As the home of a host of oil and gas producers from ExxonMobil (NYSE: XOM) on down, along with oilfield services stalwarts Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BHI), Texas has long set the tone for trends in the energy industry.
It's therefore more than a passing event that Texas Gov. Rick Perry (R) has now signed into law a bill requiring disclosure of the chemicals used in hydraulic fracturing fluids used largely in unconventional oil and gas plays. While Texas isn't the first state to enact such a law, its prominence in energy-related matters makes the step especially noteworthy and likely to be copied widely.
In the fracking process, once shale rock has been reached, typically by a combination of vertical and horizontal drilling, the shale is shattered by the force of millions of gallons of fluids that are blasted directly at it. The trapped natural gas, liquids, or oil are thereby allowed to escape through the resulting cracks and crevices for production by the well's operator.
The devil's in the details
The question addressed by the Texas bill and the handful of others that have preceded it concerns the nature of the chemicals used in the fracking fluids. While those chemicals make up a small portion of the total volume of the fluids, there nevertheless has been mounting concern among environmentalists and residents near fracking operations about the possibility of the chemicals seeping into drinking water. Until recently, companies generally treated the composition of their chemicals as a competitive secret, thereby setting up a standoff with those concerned about their environmental effects.
The companies have also maintained that properly structured wells preclude the possibility of leaking and environmental damage. Furthermore, they have contended accurately that, long before its substantially increased use in such newly active plays as the rapidly expanding Eagle Ford shale, along with the Haynesville, and Marcellus shales, fracking had been employed by the industry essentially without negative results.
Heeding the cacophony
But as the hue and cry from those opposed to the companies' secrecy escalated to a cacophony, increased numbers of industry leaders began to heed the message. For instance, Aubrey McClendon, co-founder and CEO of Chesapeake Energy (NYSE: CHK), a leader in the discovery and development of a number of the nation's shale plays, affirmed something of a capitulation at his company's recent annual meeting. His stance was shared by the leadership of other active shale operators such as Range Resources (NYSE: RRC) and Anadarko Petroleum (NYSE: APC).
In fact, a number of companies joined in communicating their backing of the disclosure bill to the state's legislators. And many of the major gas producers, including BP (NYSE: BP), have also agreed to publicize the makeup of their chemicals online at FracFocus.org.
If you assume that passage of the Texas bill indicates that environmental concerns and contentiousness regarding the expanding fracking phenomenon are being obliterated, there are other issues that are apt to fan the flames in what is likely to be an ongoing squabble. For instance, a number of environmental groups, while viewing the Texas bill as a positive step, nevertheless maintain that it needs more teeth to properly address their concerns.
A gas in the Keystone State
At the same time, Pennsylvania's Department of Environmental Protection has apparently found methane, a highly flammable gas, in several wells near Lycoming County's Little Muncy Creek. The discovery has resulted in a shutdown of operations in the area by XTO Energy, which Exxon acquired last year. The state's DEP maintains that other instances of methane contamination have been discovered near Marcellus shale wells.
However, XTO contends that any existing methane is not the result of drilling and fracking. As a company spokesman said, "In general, the gas levels that were detected after drilling was completed were similar to the pre-drilling samples we studied." Obviously, even if high levels of methane exist at or near drilling sites, it doesn't represent a problem that can be solved by fracking chemicals disclosures.
Follow the flowback
In addition, the Pennsylvania DEP and the companies have been involved in a major debate over the handling of what is called "flowback water." The term refers to the relatively small amount of water -- typically about 10% of the total used in a fracking operation -- that eventually resurfaces, rather than remaining underground.
While flowback water has generally been disposed of in public sewage plants, the involved companies and the DEP agreed earlier this month that that approach would be discontinued in favor of dedicated treatment facilities, where the brine and other materials in the water can be properly removed. At this juncture, Pennsylvania is expected to open 25 such facilities, an approach that is being observed by neighboring Ohio.
Last but almost certainly not least is the issue of whether oversight of fracking will be left to the individual states or become subject to federal control. Texas wants a continuation of monitoring by the states. Indeed, as Elizabeth Ames Jones, chairman of the Texas Railroad Commission (the state's authority over oil and gas matters), said earlier this month at a U.S. Energy Department meeting in Washington, it would be "a big mistake" for federal regulators to claim authority over hydraulic fracturing.
Tell it like it is, Exxon
And so, despite Texas' shiny new bill, aspects of the squabbling about fracking are apt to continue for some time. In that connection, Exxon, now the largest U.S. gas producer, is preparing an advertising campaign to defend the safety of fracking. For my money, that planned campaign is appropriate. Continued contentiousness regarding fracking operations in our nation's shale plays could deter the likely emergence of natural gas as our key energy source.
So hats off to ExxonMobil. And given the company's new importance in natural gas -- along with its role in oil -- I suggest that we each ascertain that the industry's biggest member is included on our individualized versions of My Watchlist.
