Texas: A Model for Handling Modern Fracking?

Since 2006, America's oil and natural gas companies have been participating in an energy boom not seen since the early 1900s. Much of that has come about due to new and improved methods of fracking -- which releases fossil fuels from previously inaccessible rock formations.

As fracking has taken off, concerns about the environmental consequences of the practice have reached a fevered pitch. Government officials are caught in the middle between the economic promise of such large energy deposits, and potential long-term consequences to our nation's ecosystem.

Amid the back and forth rhetoric, one state seems to have emerged as a model for cooperation and consensus when it comes to fracking: Texas.

In their blood

Oil rig in Breckenridge, Texas in 1920. Wikimedia Commons 

It probably doesn't hurt that Texans have been dealing with the everyday realities of extracting energy from the ground for over a century. Unlike several other states that are just entering the energy production economy, the issues surrounding drilling are old hat to Texas pros. To this day, the state produces by far the most oil in the country.

It is also home to two of the four most productive shale plays in North America: the Eagle-Ford Shale and the Permian Basin.

In many ways, the state has been ahead of the curve in providing environmental guidance and regulation for energy companies. In late 2011, the state adopted laws that required energy companies to disclose all of the ingredients to their fracking fluids -- though exceptions were made for "trade secrets".  

In May, the state's Railroad Commission also enacted new laws requiring specific standards to ensure well integrity on new drilling sites. Though the standards will likely drive up the costs for well construction, the rule was applauded by both the Texas Oil and Gas Commission, as well as the conservation director at the Sierra Club.

It's not often that any state organization can garner a positive response from such disparate organizations; but, then again, Texas has been at this for years.

We don't need the Feds
Not surprisingly, Texas government officials and the oil industry are wary that the federal government will add anything but red tape when it comes out with its country-wide standards for public lands in early 2014. Specifically, federal officials are expected to focus on the disclosure of fracking ingredients, safe well construction, and the management of wastewater.

Texas has addressed the first two issues, and is working on the third -- though it is already encouraging energy companies to recycle as much fracking water as possible.

As David Spence, professor at the University of Texas, puts it: "[Both] the benefits and the costs of fracking fall mostly on states and local communities ... [they] are strengthening their shale-gas regulations ... sometimes bringing industry and environmental groups together in the process ... State oil and gas commissions have much more experience with permitting and overseeing natural-gas production than the EPA does."

Though Spence may have a point, especially in Texas' case, it is likely to fall on deaf ears.

What this means for your investments
Below are the largest oil and natural gas companies working in Texas. The first chart shows the companies producing the most barrels of oil in 2012:

Source: Texas Railroad Commission 

The second chart shows the companies producing the most natural gas in Texas in 2012:

Source: Texas Railroad Commission. * Includes ExxonMobil subsidiary XTO Energy.

Occidental -- with its outsized oil production -- has a lot riding on its Texas holdings, as does EOG, which drills for both oil and natural gas. Devon and Chesapeake also have a strong presence in the state's natural gas realm.  Any of these companies could be negatively affected if federal regulations mean that gaining access to drilling permits takes longer.  

On the whole, however, shareholders in all of these companies can rest assured that it's highly unlikely that the state of Texas, or the federal government, will be changing the rules of the fracking game in a fashion significant enough to hurt long-term earnings potential.