Fracking War Heats Up

The EPA asked nine energy companies to provide the list of chemicals used in the fracturing process so they can complete a study on potential threats to drinking water.

On August 31st the EPA told residents of Pavillion Wyoming not to drink water from their wells after benzene and methane were found in the ground water. Pennsylvania regulators told residents near Scranton not to drink the water after there were reports of gas bubbles in the drinking water as well as methane gas bubbling up in the Susquehanna River. Those problems were thought to be a direct result of Chesapeake drilling several shale gas wells within three miles of the river.

There have been 1,785 wells drilled in the Pennsylvania portion of the Marcellus Shale. Over 30,000 are expected to be drilled if there is no halt to the fracturing process. Because of the uproar over the fracturing process neighboring New York has issued a moratorium on new drilling permits until May 15th. The EPA will hold public hearings in Binghampton NY next week.

The EPA has requested the secret sauce ingredients from Halliburton, Schlumberger, Baker Hughes, Key Energy Services, Complete Production Services, Patterson-UTI, RPC Inc, Superior Well Services and Weatherford International. Companies have 30 days to respond.

Chesapeakse said they were pro-actively evaluating all of their wells in the area and were prepared to take necessary steps to remedy the situation. However, "Based on comprehensive field testing the issue does not pose a threat to public safety or the environment." (It may however pose a threat to Chesapeake's financial environment.)

The EPA study results are to be announced in 2012.

The EPA said the latest tests in and around Pavillion WY showed hydrocarbons, benzene and methane in wells and groundwater where there had been no problems before the gas wells were drilled.

As I have reported before this is going to be a major challenge for the gas drillers. Shale gas drilling is only marginally profitable to start and any bans on fracturing will shut them down.

The EPA meeting originally scheduled for mid August had to be postponed because of the onslaught of people planning on attending and protesting. The meeting was rescheduled for next week and there are more than 2,000 people planning on attending, compared to the 150 initially expected.

Entire towns are sending delegations and some towns are starting voting initiatives to ban drilling and fracturing within their boundaries. This is going to be a major problem for those companies who have purchased leases at $2,500 per acre or more in hopes of drilling gas wells.

Several gas drillers have recently announced they were switching to oil rather than gas but the stated reason was the price of gas. Nobody wants to admit the fracturing crisis is the real reason drillers are heading west into the Bakken and Niobrara to drill for oil. Recent discoveries have shown that horizontal drilling for oil in those areas can be profitable, although at a slower rate than gas. Initial gas well payout in the early months can be equal to 75% of the cost of the well. The payout on Bakken or Niobrara shale oil is in years but there is a longer term residual income because the depletion rate is not as fast as gas.

Companies plagued with low gas prices and extremely high depletion rates are shifting their focus to the oil plays.

The shale gas fracturing story is not over yet but you can bet that resident anger is going to increase because of the grass roots level of the problem. These are small towns and word of new water problems travels fast and is quickly exaggerated. Gas drillers have not seen the worst of the problems yet.

Jim Brown

This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.

Subscribe to Energy Picks Newsletter