Frack Attack! Could Environmental Concerns Stop the Natural Gas Boom?

By Daniel Ferry - June 5, 2012 | Tickers: CHK, XOM, RRC, WM, WPRT | 0 Comments

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There has been a boom in natural gas production recently, with supplies overflowing storage capacity and prices plumbing record depths around $2 per thousand cubic feet. The cause of this natural gas bonanza is hydraulic fracturing, or fracking, which is a controversial new method of injecting fluids into existing fissures in shale formations to force out and capture natural gas that was previously thought unreachable. The reserves that have become economically recoverable due to fracking are thought to be sufficient to meet a century's worth of demand. Since natural gas burns much more cleanly than other fossil fuels like coal or oil, and supplies seem so vast, its easy to envision an era of permanently cheap, green energy.

While low natural gas prices have led energy companies like ExxonMobil (NYSE: XOM) and Chesapeake Energy (NYSE: CHK) to redeploy some resources away from natural gas to oil production, all sorts of industries stand to benefit from cheaper natural gas. To save money on fuel for its trucks, Waste Management (NYSE: WM) recently announced plans to convert its entire fleet of collection vehicles to run on compressed natural gas, with engines designed by Westport Innovations (NASDAQ: WPRT). Utility providers are converting several coal-fired power plants into natural gas facilities. And chemical companies, which use ethane from natural gas as a raw material for more complex compounds, are enjoying drastically reduced input costs.

However, all of this commerce is threatened by the environmental controversy surrounding fracking. The lion's share of the natural gas recoverable by fracking is in the United States, which has strong environmental protection laws relative to other major energy producers like Russia, Nigeria, or Saudi Arabia. Some states with the largest known shale gas reserves, particularly New York, have limited or banned hydrofracking until the EPA completes a full assessment of the practice's environmental impacts. States where fracking has expanded most vigorously often have not explicitly approved of fracking, they simply had no regulations in place when drillers began operating. Bills have been introduced in state legislatures to curb or even abolish the practice. 

It's understandable for the public to be concerned. The liquid solution forced into the earth contains a slurry of chemicals meant to do everything from dissolving minerals to killing bacteria. The best drilling firms follow the example set by the environmentally and socially conscious Range Resources (NYSE: RRC) and disclose every chemical used at every well, but more protect their fracking solution as a trade secret. Leaks from drill sites can contaminate water supplies with chemicals, and even, spectacularly, natural gas. The 2010 documentary Gasland featured residents of West Virginia whose residential water was so saturated with methane that water from the tap could be set on fire. Air samples in Dish, Texas, which hosts a number of fracking wells, have found high levels of neurotoxins, carcinogens, and benzene in the air, and residents complain of headaches, bloody noses, and blackouts occurring near wells. In Ohio, a series of extremely unusual earthquakes has been linked to the underground storage of a used fracking solution. A Cornell University study found that livestock and wildlife near fracking sites suffered abnormally high rates of disease, birth defects, and mortality, but because the composition of the fracking solution was secret, the exact cause could not be determined.

Fracking is a recent innovation, and researchers on both sides of the debate admit that it's too soon to answer many burning questions. But at this stage, the data suggest that the environmental damage inflicted by fracking is a result of utilizing older technology, failing to meet quality standards in well construction, and improper disposal of the fracking solution. This is good news, and suggests that unlike some energy production techniques, like mountaintop removal for coal mining, environmental damage is not inherent to the operation and can therefore be mitigated. Last week, the International Energy Agency published a report, Golden Rules for a Golden Age of Gas, which found that it was possible to consistently produce natural gas through fracking without harming the environment, as long as effective regulation was passed and enforced. The report estimated that conforming to a high standard of safety would add only 7% to the cost of the average well. That's well within the realm of economic feasibility, given the vast price advantage natural gas enjoys over other fossil fuels.

This is an encouraging finding for the young industry, and prudent regulation could allow the continued exploitation of America's vast natural gas reserves. If companies following best practices can keep communities safe, and provide a cheap, clean energy source, the entire global economy stands to benefit. Opposition groups and environmental scientists will continue to monitor the performance of the industry, however. If the balance of evidence shifts to indicate that fracking cannot be performed safely, it may be banned outright. This presents an enormous risk to any company involved in the production or utilization of natural gas. Investors in this space should follow the science of hydrofracking closely, because a bad finding could end the natural gas boom as quickly as it began.

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