The Oklahoma City-based Chesapeake Energy ($CHK) is one of the US’s largest independent oil & gas producers with a market-share of over $17 billion, and is furthermore the nation’s second-largest producer of natural gas.
Like a number of its peers, the company is coming off of a strong 2013 as a result of its success in pumping natural gas from its holdings in some of the most plentiful shale-based reserves that the US has to offer, which include but are not limited to the Marcellus and Barnett formations.
A Huge Year for Chesapeake
According to the narrative of the “shale boom” that has increasingly dominated energy headlines over the past year, smaller, independent outfits like Chesapeake are quickly transforming the notion of US energy independence from political stump-speech idealism into an abrupt reality. The stock’s 2013 performance would seem to corroborate the overall picture, as shares for Chesapeake gained some 63 percent to close the year just above $27 a piece.
This momentum is set to carry over into 2014 as well. The company has been cited as one of the principal reasons for the fact that the state of Ohio had more than doubled the previous year’s output of oil and gas by the conclusion of the third quarter of 2013. Indeed, from its holdings in Ohio’s Utica Shale play alone, Chesapeake nearly doubled its own 2012 output on a year-over-year increase of some 91 percent, and has plenty of room to grow in the region, where more than half of its wells are either awaiting completion, or to be connected to a viable pipeline system.
Largest Fine of Its Kind
But a news item that was relatively buried in the thick of the recently-ended holiday season may spell trouble for Chesapeake in particular, if not a whole slew of energy companies who have so far made a killing off of hydraulic fracturing, the technology responsible for granting explorers and producers access to reserves of oil and especially natural gas once thought to be off-limits, locked as it was deep underneath the surface of the earth inside limestone shale formations.
On Dec. 19, Reuters reported that the company was on the hook to pay civil fines of over $3 million, resulting from violations of the Clean Water Act from committed at its Marcellus Shale operations in West Virginia, as well as an additional $6.5 million to restore streams and wetlands it had knowingly destroyed through dumping of waste material.
The allegations may not seem terribly worrisome, given how frequently they have been levied against the oil & gas industry’s “frackers”, to say nothing of how the fines themselves represent a fairly insignificant portion of such a company’s revenue stream. But the fact that they were imposed in the first place, along with the fact that they are the largest fines of their kind to date, could signal that Environmental Protection Agency and the Department of Justice are becoming more willing to take a harder line against allegations that the industry has rejected out of hand, in much the same way as big oil once fiercely denied even the minutest assertions of climate science.
Rewind: The W. Bush Administration's Energy Policy Act of 2005 and the "Halliburton Loophole"
To understand why this recent posture on the part of Federal regulators may turn out to be more significant than the usual slap on the wrist, one must go back in time nearly a decade, to the passage of the Energy Policy Act of 2005. The Safe Drinking Water Act (SDWA) that was part of that legislation included a curious, almost shocking provision for companies engaged in hydraulic fracturing, effectively exempting them from having to disclose the exact mixture of chemicals they use in order to pressurize and ultimately fracture shale formations in order to release the much-vaunted stores of oil and gas that they famously contain.
Leading oilfield services company Halliburton (HAL) is, accurately or not, most associated with the development of hydraulic fracturing technology, though the method was actually developed by engineer and entrepreneur George P. Mitchell, CEO of the late Devon Energy, throughout the 1990’s. In 2005, Vice President Dick Cheney, formerly CEO of Halliburton, brought pressure to bear on congress to exempt oil and gas companies engaged in hydraulic fracturing from various provisions of the SDWA.
This exemption has come to be known as the “Halliburton Loophole”, and allows frackers to avoid having to give details about what sort of chemicals could be found in their “fracking cocktail”, as this potentially hazardous compound was, and still is, protected as “proprietary information”. This despite growing evidence, even at the time, that hydraulic fracturing can lead to the contamination of groundwater, resulting in various unprecedented outbreaks of illness among the citizens of surrounding areas. At the Federal level alone, hydraulic fracturing is currently off the hook on no less than seven different sets of major environmental regulation.
Pennsylvania's Act 13
The so-called “Halliburton Loophole” is not the only questionable legal turn of luck to have graced companies engaged in hydraulic fracturing, however. The State of Pennsylvania is acutely familiar with the subject: home to a significant portion of the Marcellus Shale, an epicenter of the US “Shale Boom”, Pennsylvanians live under the jaw-dropping provisions of “Act 13”, a law that allows energy companies drilling in the Marcellus the freedom to override local zoning laws in the event they feel it necessary to do so in the mad scramble for a piece of the Shale prize.
A Popular Backlash Gaining Momentum?
Though it is a mere scratch on the surface, the above alone would seem to indicate that the odds are heavily stacked in favor of the fracking companies. And this is why the Chesapeake decision may turn out to be more significant than a slap on the wrist in the end. Indeed, the EPA’s description of the allegations it has levied against Chesapeake involve violations of section 404 of the Clean Water Act, which has no direct relationship to the particular contents of the “cocktail” (industry parlance: “brine”) used in the fracturing process, but rather the overall construction activity arising from the building of wells and the roads that connect them to civilization: “the company impounded streams and discharged sand, dirt, rocks and other fill material into streams and wetlands without a federal permit in order to construct well pads, impoundments, road crossings and other facilities related to natural gas extraction.”
For the most optimistic, it is possible to interpret this as a sign that the current administration is becoming more willing, or eager, to curb at least the worst excesses associated with companies who employ the technology.
This optimism would be justified not only by measures taken against Chespeake either. The EPA’s Dec. 19 decision came on the same day that the Pennsylvania State Supreme-Court struck down major provisions of the ominously titled “Act 13”. Four of the state’s six Justices wrote that“several challenged provisions of Act 13 are unconstitutional".
Chief Justice Castille was even less equivocal: “"By any responsible account, the exploitation of the Marcellus Shale Formation will produce a detrimental effect on the environment, on the people, their children, and the future generations, and potentially on the public purse, perhaps rivaling the environmental effects of coal extraction."
Unsurprisingly, the fracking community has been seeking uniform, nationwide land-use rules similar to those in place thanks to Pennsylvania’s Act 13. And while late-year decisions regarding Chesapeake and the State of Pennsylvania may not have any appreciable effect in the short or even near-terms, and could very well peter out under the weight of industry lobbying as well as more enthusiasm for the so-called “energy revolution”, they are at the very least an indication that opposition to fracking is coming from below, and is pushing up against the threshold at which those above begin paying close attention.