Exploring for oil and gas is an inherently risky business. Producers first need to find commercially viable resources and then extract them at great cost. They do this while being mindful of their environmental surroundings as well as their shareholders' expectations. With great expectations comes great pressure.
One of the most hotly contested pressure points surrounds the use of water. Oil and gas production requires lots of water, with hydraulic fracturing requiring several million gallons of water per well in many cases. Not only are there issues surrounding the use fresh water in the process, but an emerging issue is what to do with all that water after it's been used in the drilling process.
The water used in fracking not only contains sand, but there is a real environmental concern about the chemicals used in the process. Once that water comes back up it needs to go somewhere and it needs to go there in a safe, secure, and environmentally responsible manner. The problem is that the current solution, wastewater disposal wells, could potentially create an even bigger problem: earthquakes.
Researchers now believe that a 5.7-magnitude quake near Prague, Okla., on Nov. 6, 2011, can be directly linked to disposal wells from oil and gas drilling. Overall seismic activity in the middle of the country had averaged about 21 seismic events per year from 1970 to 2000. However, there has been a significant increase in seismic events over the past few years with 50 events recorded in 2009, 87 in 2010 and 134 in 2011.
There have been rumblings in the past that energy production is linked to an increase in seismic activity. According to a recent article in The Wall Street Journal, one of the more profound examples of this can be found in The Netherlands. The linkage between production and seismic activity is such that the region's top natural gas producer, a joint venture between Shell (NYSE:RDS-A) and ExxonMobil (NYSE:XOM), doesn't deny that its activity causes the quakes. In fact, it's even willing to compensate area property owners for the damage.
In the U.S. most of the quakes haven't been linked to drilling of oil and gas but instead to the disposal of wastewater from the process. This is risk that should have energy companies quaking; however, with risk comes opportunity, and one company is emerging with a solution to the problem.
Before we get to that company, let's drill down into the wastewater disposal problem. In the Oklahoma quake, it's believed that fluids from conventional drilling, not hydraulic fracturing, were the culprit. Energy companies had been pumping the fluids that result from the drilling process into abandoned wells for the nearly two decades. By 2006, pressure in these underground holding areas began to escalate as the wells began to fill up. This buildup of pressure, according to researchers, caused a series of earthquakes through 2011 with the largest one registering 5.7 in magnitude.
The evidence is not conclusive and many, including the state's geological survey, disagree. However, that same evidence is compelling, and its occurrence is not limited to Oklahoma. Early last year Ohio had to suspend drilling wastewater disposal wells after a series of earthquakes centered on a disposal well. The largest quake, which registered 4.0 in magnitude, occurred on Dec. 11, 2011.
This could be a big blow to energy production and oil-field service companies which have spent billions to get rid of all the water used in oil and gas production. The industry has more than 150,000 active disposal wells, and more being drilled every year.
In just one example, the lead developer of the Mississippi Lime formation in Oklahoma and Kansas, SandRidge Energy (NYSE:SD), has spent nearly half a billion dollars to drill 116 disposal wells and install 700 miles of wastewater pipeline. For SandRidge, its disposal system is the most effective way to manage produced water and a key to controlling its costs as it ramps up its oil and gas production. Given the company's financial situation, potential earthquakes are not a risk that it can afford.
Furthermore, while earthquakes are a major concern for wastewater disposal wells, the risks don't stop there. EXCO Resources (NYSE:XCO), for example, was fined over $150,000 after it was found that an underground pipe at its wastewater disposal well in Pennsylvania was leaking. This disposal well was located in a sparsely populated area and didn't cause much harm. However, it highlights another major risk faced with disposing of the wastewater, a risk that could be heightened by the fact that wastewater disposal is not a core business for most oil and gas companies.
Whether or not wastewater disposal does indeed cause quakes, I think we can all agree that it is a risk that needs to be better managed by the industry. One company sees these risks as an opportunity, and it's stepping up to the plate and presenting a better solution to the industry. Heckmann (NYSE:NES) offers oil and gas producers a comprehensive environmental solution, which includes the delivery of the water required for drilling, its collection after it has been used, followed by the treating and recycling of as much as possible, and then the disposal of the remains.
While the company does own 46 disposal wells, the goal is to have less water disposed and more treated and recycled. Last year the company bought a stake in a wastewater treatment and recycling facility in the Marcellus and has plans to expand its capabilities in treatment and recycling. It can then replace the need for fresh water in the drilling process by using this recycled water. That means less produced water is making its way into disposal wells.
Because of its now nationwide reach, and the risks involved with disposal, more exploration and production companies are likely to contract with Heckmann's cradle-to-grave approach to water management. As this happens we will see more producers move away from simply disposing of produced water and instead treating and recycling as much of it as possible. Heckmann is the one company with the best position to deal with this problem, making it the one company with the resources to eliminate the one risk that makes energy companies quake.
Fool contributor Matt DiLallo owns shares of Heckmann. Matt DiLallo has the following options: Short Jun 2013 $4 Puts on Heckmann. The Motley Fool owns shares of Heckmann and has the following options: Long Jan 2014 $4 Calls on Heckmann and Short Jan 2014 $3 Puts on Heckmann. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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