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Tickers in this Article: CHK, ECA, HAL, SLB, BP
New gas drilling methods employing a technique know as hydraulic fracturing or "fracking" has dramatically increased the production of natural gas in the U.S. in recent years, prompting a plunge in natural gas prices. But, lately there has been growing concerns on the part of the public, state and federal environmental regulators that the technique may be having an adverse effect on groundwater in drilling areas.

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Shale Gas Production Set to Soar Over Next Decade
Shale gas currently accounts for about 20% of U.S. production, but it could rise to 50% within the next 10 years. Much of this projected increase depends on new drilling. Currently, there are about 1,800 wells in the Marcellus shale, a prolific gas field in Pennsylvania that is estimated to hold enough gas to supply total U.S. needs for 20 years. The industry is now planning to increase the number of wells tapping into the Marcellus to 30,000 over the next decade.

Ground Water Contamination Fears Increases Regulatory Scrutiny
Critics say the chemicals contained in the drilling fluids risk tainting groundwater. For their part, energy companies contend that the chemicals are separated from the aquifers by steel and concrete casings and are thus unable to taint water. However, such assertions haven't been able to stop a groundswell of public, regulatory and even shareholder opposition to such drilling that could significantly curtail or even stop outright the exploitation of America's massive shale gas fields.

Recently, environmental regulators in Pennsylvania ordered major shale gas producer Chesapeake Energy (NYSE:CHK) to conduct a review of a total of 171 wells after receiving reports of bubbling water on the Susquehanna River in the northern part of the state and worries of methane in local well water. In Wyoming, an area where Canadian gas producer Encana Corp. (NYSE:ECA) has been drilling, the U.S Environmental Protection Agency (EPA) advised people not to drink water after benzene, methane and metals were found in groundwater, although it couldn't pinpoint the source of the contamination.

EPA Now Investigating Fracking
Fears that similar contamination could impact New York state residents has energized opposition to shale gas drilling in that state. New York state energy officials have yet to issue drilling permits in their jurisdiction, which also covers the Marcellus shale formation, and are now under increasing pressure to hold off until the EPA concludes a two-year study on the possible impact of gas drilling on drinking water. The study will also include a analysis of the fracking fluids used, which are produced by drilling operators Haliburton (NYSE:HAL) and Schlumberger (NYSE:SLB) - the formulation of which are considered proprietary.

Green Shareholder Activism on the Rise
Perhaps as a consequence of the drastic loss in shareholder value resulting from BP plc's (NYSE:BP) Gulf of Mexico oil spill disaster, shareholders in energy companies are now adopting a more activist stance as they press for greater disclosure regarding practices that could give rise to adverse environmental impacts and possible company liability issues. So far this year, more than 100 climate and energy-centric proposals have been put before shareholders of 88 U.S. and Canadian companies - almost 50% more than last year. While most of these proxy proposals gained the support of 20% of the voting shares, that proportion rose to 40% in the case of five energy companies.

The Bottom Line
The U.S. energy industry is still feeling the aftershocks of the Gulf oil spill disaster. Greater regulatory control is the inevitable outcome. In the case of shale gas, this could result in a drastic downward revision in the expectations of future production from such formations. If such a scenario unfolds, then natural gas prices, which have depressed on the expectation of a future glut, would be likely to rise dramatically. (To learn more, see our Oil And Gas Industry Primer.)

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