Should Oil and Gas Investors Fear the FRAC Act?

In June, Democrats introduced the FRAC (Fracturing Responsibility and Awareness of Chemicals) Act via companion bills in the House and Senate. The FRAC Act seeks to amend the Safe Drinking Water Act so that hydraulic fracturing would be regulated on a federal level.

Hydraulic fracturing is the technique that, combined with horizontal drilling, has allowed domestic E&Ps like Devon Energy (NYSE: DVN  ) , Southwestern Energy (NYSE: SWN  ) , and XTO Energy (NYSE: XTO  ) to unlock massive shale deposits like the Barnett and the Fayetteville.

Big Oil's lobbyist, the API, has been hootin' and hollerin' about the implications of federal frac fluid oversight, saying that domestic production would drop "significantly" if servicers like Halliburton (NYSE: HAL  ) and Baker Hughes (NYSE: BHI  ) had to report the chemical components added to the water that's pumped downhole and used to fracture hydrocarbon-bearing rock. One industry estimate puts the additional cost of compliance at $100,000 for each new natural gas well.

Big Oil (and especially Small Oil), you know I often stick up for you, but I suspect you're crying wolf this time.

The oil patch is an extraordinarily entrepreneurial place. If certain chemicals are banned from frac fluid, I have every confidence that the contractors will be able to formulate an alternative that doesn't break the economics of the stimulation job. Further, that compliance estimate sounds like a serious exaggeration.

Why am I sympathetic to this legislation? For one, state regulatory bodies can become quite cozy with industries that drive the local economy. Second, while the risk of polluting an aquifer seems remote, given that most horizontal drilling occurs much deeper in the earth, I do recognize that there are some rather nasty chemicals involved here, and they have been and will continue to be spilled on the surface. That poses enough of a threat to drinking water to get me concerned.

According to local media reports, a recent frac job performed by Schlumberger (NYSE: SLB  ) for Chesapeake Energy (NYSE: CHK  ) in the Haynesville shale play saw some frac fluid spilled, and 17 cows died.

To be clear, the outright ban of hydrofracking would strike an incredibly damaging blow to the industry and to our domestic energy supply (hello, Russian gas imports!), but I don't foresee such a threat to the overall practice. No matter what your opinion of members of Congress, I don't think any of them are that stupid.

As far as better chemical disclosure goes, I'm all for it. Let's just make sure that our representatives realize what a good thing we have going with shale gas, and that they don't strangle the goose that's laying golden energy eggs.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. Chesapeake Energy is an Inside Value selection. The Motley Fool owns shares of Chesapeake and XTO. The Fool has a disclosure policy.


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  • Report this Comment On August 19, 2009, at 4:36 PM, driller101 wrote:

    Finally something sane from the fools. While this will basically duplicate what the states are supposed to be doing already, the remark about the relationships between the regulatory bodies and the oil companies is right on.

    Furthermore the cost of compliance at 100k per well is ridiculous. Compliance is basically reporting, and they already have people on staff or outsourced to file for permits, etc.

  • Report this Comment On August 19, 2009, at 9:28 PM, lcash218 wrote:

    What the oil service companies fear with this is not that chemicals will be banned but that their proprietory blends of chemicals will be made public knowledge to their competitors. Trade secrets will be revealed and that will harm the service companies ability to service the wells.

    Lcash

  • Report this Comment On August 19, 2009, at 11:22 PM, Fool wrote:

    Obviously anyone who thinks the state regulators and the industry are in bed with each other haven't worked in Pennsylvania or New York!

  • Report this Comment On August 20, 2009, at 1:47 PM, sewingmum wrote:

    Could you clarify that statement? Are they or or they not in bed with each other in PA and NY? LOL I know in Northern Michigan, where their industry is ravaging the land and their irregard for safety has injured and killed many people in our small tourist town, they have to be in bed together. Too many lies and we've caught them in many.

    Northern Michigan on the Niagara reef and Antrim Shale. Fracturing regulation, you betcha, but it won't make any difference. This industry will do what it wants anyways but good try.

    Another oil and gas casualty of Northern Michigan

  • Report this Comment On August 20, 2009, at 3:06 PM, Change2012 wrote:

    Does OSHA or DOT ring a bell (Occupational Safety & Health Administration) (Department Of Transportation). These are federal government organizations.

    Frac jobs require chemicals to be injected at each wells location. That means every frac in the US has chemicals transported over roads. This requires every chemical to be labeled. If your using a large frac company, they probably have what we call a MSDS book on location that describes each chemical on location and how to neutralize it.

    Note: cows have also been know to die when standing next to a fence during a lighting storm. Statistics show if you have a large amount of storms or a large amount of activity, an accident can kill your cow.

  • Report this Comment On August 20, 2009, at 4:31 PM, Informed25 wrote:

    Interesting point of view. I tend to agree. Have you seen the work ProPublica.org has done on this subject? Besides a lot of effort to document the environmental risks everyone talks about, a recent expose showed how much those industry estimates about the cost of regulation have been exaggerated. You can find it here: http://www.propublica.org/feature/energy-industry-sways-cong...

    I don't think the Frac act would hurt investments in gas companies one bit. The gas is going to be drilled one way or another, and those companies wil make their money, and we as investors will in return. The question seems to be whether the country throws away its clean water resources in the process.

  • Report this Comment On August 20, 2009, at 5:23 PM, Wildcat79 wrote:

    Allot of these issues could have been taken care of by the State regulatory commissions with basic cementing requirements.

    Insuring that there is adequate enough cement between the formation and the pipe (more than the regulatory bodies require) and the processes in which that occurs most likely would have stopped allot of these problems along time ago.

    What my concerns are is the lite-weight cement slurries that are being pumped and at times these slurries allow for migration of fluids behind the pipe.

  • Report this Comment On August 21, 2009, at 7:54 AM, NeverThere wrote:

    Service Companies are out to protect their trade name products. With the overall rig count down in the country right now, competition for work is extremely cut throat. Each company boasts of a better product than their competitor in order to keep their crews working. Remember, they too, have tens of millions invested in each crew they put out in the field. That being said though, all of the service companies are working toward "green" frac chemicals that will be more environmentally friendly. The company that eventually comes up with a "green" product that not only performs as well as their current product, but is also cost effective, will no doubt be the industry leader. Should they have to divulge their trade secret ?

    I believe their is already enough govt regulation that more than protects the water. Adding more will certainly cost companies more. 100k per job is not out of line seeing how most of these jobs exceed $1M already. A 10% increase would not be hard to imagine.

    The bottom line is that hydraulic fracturing will never be banned. Without it, you have no oil & gas industry in this country. None. You cannot produce from tight sands and shales without it. The impact to the economy would be far worse than the failure of the banks or the auto industry. The govt bailed them out, so they need to wisen up and keep this industry afloat as well.

  • Report this Comment On August 21, 2009, at 9:45 AM, EnergyInDepth wrote:

    There's a lot of misleading information out there about hydraulic fracturing. The industry has created a new website to explain the issue at www.energyindepth.org. You can even find a list of the chemicals used in the process.

    Fracturing has been regulated at the state level since the late 1940s. More than one million wells have been fractured without a single incident of water contamination, confirmed by studies from the EPA, Groundwater Protection Council and other regulatory agencies. And, fracturing will be needed in the majority of wells drilled in this country.

    This technology is essential for more American energy -- which results in more jobs, more tax and royalty revenues to the state and federal treasuries and less reliance on foreign oil.

  • Report this Comment On August 21, 2009, at 2:45 PM, carbonates wrote:

    Sorry, Toby, I didn't read your email soon enough, so I am replying here:

    There has been no release of information that tells what killed those cows, and sadly it doesn't seem to be forthcoming. My own suspicion is that it was anti-freeze (the same stuff as in your car radiator). They use this sometimes and it has a sweet taste that animals like. The reports of "chlorides" don't make any sense (except to people who never took chemistry and don't read food labels), since chlorides are part of "sodium chloride" that we all use for food, and cows also like. Most farmers put out potassium and sodium chloride in large blocks for cows to lick on- cows don't die from chlorides.

    Most of the chemicals used in frac fluid are quite common, found in most households under the kitchen or bathroom sink in the form of cleaning compounds, shampoo, and "natural" insect repellents (boric acid). I think the "trade secret" debate is a red herring. Its not that hard to analyze a sample in the lab and discover all the "secret ingredients." I really don't think the industry cares that much about this "trade secret" issue simply because they can't really keep it secret from their competitors anyway.

    Fracturing has been done now for about 60 years. Early on they dropped nitroglycerin into wells. The US Department of Energy tried it with nuclear bombs, but annoyingly had to give up when the gas produced was radioactive. I suspect those frac jobs by the US government are probably the worst cases of environmental damage ever done by fracturing. For hydrofracturing (using water instead of bombs), there still is no smoking gun in the form of an example of ground water being contaminated by the hydrofacture job. All the examples you will hear about (like the cows) are things that could have happened at any well site, and probably any construction site of any kind, with or without fracturing being done. Most well pads today have large tanks, or lined ponds that hold the well fluids, which in many cases are diesel fuel. Lots of conventional drilling, and some gas shale is drilled with diesel fuel instead of water because water reacts with the rock. Salt for example must be drilled with diesel, and some shales expand when they absorb water, making drilling impossible. The drilling fluids at ANY well site, not just where hydrofracturing is taking place, would not be safe to drink. Those are already regulated- ironically by the very laws that everyone claims exempted the oil industry.

    This whole issue is not about "improved" regulation. It is about an extra layer of regulation that is not needed. It will do nothing to improve water quality or insure water safety that is not already being done. There is plenty of state regulation already, and ironically, the author of one of these bills is from Colorado, which now has the strictest state regulations on drilling in the country. The Federal regulations are likely to be lighter than those imposed by Colorado already.

    The extra cost is real, and with gas shale an extra 100K per well is enough to stop many wells from being drilled, especially at current gas prices. Since gas shales operate on a manufacturing basis, like building widgets, an extra increment of cost becomes millions of dollars in additional costs. That's enough to make a drilling program stop dead. Yes, good operators will find somewhere else to cut the costs, but it might be in something else that the general public will dislike even more, and there is little proof that this will benefit investors in gas producers. It might benefit foreign gas producers, especially the Canadians who have their own gas shales.

    Keep in mind, there will be other unintended consequences of this bill if it passes. One potential victim will be geothermal energy, which also uses frac technology, and has much less tolerance for increased costs and regulation than even gas shales. This bill will kill more than just natural gas. It will kill alternative energy as well.

  • Report this Comment On August 25, 2009, at 10:48 PM, curtbs wrote:

    One of the ways MAJOR drillers[devon,southwest, ect] are going about getting ready for any government intrusion is adapting clean water technology from a little otc company called ecosphere[ESPH]Right now at its lows and smart money is accumulating in anticipation of revenues starting in Q4 2009.

  • Report this Comment On September 01, 2009, at 12:12 PM, littlemike4 wrote:

    Several points. I've worked in the research end of the oil field service for a career. I may lapse into the jargon of the business but will try to be clear.

    The whole point of fracturing, with any fluid, is to open up rock or formation in hycrocarbon zones. Fluids lost to fresh water zones are wasted. ( and obviously the concern of the legislation). The engineers designing such a job will consider the maximum extent that they can open up such fractures in pre job planning -- which is one of the more scientific (as oppossed to "art" parts of the service business. Rock mechanics. They look for zones which will block the fracture both up and down -- often these are impermeable shales, which are notoriously difficult to fracture. But the point is, the technology only make economic sense when the fluids can be confined to productive zones.

    Now the current emphasis isd on fracturing tight gas shales, and I've just remarked that shale zones are often used as natural boundaries to fracturing. The resulting technology comes down to very rapid, but lower pressure treatments than the recent (15 -20 yrs) experience which has pushed for higher and higher pressures in hard rock. 100 bbl/min (42000 gal/min.) is dcommon in Arkansas shales currently. the actual jobs may go very rapidly (1/2 hr or so) but the volumes of water and sand can be enormous.

    The current price (Sept 1,2009) is $2.90/mcf (thoustnd cubic tfeet. The resultant wells may produce about 50,000 mcf per day. That means that the whole driving force is to cost control. What I

    'm saying is that in these cases the amounts of chemical additives is very limitted and constantly challenged..

    Off on a different slant.

    Fracturing is not drilling (sometimes called well construction). When a well is drilled, a casing (protectiving pipe) is first set accross the ptable water zones, This is held in place by cement, top to botttem. The well is then drilled on a smaller diameter as far as the conditions will allow. If a high pressure zone is encountered, that will require a second stand of pipe. If the zone of interest is deeper yet and of a lower pressure, then this second string of pipe must secure the high pressure zone both above and below. That used to happen often in drilling on the Gulf Coast where small tight gas pockets were encountered above oil bearing sands.

    What I have seen:

    I have never seen a potable water supply intentional (for obvious reasons) or unintentional fractured into. This may have happened, but I am totally unaware of it.

    I have seen wells blow out before the surface pipe was set. When this happened, and the well was eventually plugged. The high pressure gas was then able to flow into the permeable zones of the potable water. In a case that I know of (1972) the Texas railroad commission authorized igniting severlal of the breaks (where natural gas was comming to the surface) until the well was sucessfully plugged with cement. The Mexican blowout at Bay of Campachee. was a similoar case. High presssures were encountered before expected and the drilling operations were not prepared to react.

    Obviously the industry is well aware of the above casses and current regulatory agencies enforce safegaurds.

    An aside comment on this; the US Gull coast technology currently lags that of Petrobras because the Minearal Management Services has not allowed floating production tankers to take oil directly from a well. It must be pipelined to a coastal facility. Thus there is reduced danger of oil spills from tankers. In Brazil they can, and it has led to their rapid development of ffar off shore deepwater (to 10,000 feet seabed) fields.

    I have seen contamination of surface facilities from spills and blowouts. The formation brines that come with oil and dgas are often far more saline that the 2% KCl 'frac water'. And virtually every state and Canada have strice prohibitions on dumping it on the ground. For a while this led to emphais on "on-the-fly" treatments in which all chemicals were added to a monstrous blender tub just seconcds before the high pressure pumping unit took the frac fluid down hole. However the current emphasis on cost control has probably reversed the trend. As you can imagine an actually fracturing treatment involves fquite a bit of water storage. This is often held in 'frac tanks' which you may have observed --huge squarish tanks on tiny two wheel rear axles. Frac tancs can only be transported empty. They are sited at the job site several days before and then are filled with potable water trucked in. Notice I said potable water -- which is used most often because it providss a clear baseline for the chemist - formulators of the treatment to use a standard formulations. Field brines -- which I commented above are often to saline -- are usually not considered as they would require considereable lab and design work before every job -- too much for the service to be economical.

    In suimmary then -- what the current legislation is really all about is a turf war between agencies. Somebody is trying to redifine a problem (and there are real dangers in handling volumes of anything of this sort) so that their agency can get into the came and justify a new empire.

    As the previous comment said -- most state regulatory agencies are probably far ahead in understanding what they're about than the current agency boosters.

  • Report this Comment On September 01, 2009, at 2:13 PM, littlemike4 wrote:

    After reading my comments above I realize I can be much more brief. The danger doesn't come from fracturing into potable water zones. It comes from spilll or accidents in the transportation to the surface site, from blowouts of failures at the well.

    Not just a major company, but anyone driving down the highway had better have all required documentation in hand for materials they are transporting. This means MSDS sheets for everything. And the data sheets are designed to allow rapid identification of hazards and potential spill handling. Operators must be HAZMAT trained for their level of participation, with cloearly defined responsibility ass the way up. Regardless of industry. I believe that this regulation is vigorously enforced at all state levels now.

    Accidentlal spills (or deliberate) must be reported. I was on the North Slope at one time when a service company engineer pointed out to me the most vigelant 'reporters' of any sort of improper activity most often came from the staffs of the companies themselves. There's something about employing people who choose to live in a fridgid wilderness that makes them very intolerant of sloppy environmental practices. Yes peoploe tried to ttake shortcuts. But there were always others who dissapproved and could report it without fear of retaliation.

    My point is that this amounts to attempt to redefine the problem into a very improbable event (fracturing into potable waters), whereas the real problems transportation and surface well site regulation are already recognized and regulated.

  • Report this Comment On September 28, 2009, at 3:49 PM, XMFSmashy wrote:

    Best comments I've ever gotten on an article. Great commentary, all, and thanks for contributing.

    TS

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