If the EPA won't stop fracking, then maybe the Justice Department will step in and do the job for them.
Baker Hughes (NYSE:BHI) and Halliburton (NYSE:HAL), two of the three biggest companies involved in providing services for hydraulic fracturing, announced last week they received civil investigative demands, or CIDs, from Justice regarding a probe into alleged "anticompetitive practices involving pressure-pumping services performed on oil and gas wells."
CIDs require recipients to produce documents, respond to interrogatories, or provide sworn deposition testimony and are used by the government before litigation has actually commenced. The area Justice is investigating, pressure pumping, is the main step in the fracking process and involves injecting water, chemicals, and other fluids under high pressure into a well to fracture the rock formations trapping the oil and gas deposits.
Once the rock is fractured, proppants, typically sand or ceramic beads, are then used to prop open the fissures (hence their name) to allow the gas and oil to flow freely.
It has been the development of the hydraulic fracturing process that has created the natural gas boom we're in the midst of. The U.S. is awash in natural gas and will soon become a major exporter through Cheneire Energy's (NYSEMKT:LNG) Sabine Pass facility in Louisiana.
Environmentalists have opposed fracking, however, accusing the procedure of causing everything from groundwater contamination to flaming faucets and earthquakes. Spurred on by these activists, the EPA began conducting tests to prove it was fracking behind drinking water contamination, as the theory was that fracking fluids were seeping into the aquifers. Yet as Nuverra Environmental Solutions (OTC:NESC) explained, these fluids are pumped into wells thousands of feet below the ground, far below the aquifers, and the fluids seep down, not up. Nuverra is one of the leading suppliers of water and fluids-management services used in fracking for the oil and gas industry.
The EPA injected tracer chemicals into the fluids that were pumped into the wells at around 10,000 feet below the surface and monitored them at the 5,000-foot level. To the chagrin of the agency and the environmentalists, they found nothing. The regulatory agency ultimately punted on its study, which was originally supposed to be peer-reviewed, turning responsibility for its completion over to state authorities and high-tailing it out of town.
The Energy Department, meanwhile, conducted its own tests and just concluded a landmark study determining that fracking isn't responsible for contaminating groundwater supplies at all. As for the flaming faucets, it was a condition known in the area for years before drilling ever occurred there. Whether fracking causes earthquakes is still a matter of conjecture.
But with two agencies seemingly giving the procedure a green light to continue, the Justice Department is stepping in to investigate supposed anticompetitive practices. Halliburton (NYSE:HAL), the favorite whipping post of environmental activists, is the industry leader, with an estimated 29% share of the pressure pumping market, while Baker Hughes had a 4% share. Schlumberger (NYSE:SLB), which is the second biggest services provider with a 21% share, hasn't said whether it's received any inquiries from the government.
Yet it's a strangely timed investigation, since the onshore pressure pumping market peaked a few years ago, and like the industry they service, the pressure pumpers have seen margins fall as a glut of equipment flooded the market. While there is an offshore market for pressure pumping, it's tiny by comparison, and analysts are left scratching their heads wondering what the Justice Department is actually trying to accomplish, particularly as both Halliburton and Schlumberger develop new technologies that minimize pressure pumping a a whole.
A stalled initiative by activists at the EPA and a clean bill of health by Energy could give some indication of why Justice is now involved, but while investigations don't always lead to charges, this fishing expedition can still serve to make mischief.