The Latest Rumblings Aren't Good for Shale Drilling

The stock market seems to be dismissing the risks but there are rumbling that unconventional oil and gas investors should be aware of. The ground from Texas to the United Kingdom is literally shaking because of fracking in the search of oil and gas.

This isn't meant to be a scare tactic or environmental statement, but instead a discussion about very real risk factors investors in oil and gas companies in the U.S. should be aware of.

Over the holiday weekend, a 4.0-magnitude earthquake hit Youngstown, Ohio, the eleventh such ground-shaking event to hit the area in the last nine months. State regulators have expressed their desire to keep drilling going in the area but have shut down some wells near the epicenter.

Unknowns persist
One of the major problems with pinning your energy hopes completely on shale oil and gas is that we don't know the impact of such drilling, particularly with horizontal wells in such dense locations as we are drilling today.

Maps of two of the most well-known shale plays, the Bakken and Barnett plays in North Dakota and Texas, respectively, have exploded with activity over the past decade. Below, I've shown the change in activity in the Barnett play, as provided by the Energy Information Administration. To see an animation of the expanded drilling in Barnett click here, and for Bakken click here.

Source: Energy Information Administration.

In 2000, there wasn't a single horizontal well in the area, today the map looks like it has a bad case of the chickenpox.

The problem with this rapid expansion is, we still don't know all of the effects of drilling this many horizontal holes in the ground, pumping water and chemicals into them, and then extracting oil and gas does to the environment around the wells.

Environmental activists argue that these chemicals can leach into drinking water. And now companies themselves are admitting that they're likely responsible for earthquakes. This is earth-shattering news -- and the stock market seems to be acting like it's another day at the office.

Are your stocks at risk?
Shale drillers all pose unknown risks, but based on geography some of these players may be safer than others.

Range Resources (NYSE: RRC  ) operates near where earthquakes in Ohio and Texas have occurred and may be affected by fallout if these quakes continue. Drillers Kodiak Oil & Gas (NYSE: KOG  ) and Continental Resources (NYSE: CLR  ) , on the other hand, have thousands of acres in North Dakota, where expanded drilling hasn't led to earthquakes -- yet.

Are quakes spreading or stopping?
We don't know exactly what's going to happen with the future of shale drilling, especially considering its tremendous positive impact on domestic natural gas and oil production. But with everyone drilling in the same areas, using relatively new drilling techniques and chemicals, investors need to understand what they're getting into.

Until now, earthquakes have been fairly small and haven't gathered much attention in the way of national media. Even the quake in Ohio over the weekend wasn't front-page news.

But it highlights a risk that drillers and neighboring citizens aren't likely to want to see more of. A company responsible for an earthquake that caused real damage could be facing lawsuits from a number of places, something investors don't want to see.

It's a risk, and if you're going to be in stocks that involve fracturing the ground a mile under the earth's surface, you better own it.

Everyone is involved
At this point, nearly every major energy company has some exposure to shale drilling. Total (NYSE: TOT  ) bought assets in Utica Shale from Chesapeake Energy (NYSE: CHK  ) just yesterday, while ExxonMobil and others have made major investments in unconventional oil and natural gas.

If you want to reduce your shale exposure because of the risks, keep a close eye on where companies are expanding, because almost everyone is expanding in shale drilling today.

If shale is disrupted and oil stays over $100 per barrel, where do you want to be invested? See who our analysts think are the "3 Stocks for $100 Oil" in our free report. Just click here for access.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Motley Fool newsletter services have recommended buying shares of Chesapeake Energy, Total, and Range Resources. 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. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (8)

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 January 04, 2012, at 4:15 PM, frank4159 wrote:

    Make sure you know the difference between what causes an earthquake and what affect fracking has on any and all formations. The populace is jumping to conclusions. Settle down! Quakes will occur, drilling or not

  • Report this Comment On January 04, 2012, at 8:36 PM, bart889 wrote:

    Please get your facts straight. The earthquakes are not caused by fracking, they are caused by pumping wastewater into deep disposal wells. Four such wells, within a five-mile radius, have been shut down.

    No oil or gas wells have been shut down, and no frack jobs have been halted.

  • Report this Comment On January 05, 2012, at 3:43 AM, cattywampus wrote:

    Seismic and geophysical companies might see some movement. IO, CGV, GOK, GGS, TGE, SLB

    If more fault line or instability detection is required.

  • Report this Comment On January 07, 2012, at 5:09 AM, TruffelPig wrote:

    Earth quakes have been caused by conventional mining (coal). Has that stopped anything?

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