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The rise in earthquakes as a result of fracking poses a massive problem for the oil and gas industry.
It is not hydraulic fracturing per se that is causing the earthquakes. Rather, the injection of wastewater back into the ground that contributes to fault lines "slipping," which results in heightened seismic activity.
Oklahoma has become the earthquake capital of the United States, surpassing even tremor-prone California. Oklahoma has averaged less than two earthquakes of a magnitude 3.0 or greater over the last 30 years. Shockingly, however, that rate has skyrocketed in recent years. In 2013, the state experienced 585 earthquakes with at least a 3.0 magnitude. And if the current rate of earthquakes continues, Oklahoma could have 875 by the end of 2015.
The oil and gas industry in Oklahoma has downplayed the induced seismicity from disposal wells, but the frequency of earthquakes – rising to several earthquakes each day – has become too hard to ignore. That is leading to the prospect of a flurry of lawsuits against fracking companies. Continental Resources (NYSE:CLR), one of the most active companies in Oklahoma, even included legal action and state regulation related to seismic activity on its list of risks in its financial statements.
Legal action in neighboring states offer an indication that costs will rise for Oklahoma drillers as the backlash ensues. Chesapeake Energy (NYSE:CHK) and BHP Billiton (NYSE:BHP) paid an undisclosed sum to settle a 2013 case in Arkansas over earthquake activity.
Energy companies can deal with paying off plaintiffs one by one, although it will raise the cost of doing business. But the big threat to drillers is a court case going against them, saddling the industry with the costs of earthquake-related damage and raising the liability for all future drilling. In essence, the subsequent cost of insurance needed by drilling companies could make oil and gas production unviable.
One case in particular could determine how bad costs could get for the industry. A woman named Sandra Ladra has brought a case against two oil companies -- New Dominion and Spess Oil Co. -- after her chimney collapsed amid a 5.7 magnitude earthquake, and the falling bricks severely injured her. The 2011 earthquake was the strongest in Oklahoma history and destroyed 13 homes. A 2013 peer-reviewed study pointed to injection wells nearby that were used to dispose of fracking wastewater as the cause of the earthquake.
The Ladra case has now moved to the state supreme court. A court ruling in her favor will amount to a huge blow to the industry statewide, raising costs of operating and possibly contributing to a significant reduction in drilling over the long term.
By James Stafford of Oilprice.com. Oilprice has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.