On the 40th anniversary of the Clean Water Act, environmental advocates aren't finished with their fight against fracking. A green coalition has banded together to halt hydraulic fracturing in California, armed with a whole bunch of lawyers and a whole bunch of money. Let's review the dirty details of this clean team's dream, and how it could drastically change the natural gas dialogue.
Yesterday, non-profit environmental law firm Earthjustice, along with the Sierra Club and three other groups, filed a lawsuit against the California Department of Conservation, Division of Oil, Gas, and Geothermal Resources (DOGGR). Earthjustice alleges that DOGGR has not practiced due diligence in its approval of oil and gas drilling activity and is in violation of the California Environmental Quality Act.
In the first years of the black gold rush, you could stick a shovel into places in Texas and oil would bubble out from the ground. Those days are long gone, though, and oil and gas companies must work harder and harder to find energy in Mother Earth's crevices. Offshore drilling, tar sands exploration, and hydraulic fracturing ("fracking") all came about because of rising energy demand in the face of diminishing supply.
In a sentence, fracking involves injecting pressurized fluid through rock fractures to push hard-to-reach gas up to the surface. The process has been around since the 1950s, but it has only recently taken off as the U.S. has turned to domestic natural gas production to curb its addiction to foreign oil.
Au naturel in California
Currently, the Sunshine State has about 1,500 natural gas wells producing just over 300 billion cubic feet of gas annually. That might seem like a lot, but considering the United States has almost 500,000 natural gas wells and produced 28.6 trillion cubic feet of natural gas in 2011, California accounts for just over 1% of the country's total output.
Although anti-fracking legislation hasn't received widespread support in California, Vermont became the first state to place an outright ban on fracking last week. The successful passage of this bill served as a wake-up call for drilling companies worldwide , and natural gas corporations are casting a wary eye toward state legislatures.
So what gas companies lose from this news? Let's examine three scenarios:
1. None. Critics of natural gas have been around as long as natural gas has, and this most recent lawsuit won't change anything. Even if an anti-fracking law were to pass, it'd take years to hammer out the details, and years more before companies were forced to shut down. With 1% of the country's production, California is a drop in the bucket.
2. Some. California has a history of environmental leadership, and this most recent lawsuit is the strongest and most supported yet. It'll take some time and political maneuvering, but this is the beginning of the end for fracking in the state. For a list of California's most exposed companies, check out the Western States Petroleum Association member list. These corporations account for 80% of all drilling in California and fracked approximately 628 oil wells in 2011. Among the list are Phillips 66 (NYSE: PSX), Valero Energy (NYSE:VLO), BP (NYSE:BP), ConocoPhillips (NYSE:COP), Occidental Petroleum (NYSE:OXY), and HollyFrontier (NYSE:HFC).
3. Everyone. California accounts for around 13% of U.S. GDP and is the eighth largest economy in the world. When California says "jump," industries and governments listen. Since the 1960s, the state has been a leader in stricter auto emissions regulation, with the eventual result that automakers adapt their entire fleet to meet the state's standards. With Vermont already onboard, an anti-fracking ban in California would sweep the nation, putting fracking-centric corporations out of the business and rattling the energy sector as we know it.
So is fracking finished?
Will California choose Door No. 1, 2, or 3? Perhaps a better question is: Which door can California choose? The power of status quo should never be underestimated, and industry lobbyists will keep Door No. 1 wide open. Likewise, environmental lobbyists have their foot in Door No. 3, and they're not taking no for an answer, no matter what happens to this lawsuit.
At the end of the day, competition between these two factions creates a context of critical construction, demanding only the fiercest of defenses from each side. Shareholders have a role to play, too, as corporate transparency and accountability are an investor's most trusted tools. No matter what your opinion, keep informed and keep an open mind, and you just might find yourself picking the magic door before California even has a chance to choose its destiny.
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