Whenever "government" and "oil and gas industry" are mentioned in the same sentence, it normally relates to having the two at loggerheads over regulations or taxes. This week, though, both Colorado and Wyoming enacted legislation to address the environmental impact of fracking, and it was greeted with acceptance from both sides of the argument. Let's look at both of these regulations and why both proponents and opponents should be happy with -- or at least accepting of -- these decisions.
Better than a ban
There are lots of issues that need to be addressed when it comes to fracking, but the ones that garner the most attention have been the potential for fracking to contaminate groundwater and methane leakage associated with the process. The most pertinent argument for using natural gas has been that it is a less damaging fossil fuel than oil or coal. These two issues have essentially made that argument a moot point, though, because the damage done by methane is much greater than that of CO2 on the atmosphere and the threat to freshwater sources. This is what makes the recent legislation from Colorado and Wyoming so important. Not only does it impose strong regulations, but it also increases the transparency and accountability of the process.
To address the issue of groundwater contamination, Wyoming has developed a system in which drillers need to do baseline tests of all water sources within a half-mile radius of a prospective well site before drilling. Also, throughout the process of bringing the well online, companies will need to constantly monitor these water sources to ensure no change to the baseline conditions.
Colorado, on the other hand, has tackled the other side of the environmental issue. The release of methane and other volatile organic compounds has not only been a concern in terms of greenhouse gas emissions, but it has also created a public health issue because increased levels of smog and ozone. The new rules enacted by the state legislature are quite comprehensive and cover aspects of the process such as using high-efficiency burners, employing better drilling equipment that prevents leakage, and establishing a monitoring program that frequently checks in with new and existing wells to check for and repair leaks.
The benefits of these of regulations are threefold:
- It puts adequate restrictions on the industry without bringing it to a screeching halt, which has had environmental groups and the oil and gas industry applauding the implementation.
- It develops an unprecedented level of transparency to the entire industry, which could be to drillers' benefit if it can prove to complete an entire well without tarnishing water quality in the region.
- It provides a level of accountability to the process. So if an oil services contractor is the party responsible for the leak or contamination, it is the one responsible rather than the lease owner.
The one unfortunate point is that these rules were enacted in separate states. But the reception that they had from both sides of the argument could potentially lead all oil and gas producing states to adopting similar regulations, which would be very helpful for drillers that have operations in multiple states.
Could these regulations lead to consolidation?
One reason these regulations have been a success where so many others have failed is that they were formed by bringing both environmental groups and oil and gas drillers to the table. Many of the best practices that were enacted in Colorado are a result of what companies such as Anadarko Petroleum (NYSE:APC) and WPX Energy (NYSE:WPX) have done so far. Of course, when regulations like these get enacted, there are some winners and losers. Although many of the larger producers like Anadarko and WPX will be shouldered with larger costs because they will need to go back and retrofit many of their existing wells, these companies have used these industry best practices for quite some time and have checkbooks large enough to make the fixes.
Smaller drillers that may be running on a budget, though, may find these new regulations much more cost-prohibitive. If these players can't comply with these rules without breaking the bank, then it's likely they'll get gobbled up by some of the larger players that can afford it.
What a Fool believes
As much as many people may turn their nose at the idea of consuming fossil fuels to meet our energy demands, it is a reality that we will have to live with for some time as new technology and consumer habits change. But it doesn't mean the oil and gas industry should have carte blanche when it comes to extracting natural resources. The two regulations set forth by Wyoming and Colorado are exactly what the industry needs -- an opportunity to grow while being held to a higher level of scrutiny. If regulations like this could be enacted in tandem across the U.S., it would help us to realize the potential of the American energy boom while mitigating its environmental impact. It is in the best interest of the industry to embrace these efforts, because continuing to fight regulation will only make things more difficult for all parties involved.