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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.
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.