A Closer Look at Fracking

Joel Anderson |

ECA, EOG, HES, BEXP, CLR, CHK, fracking, hydraulic fracturing, natural gas, oil, oil and gas exploration, drilling, pressure, wells, aquifer, groundwater, contamination, chemicalsHydraulic fracturing, better known as fracking, was in the news again Thursday when an EPA report came out that may link the controversial practice to groundwater pollution in Wyoming. Fracking has been a major point of contention between local communities, environmentalists and energy companies for some time, and it's clear why. While some lingering questions remain about the ecological impacts, it's become more than clear that fracking shale deposits in the United States has provided ample new opportunities in trying economic times.

 Fracking Has Long Been a Useful Strategy

Hydraulic fracturing has actually been employed as a means of extracting fluids like natural gas or oil from wells for over 60 years, with the method first being used in Kansas in 1946. However, the potential of the process for unlocking the shale gas across the United States has only been recently discovered and developed. The process of hydraulic fracturing involves pumping water mixed with sand and chemicals into wells at very high pressures (up to 9000 lbs per square inch) to create and/or widen cracks in underground shale that release the fluids captured inside. The process has come under increased scrutiny of late as the combination of hydraulic fracturing and developments in horizontal drilling have allowed oil and gas exploration companies access to natural gas trapped in deeply buried rock like the Marcellus Shale, a sprawling formation buried deep beneath parts of West Virginia, Pennsylvania and New York.

Clear Economic Benefits

A 2009 study by the Potential Gas Committee saw measurements of natural gas reserves in the U.S. jumped 35 percent from 2006 to 2008, due in no small part to the vast fields opened up by fracking. In many cases, the jobs created by this boom in natural gas production has resulted in local economies seeing increased job creation even during extremely trying economic times. A Chicago Tribune article from Sunday cited statistics from a study by IHS Global Insight that fracking had created 600,000 jobs with 148,000 directly related to drilling and total shale jobs forecast to grow to 870,000 by 2015.

One clear success story in this regard has been the state of North Dakota. The state has the country's lowest unemployment rate (3.5 percent as of September 2011) and a major part of the economic boom there has been the exploration of the Bakken rock formation. While the formation has long been known as a source of oil, only recently has a combination of rising oil prices and fracking technology made it economically feasible to extract the resource. Now, companies like Continental Resources (CLR)Brigham Exploration Company (BEXP)Hess Corp. (HES), and EOG Resources (EOG) have been actively exploring the Bakken with solid results. EOG has gained almost 50 percent in its share price in the last two years, while Continental has more than doubled over the same time period.

Questions Linger About Environmental Impact

While the combination of lowered unemployment, increased reserves of natural gas, and increased profits for oil companies may seem on the surface like a win-win, questions about the long term environmental impact of fracking have persisted. Critics have long contended that fracking has serious consequences ranging from earthquakes to methane being allowed to leak into water wells. The most commonly repeated concern is the potential to contaminate groundwater supplies by allowing the chemicals in the water used for fracking to seep into underground aquifers. Industry experts insist that this is preposterous, pointing out that typically thousands of feet of rock separate shale deposits from aquifers. There have been specific cases where groundwater has been contaminated by fracking operations, including a $1 million payout by Chesapeake Energy (CHK), but these have all been related to specific errors by the drillers and couldn't be connected to any systemic issue with fracking.

New fuel was thrown onto the fire of fracking controversy last Thursday when an EPA report investigating groundwater contamination in Wyoming near fracking operations discovered chemicals consistent with those used in drilling. Doug Hock, a spokesman for the Calgary-based EnCana Corporation (ECA) stated that the report was "not a definitive conclusion" as industry voices were raised in defense of hydraulic fracturing, but it appears clear that the EPA will begin an investigation of the practice that environmental activists have long called for. The Wyoming wells in question, though, feature aquifers that were mere hundreds of feet above the shale deposits, meaning that any groundwater contamination, if related to fracking at all, could be specific to these shallow wells.

However, even environmentalists seem to agree that better regulation and industry standards could allow for fracking to continue in a limited capacity that would not seriously threaten the environment. "At the massive scale envisioned by shale gas proponents, our land, air, water, and communities will be further sacrificed," said Erik Schlenker-Goodrich, director of the Western Environmental Law Center’s Climate and Energy Program in a forum on fracking created by Yale Environment 360. " This is as much a consequence of our dysfunctional policymaking apparatus as it is of the innate risks and impacts associated with shale gas."

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
HES Hess Corporation 57.92 1.81 3.23 6,113,654
T.AXX Axia NetMedia Corporation n/a n/a n/a 0
ECA Encana Corporation 12.69 -0.06 -0.47 28,904,996
CLR Continental Resources Inc. 57.61 0.06 0.10 2,242,249
EOG EOG Resources Inc. 103.74 -1.01 -0.96 4,078,342
CHK Chesapeake Energy Corporation 7.23 0.18 2.55 51,162,112

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