Some of the companies in the exploration and production industry may have underestimated the regulatory risk in the business model as the opponents of hydraulic fracturing ramp up the battle against this controversial drilling technique.

IN PICTURES: 6 Millionaire Traits That You Can Adopt

Any large scale restrictions on the use of hydraulic fracturing or significant added cost to wells would render many unconventional resource basins uneconomic to develop. The industry is currently facing regulatory threats from several different areas.

Federal Level
At the federal level, the Environmental Protection Agency (EPA) announced in early 2010 that the agency was studying the impact that hydraulic fracturing may have on drinking water. The EPA is holding a series of hearings around the U.S. to solicit input from the industry and those Americans who live in areas where hydraulic fracturing is used.

The EPA also requested data on the chemicals used in this process from nine oil service companies that are involved in this sub segment of the industry. These include industry leaders like Halliburton (NYSE:HAL), Baker Hughes (NYSE:BHI) and Schlumberger (NYSE:SLB). Other companies receiving requests included Weatherford (NYSE:WFT), Patterson-UTI (Nasdaq:PTEN), Complete Production Services (NYSE:CPX), Key Energy Services (NYSE:KEG). RPC, Inc. (NYSE:RES) and Superior Well Services (Nasdaq:SWSI). The EPA expects the initial results of the study to be released in 2012.

Some companies have voluntarily released data on the fluid content. Several months ago, Range Resources (NYSE:RRC) started releasing to the Pennsylvania Department of Environmental Protection information on the additives used in fracturing wells in the Marcellus Shale.

State Level
Another front has been opened by the Delaware River Basin Commission (DRBC), which is a federal-state compact government agency formed in 1961 by Congress and Pennsylvania, New York, New Jersey and Delaware. This commission has authority over water issues in the Delaware Basin. In May 2009, the DRBC ordered that companies could not commence any natural gas drilling in shale areas without the commission's approval within the drainage area of the Special Protection Waters of the basin. The drainage area covers several counties in Pennsylvania, New York and New Jersey. The DRBC is expected to release draft regulations by the end of the summer of 2010, to be followed by a public rule making process.

In New York, the State Senate voted in early August 2010 to ban the issuance of permits for hydraulic fracturing of wells through May 15, 2011. The measure passed by the overwhelming margin of 48-9. The New York State Assembly is set to take up the bill in September 2010, and then it would have to be signed by Governor Paterson to become law.

An interesting side note to the hysteria regarding hydraulic fracturing in New York is that the first natural gas well to undergo fracturing was located in Fredonia, New York. The well was drilled in 1857 and failed to produce natural gas. The driller used gunpowder to induce fracturing of the formation, and the well started producing natural gas shortly after this innovative technique was used.

The Bottom Line
The oil and gas industry is facing an onslaught of regulatory burdens as several federal and state entities study and update regulations on hydraulic fracturing. Any significant restrictions or added costs here might threaten the manufacturing business model of oil and gas development used in unconventional resource plays. (For related reading, take a look at Understanding Oil Industry Terminology.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!