Are New Regulations A Threat to Drilling?

The exploration and production industry says that recently proposed environmental legislation might put the brakes on oil and gas drilling in the U.S., in particular the development of oil and gas shale resource plays that many companies depend on for growth in production and reserves. Any further slowdown in drilling here here would ultimately lead to less supply, and mean higher prices for consumers. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer.)

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The industry currently uses a technique known as "hydraulic fracturing" to enhance production at wells where the hydrocarbons can't flow naturally. The practice involves the injection of millions of gallons of water into the well bore to fracture the formation, and the introduction of a proppant (usually sand or ceramic) into the formation to keep the fractures open.

The water contains chemicals (some toxic), and has recently raised concerns about contamination of ground water, as the practice spreads to areas that are not accustomed to drilling.

Democratic Congressmen Diana DeGette of Colorado and Maurice Hinchey of New York have proposed legislation to allow the Environmental Protection Agency (EPA) to regulate hydraulic fracturing under the Safe Drinking Water Act. The practice was exempted in 2005.

Chemical Composition
Although the practice sounds a little scary, there are some things that need to be made clear. The fracturing fluid, on average, is 99.5% pure water, using data from the Fayetteville Shale, where hydraulic fracturing is a way of life.

It is not certain that the fluids would migrate vertically to contaminate the groundwater. A study done in the Fayetteville Shale estimated it would take 830,000 years for the fluids to migrate from a well drilled at a depth of 4,000 feet to reach an aquifer at 750 feet.

Hydraulic Fracturing is vital to many operators. Whiting Petroleum (NYSE:WLL) operates in the Bakken Shale and uses the technique to develop the area. Its first wells in the Bakken Shale, completed without the benefit of fracturing, had initial production rates of a couple hundred barrels of oil per day. Wells drilled recently, using fracturing, have had initial production rates as high as 4000 barrels per day.

Southwestern Energy (NYSE:SWN), has 15 rigs drilling horizontal wells in the Fayetteville Shale in the first quarter of 2009, and all these wells need to be hydraulically fractured.

It's not just the operators who would suffer. Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL) and BJ Services (NYSE:BJS), the industry leaders in this business, earn millions doing multi stage fracturing jobs for customers. All three see unconventional resource development as a major growth business.


The Bottom Line
The effort to regulate hydraulic fracturing of oil and gas wells is well intentioned, but like all efforts to regulate, it might end up costing consumers. (For more on regulations and its effect on consumers, take a look at Free Markets: What's The Cost?.)