some gloom-and-doom predictions. But it's reasonable to assume new restrictions and costs will be placed on the industry, which will affect their bottom line, to some degree.

Just take a look at the Marcellus formation, a massive deposit of gas-bearing shale that stretches from Ohio to New York. The U.S. Geological Survey estimates it contains 1.9 trillion cubic feet of gas. More recent estimates put the figure at 500 trillion cubic feet of natural gas. That means something like $1 trillion in natural gas is locked up in the formation. Fracking will have to be used to access the rich deposits of natural gas.

The oil and gas companies that own the wells won't be the only ones impacted by the legislation.

Oil services companies Halliburton, Schlumberger and BJ Services, the three largest manufacturers of fracking fluids, earn millions doing fracturing jobs.

Even private equity is involved.

Kohlberg Kravis Roberts & Co. recently invested $350 million in East Resources, a major player in the Marcellus Shale with control of 900,000 acres. Avista Capital Partners invested $150 million with Carrizo Oil & Gas to buy acreage in the Marcellus Shale.

The industry estimates complying with new federal regulations would cost $100,000 for each new natural gas well. Wells already cost a hefty sum to drill, so tacking on another $100,000 in an effort to protect water supplies doesn't seem like a bad deal.

But the oil and gas industry doesn't quite see it that way. They argue the legislation creates unnecessary duplication because they are already regulated by state governments.

That may be true. But how well can any agency regulate fracking when no one knows the exact combination of chemicals being used? It would be like regulating a prescription medication without knowing what it's made of.