At Last, the EPA Weighs in on Fracking
In a significant move for investors, the Environmental Protection Agency (EPA) is indicating that it finally plans to require natural gas producers to divulge the chemicals used in shale gas drilling.
The EPA has decided to conduct an official study of the process, initially this week sending a letter (PDF) to nine major service companies requesting that they voluntarily provide details about the chemicals they use. Of course, if they do not comply, the letter informs the companies that the EPA could compel the information.
Here’s why the move is important to investors: Clearing up environmental concerns will open up shale gas drilling.
And that is going to make you a great deal of money over the next decade.
Concerns Over Chemicals Have Kept Drilling Down
I have written about the importance of shale gas as a new, domestically available energy source (“Marcellus Shale About to Take Off On One Sweet Ride“).
But until the environmental concerns are sufficiently addressed, opposition to drilling will remain, especially for the major Marcellus Shale Play (MSP) in Pennsylvania, New York, and West Virginia. And MSP is quickly developing into the most important new energy source in the country.
The problem surrounds the way in which the gas is extracted.
It is held inside the shale, so the rock needs to be opened before the gas can flow. That opening is accomplished by moving millions of gallons of chemical-laced water downhole under high pressure, breaking the rock – the fracturing (or “fracking”) process.
Along with the gas coming to the surface, there is a water flowback. That water is now contaminated with hydrocarbons, residue from the shale formation, a bit of increased natural radiation, and the chemicals used in the fracking process.
This is where the battle lines are drawn.
Some of the chemicals – and there are 344 so far identified as being used in the process at various locations – are of primary concern.
Those of greatest concern are ethylene glycol, employed to combat scaling, and glutaraldehyde, to deal with bacteria and prevent corrosion. These are very nasty carcinogens.
In the fluids moved downhole, many companies point out, chemicals comprise only about one-half of one percent. Nonetheless, in a normal frack job, that amounts to more than 7,500 gallons of chemicals.
And then there is the composition.
Company spokespeople and the American Petroleum Institute (API) have argued that the formula for the chemicals is a proprietary or trade secret and is therefore protected.
Some have also maintained that the chemicals themselves are covered under the same rule. But this latter argument seems less defensible, since the list of chemicals used at a drilling site have to be included anyway in a Material Safety Data Sheet (MSDS) to allow reaction to accidents.
However, the EPA’s leverage in compelling the information is questionable, because fracking is exempt under the Safe Drinking Water Act (1974). Halliburton Co. (NYSE:HAL) developed the fracking process and holds the basic patent. As a result, the exemption is often called the “Halliburton Loophole.”
Given the rising political reactions to fracking, resulting in a ban on its usage in New York state and a similar move gaining some momentum in Pennsylvania, the EPA has decided to weigh in.
The agency does have some justification for taking a more active evaluation approach, because of the Fracturing Responsibility and Awareness of Chemicals (FRAC) Act of 2009 introduced in both houses of Congress (S.R. 1215/ H.R. 2766). That bill proposes to eliminate the Halliburton Loophole and require disclosure of the chemicals used in the fracturing fluids.
On the other hand, there is no question that the EPA’s decision is a major change.
The EPA’s letter requests that the companies provide detailed information about the chemicals they use, along with any information they have on potential health and environmental impacts of the process. It also asks for the locations of any sites where the process has been used, as well as the fracking procedures at each site.
In return, to assuage the companies’ major legitimate concern, the EPA has agreed to keep each chemical composition formula confidential.
But not without a caveat. The letter notes the EPA could still release the information if its disclosure “is necessary to protect health or the environment against an unreasonable risk of injury.”
In addition to putting the main questions on the table for serious discussion – rather than continuing to have the industry stonewall the issue and public unrest increase as a result – the EPA will be setting a baseline for regulations.
Most of these rules will be on the state level, not federal. When regulating, the EPA sets down standards, but states are allowed to either meet those standards or pass more stringent approaches of their own. In the case of fracking, some states are already doing so – as much to prevent federal action from limiting state leverage on the matter as anything else.
Wyoming, for example, had its own state-level fracking regulations come into force on September 15th. This action requires that companies fracking within the state disclose the types and amounts of chemicals used during the process, their concentration and rate, and what they do to reuse and dispose of the chemicals once the process is completed. The official in charge of the move admits the new rules are intended, at least in part, to cut the EPA off “before they circumvent states’ rights” with their own set of regulations.
A Huge Upside for Shale Gas
Shale gas is too large a target for the operators to avoid. There is too much money to be made, and it provides a significant expansion of domestic drilling opportunities to lessen dependence on foreign energy sources.
As the EPA uses its considerable weight to influence this outcome, a compromise will be reached.
My view is that the Halliburton Loophole will be eliminated, and companies will disclose the chemicals they use (although the formulae will not be made public). This last issue is not a major problem in a basin like the MSP anyway. You give me the data on enough wells (8,000 to 11,000 of them), along with a list of the chemicals, and I’ll be able to tell you what the composition looks like.
In the Marcellus, we should be at that point in less than a year.
If the environmental concerns can finally be answered, there is a huge upside here.
For instance, the American Petroleum Institute has already estimated that MSP production alone would provide some 18 billion cubic feet of gas daily, or about one-third of the entire U.S. national need.
And the estimate includes one other benefit of note… 280,000 new jobs.