Natural Gas Fracking Operations Comes Under Pressure

The natural gas industry has seen unprecedented production growth over the last 5 years, which has led to record gas supplies. From 2006 to 2008 advances in drilling technology resulted in a 245 percent increase in the amount of gas that was categorized by the Energy Information Administration (EIA) as “Technically Recoverable”. Hydraulic fracturing, or fracking, has been a major contributor to the increase in drilling activity in and around shale rock formations. This process makes it possible to extract trapped gas and oil deposits from within dense rock layers that lay thousands of feet below the surface. Liquid compounds made up of water, chemicals and sand are pumped into pre-drilled wells at extremely high pressures with the intent to exceed the natural strength of the rock and created fissures or cracks. Trapped gas and oil are then released via these fissures into well cavities and channeled to the surface for storage.

Recent debate has focused on the potential environmental and health risks associated with the chemical compounds used to fracture the rock. The U.S. House of Representatives Committee on Energy and Commerce Minority Staff recently released a report that examines the nature of the chemicals used in hydraulic fracturing. The Committee surveyed 14 oil and gas service companies and found that between 2005 and 2009 the companies used 29 common fracking compounds that are either carcinogenic or currently regulated by the Environmental Protection Agency (EPA). Complicating the issues is the fact that chemical manufacturers have deemed many of their fracking products proprietary and are not currently required to disclose the full nature of these compounds.

The federal government’s central statue to protect the U.S. water supply is the Safe Drinking Water Act, which addresses underground injection of fluids and chemicals. Congress passed exemptions to this act in 2005 that apply to the underground injection of fluids used for oil and natural gas drilling operations. By request of the congress, the EPA is conducting a separate study to investigate hydraulic fracturing and related risks associated with drinking water supplies. The research will focus on all stages of the process from the mixing of chemicals to the ultimate treatment and disposal of the wastewater. The EPA will begin the study in early 2011 and intends to have preliminary results available by 2012. Members of congress have formally requested an acceleration of this ongoing study.

In addition to federal level regulation, states may have additional governing authority over hydraulic fracturing and fossil fuel operations. The state of New York has chosen to exercise this authority and currently has a moratorium on all fracking activities which expires in July 2011. Opponents of fracking view accidents such as the recent Chesapeake Energy well blowout in northern PA as prime examples of the need for more industry regulation. A failure in the protective well casing was the suspected cause of thousands of gallons of fracking fluid spilling into a nearby creek that empties into the Susquehanna River. Added federal regulation may be necessary in order to maintain safety standards across a growing sector of the natural gas industry.

The question remains as to what long-term price impact this may have on an expanding energy market? A low-risk scenario would be moderate demand growth over the next couple of years, while natural gas supply remains strong with no major regulation impact. A high-risk scenario may be strong demand growth over the next couple of years, while natural gas drilling comes under pressure from federal and state-level regulators. The future of this sub-industry is unknown, but will certainly become more important to all stakeholders as operations intensify along resource rich shale basins.