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Fracking Woes Could Help China Blow Past Us

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It seems like only yesterday that China was characterized by the Great Wall, hordes of bicycles, and nary a thought about starting companies to permit participation in global commerce. Little did we know that it would soon become the major market for the world's commodities, while essentially keeping the U.S. afloat with a stream of loans.

Now its adoption of the controversial hydraulic fracturing process, or fracking, just might allow it to further advance on us. Indeed, that's especially likely if our own fracking activities continue to face a steady flow of challenges.

Fracking involves a process wherein, once a well has been drilled to hydrocarbon-bearing rock (usually shale), the rock is blasted by a mixture of water, sand, and chemicals. Fractures in the rock then allow the trapped gas or liquids to make their exit.

Here comes China
Thus far, China has only taken a few steps with regard to fracking. In its own country, PetroChina (NYSE: PTR  ) has reported some positive results in Sichuan province under the tutelage of Royal Dutch Shell (NYSE: RDS-B  ) . And CNOOC (NYSE: CEO  ) , the country's biggest offshore producer, is involved in U.S. fracking deals with Chesapeake Energy (NYSE: CHK  ) in the Eagle Ford and Niobrara shale plays.

But the country is gearing up to intensify activity on its own field, thereby allowing it to benefit from shale-gas reserves half again larger than our own. To help with the process, CNOOC and China Petrochemical Corp., or Sinopec (NYSE: SHI  ) , are both in line with the likes of Saudi Arabian Oil Co. for a chance to bid for a 30% stake in Texas' sophisticated Frac Tech Holdings, which provides and operates the stimulation equipment and services that are vital to hydraulic fracturing.  

The winning bidder will shell out at least $2 billion to join the ranks of current owners. Today, 70% of Frac Tech belongs to a consortium of investment and sovereign-wealth firms from Asia and Abu Dhabi, along with Chesapeake, which is a 30% holder. It's likely that the sale would be facilitated by the issuance of new shares by Frac Tech -- which is also considering joint ventures around the world -- along with sales of a portion of stakes by current holders.

There's no certainty about what sort of regulatory rules will face companies, foreign and state-owned, that ultimately participate in China's fracking expansion. But, with a seeming determination to reduce its choking urban pollution, I'm betting that those rules will lean in the direction of pragmatism and reality, and will generally be intended to enhance the amount of fracking in the country.

Damaged water?
Meanwhile, our own fracking milieu is becoming a bit more shaky. There's long been concern about the chemicals used in fracking fluids and the potential that they could contaminate water tables near the drill sites. But 2011 also has witnessed intensifying concerns that the fracking process is guilty of spawning small earthquakes in the area of "injection wells," where the water is discarded once it's been used.

Concerns about fracking's effect on groundwater have been around for years, but were helped to spread virtually nationwide in 2010 with the release of a documentary film, Gasland, by a Pennsylvania filmmaker. Industry experts maintained that the film was fraught with errors and misinformation, but it nevertheless dealt fracking something of a blow.

More recently, that attention has been focused on Pavillion, Wyo., a town with a population of fewer than 200, whose groundwater the Environmental Protection Agency thinks may have been contaminated, primarily by the wells drilled near it. While the Wyoming wells are shallower, fracking typically takes place at depths exceeding 10,000 feet; most water tables are within 500 feet of the surface.

That, says Mark Miller, CEO of Cuadrilla Resources, is why "it would defy physics" for fracking chemicals to find their way into groundwater. (Earlier this year, Cuadrilla surprisingly made a major natural gas find through fracking operations near Blackpool, England.) Nevertheless, the peripatetic EPA forges on, and, as The Wall Street Journal noted in an editorial, "If the Wyoming study holds up under scrutiny, an industry that employs tens of thousands could be in peril."

Shake it up, baby
Perhaps somewhat more plausible is the contention that pressure imbalances brought about by the discarding of used fracking water into injection wells can result in generally minor earthquakes. As my Foolish colleague Dan Dzombak noted recently, a series of 43 earthquakes that occurred in Oklahoma are thought to have resulted from fracking, a phenomenon that also occurred amid Cuadrilla's efforts in England.

In addition, Arkansas recorded 850 mostly minor events in 2010, up from 38 the prior year. Chesapeake was fracking actively in the state's Fayetteville Shale at the time. The company has since sold its Fayetteville assets to Australia's BHP Billiton (NYSE: BHP  ) .

More than a few industry observers would echo the Journal's concerns about EPA overzealousness potentially leading to a moratorium on fracking in the U.S. As the newspaper also stated in its opinion piece, "The agency is dominated by the anticarbon true believers, and the Obama Administration has waged a campaign to raise the price and limit production of fossil fuels."

Batty excessive environmentalism
But it isn't only fossil fuels that are in environmentalists' scopes these days. Indeed, so-called green fuels attract their attention even before becoming economically viable. Among the concerns du jour is that bats are being killed by wind turbines, albeit without contact occurring. It seems that the bats' lungs essentially explode from the rapid pressure drop that occurs as air flows over the turbine blades.

Don't get me wrong: I'm not keen on damage to the planet. In fact, I consider myself to be an environmentalist and am most offended by real environmental destruction, such as is brought about by the equivalent of one Deepwater Horizon spill occurring through leakage in Russia every couple of months. But I am also concerned about those who would chase windmills and potentially curtail the operations of domestic natural gas producers, precisely as our Chinese friends are getting cranking.

From an investment perspective, all this is but one reason why my attention to oil-field-services kingpin Schlumberger (NYSE: SLB  ) continues to increase. Given the company's broad reach, poorly grounded domestic regulations will be at least partially offset by its international activities, including those in China. It's also a reason why the company belongs on all Foolish watchlists.

Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned above. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 23, 2011, at 5:49 PM, cladd wrote:

    The discovery of shale gas by Cuadrilla Resources has the opportunity to significant alter the energy security equation in the United Kingdom. Natural Gas Europe has a series of articles on the company and on the growing unconventional gas movement (and opposition to) in Europe.

  • Report this Comment On December 23, 2011, at 6:11 PM, DJDynamicNC wrote:

    The bit at the end about the bats in windmills is a red-herring.

    You presented your argument in a solid manner, and though I disagree with your conclusions - I've watched tap water light on fire in areas contaminated by fracking - I don't find any particular fault with the argument you deploy. But if you have to throw in an emotive red-herring at the end to attempt to pre-emptively gun for your opponent's credibility - rather than his or her logical argument - then that tells me (rightly or wrongly) that you may lack faith in the strength of your ideas in their own right.

    Comment offered as constructive criticism, not personal attack.

  • Report this Comment On December 23, 2011, at 6:39 PM, DoctorLewis4 wrote:

    The oil and gas industry has an opportunity to get this one right. Instead they are spending millions discrediting their critics via advertising campaigns. You've seen the commercials - all American families in green meadows with blue skies talking about jobs while birds chirp in the background. Give us a list of the chemicals you use in fracking instead of hiding it. Show us that it is safe without the usual flack about the hippies. Then maybe we can figure this out and make it work!

  • Report this Comment On December 24, 2011, at 11:00 AM, hanlonm1 wrote:

    "i am most offended by real environmental destruction"............the contamination of groundwater (already proven in Wyoming, as you pointed out, and anecdotally exists in many other places) is not REAL environmental destruction??? Sure.

  • Report this Comment On December 24, 2011, at 11:07 AM, hanlonm1 wrote:

    you contradict yourself several times in this article. if i wasn't already educated on the subject I would have left your article very, very confused

  • Report this Comment On December 26, 2011, at 5:14 PM, trin6810 wrote:

    Where is the Industry study showing this process is safe? They have had plenty of time to come up with a study to determine how really safe it is to place millons of gallons of fuel oil into the ground - who trusts them? no one who thinks trading gas for water is a good deal! Ban fracking until the industry provides a study from independant sources that this process is safe. Why should anyone trust an industry that has to get itself exempt from the Clean Air Act, Cleean Water Act, Superfund Act and every other major environmental piece of legislation in the past 40 years in order to operate - If its so safe why don't they agree to place themselves under these laws - no way no how will they do it - should tell you something!

  • Report this Comment On December 27, 2011, at 10:31 AM, OKIEOIL wrote:

    Two facts that are independently varifiable from multiple sources.

    1. Fracing is a process that has been around since around 1950 and has been done in every onshore oilfield in the USA since that time.

    2. Less than 10% of the wells in the world are in Shale. Most of the fracturing treatments are done in traditional reserviors of Sandstone, Limestone and Dolomite.

    Comment: If we apply "scientific method" standards to published "proofs" of the relationship between Fracing and fresh water contamination, the correlation up to this date is spurious as every field must be evaluated separately. Each are different due to geology and the type of fracture treatment applied as well as the reservoir protection and freshwater protection rules by state organizations such as the Oklahoma water resources board and the Texas Railroad Commission and Water Board. The reports ignore oil and gas fields that were in service long before fracing was conceived. The first question to ask is when was oil or gas first discovered in the area? Few generalizations stand up to scientific scrutiny. We must continue to gather data and objectively evaluate it. The science for safe completions is out there, it is up to operators to utilize it. Most do it due to enlightened self interest. Every cubic foot of gas and gallon of oil that escapes is unrealized revenue and a risk of a accident, whose liability could wipe out the company.

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