How Shale Fracking May Hurt Your Investment

By Tim Parker | January 26, 2012 AAA
How Shale Fracking May Hurt Your Investment



In 2011, two new terms became well known to energy investors all over the world: shale and fracking. These terms represent either the newest technology that will change the way oil and gas and are produced, or it will be a fad, at the least, or an energy bubble, at the worst. Are these new American and Canadian shale formations worth your investing dollars or should you stay with the more traditional means? (To learn more, check out Oil And Gas Industry Primer.)

TUTORIAL: Commodities

What Is Shale?
An oil well can be placed just about anywhere. They can be drilled into rock, under the sea floor and through thick ice. Shale is a type of rock that is made up of mud, clay and other minerals. Oil shale holds a material called kerogen, a mixture of organic compounds that produce shale oil.

Shale oil isn't a new finding, but the technology to extract it in a cost effective way has only recently been developed. North America is full of shale formations, including the much hyped Bakken Shale, which may include as much as 24 billion barrels of oil.

What Is Fracking?
Fracking is short for hydraulic fracturing, and is the process used to get oil out of the shale. A well, which can be more than two miles deep, is drilled into the shale, and then water and chemicals are pumped into the well. This fractures the shale, which is then processed and heated to 900 degrees, turning the kerogen into a liquid that is then processed even further, into oil.

Fracking is seen by many as the way North America will finally end its dependence on foreign oil, but is it that perfect of a technology? (For related reading, see Top 6 Oil-Producing States.)

What's the Catch?
Fracking involves millions of gallons of water filled with chemicals and sometimes radioactive waste, according to opponents. In order to dispose of the waste water, it has to be chemically treated or pumped into waste water wells deep beneath the Earth's surface.

Pumping the water deep underground was considered to be an environmentally friendly disposal method until a recent series of earthquakes in Youngstown, Ohio were attributed to these waste-water wells. Other studies indicate that some of this waste water may be entering the water tables. What once had an environmental and political-free reign is now coming under scrutiny.

How to Invest
Companies like Continental Resources and Chesapeake Energy are two oil companies largely engaged in shale fracking, with Chesapeake forecasting more than 50% of its revenues coming from shale. Integrated oil companies that aren't completely dependent on shale will be a safer bet for investors.

Along with direct investment in the drillers, the amount of oil coming from these wells has presented an infrastructure problem. Pipelines and storage facilities are struggling to catch up to the growing demands of the oil industry. This problem presents an investable opportunity, but the opportunities aren't as apparent for amateur investors - at least not yet.

The Bottom Line
No investment opportunity is without risk and, as the recent Ohio earthquakes demonstrate, it takes very little to change political, environmental and investor sentiment. Shale gas and oil investments should follow the same diversification rules as all other portfolio holdings. When something is touted as a sure thing or easy money, that's when the wise investor gets a little nervous. There is no fool-proof investment. (To learn more, check out Peak Oil: What To Do When The Wells Run Dry.)

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