Will New Fracking Rules Hammer Your Energy Stocks?


Do you ever get the sense that the energy industry is effectively under the thumb of groups of geezers who, officially acting as corporate boards of directors, are only interested in lining their own pockets, even if our environment is damaged in the process?

I'd wager that you don't actually think that way, and you shouldn't. My experience in and around energy companies tells me that at all levels, the industry's employees are -- are you seated? -- environmentalists. Even the powers that be within oil and gas companies, including BP (NYS: BP) , are determined to take every measure possible to maintain a pristine environment. It's telling that, in the four decades leading up to April 2010, and through the drilling of 50,000 offshore wells, of which about 4,000 were in deep water, there had not been a single serious environmental incident.

Perhaps it's an aura still lingering 100 years after the (justified) breakup of the Standard Oil Trust and the formation of companies that today include ExxonMobil (NYS: XOM) and Chevron (NYS: CVX) that makes it feel like the industry is being lambasted more than usual. Or maybe it's the increasing speed with which new technologies are being developed for the production of energy under difficult conditions that's creating that sensation.

Mounting environmental concerns
It's hard to shake the feeling that mounting concerns about the dangers of hydraulic fracturing, or fracking, coupled with residual disgust about the damage done in the Gulf of Mexico starting 16 months ago, will increasingly threaten our nation's ability to cost-effectively produce oil and gas. Indeed, a report released late last week by an Obama-created advisory panel established to advise the Environmental Protection Agency indicates that regulations covering fracking are on the verge of proliferating.

The report defers to the agency to recommend specific fracking oversight regulations, but it clearly sets a tone indicating a bevy of new rules and disclosure demands is on the horizon. "To say there are not serious environmental impacts is not sustainable. When you realize we may have several thousand such wells drilling in the U.S. over the next 20 years, it's important to get this right," said John Deutch, the panel's chairman and a former director of the CIA.

While he likely meant "realistic," rather than "sustainable," his point is well-taken. But members of environmental groups and the industry have already staked out polar opposite positions on the panel's composition and the basic thrust of the report. Representatives of the Environmental Working Group, for instance, claimed that the seven-member panel was excessively tied to the industry. As The Wall Street Journal noted, Deutch is a member of the board of Cheniere Energy (ASE: LNG) and previously served on Schlumberger's (NYS: SLB) board.

In a blog, Exxon expressed the opinion that "The short 90-day time frame meant the panel did not have a fair chance to examine carefully the concerns or challenge some of the assumptions about (fracking) that derive from emotional appeals rather than ... realities." In addition, the company said that from its perspective, the report " ... lacks an acknowledgement of ongoing industry and regulatory efforts, particularly state regulatory activities ..."

Amateur hour
I find I must take sides here regarding the panel's composition. While neither the companies nor the environmental organizations should be granted anything approaching exclusivity in the group, energy technology has become so complex so rapidly that more than a modicum of experience finding and producing oil and gas is hardly an expendable luxury for making a meaningful contribution to the panel's effort.

As to progress already made by some of the states (including Texas, Wyoming, Colorado, and Pennsylvania), it seems clearly preferable to opt for state-based regulation of fracking, rather than blanket rules derived at the federal level. If nothing else, it fosters specific rules for specific issues and permits a healthy exchange of ideas and experiences that will likely benefit the desire to "get it right."

The report follows a recent EPA disclosure of new federal air standards for wells on which hydraulic fracturing has been employed. At the same time, the agency has undertaken a study, which is expected to last two years, on the effects of fracking on drinking water. In 2005, when new Federal Energy Act statutes were issued, Congress prevented the inclusion of fracking. That's an omission I'm betting will be reversed.

Down in the mouth in the Gulf
The ongoing exodus of rigs from the Gulf of Mexico following the Macondo blowout was noted by Randall Luthi, president of the National Ocean Industries Association, at an Energy Information Administration conference. He also pointed to significant added costs resulting from new rules covering offshore drilling. Perhaps even more significantly, he said that, "We are now limited [until 2017] to looking for oil and gas in the same areas we have looked for 30."

That last message is perhaps the most daunting: At the precise time that offshore oil and gas are rapidly becoming more difficult to produce, the areas available to the industry for exploration and production are being squeezed. As such, it's an economic reaction, rather than a political one, when I scratch my head as I recall President Obama's March trip to Brazil, where he endorsed that country's increasing offshore energy presence and indicated our willingness to acquire the fruits of that effort. Huh?

Foolish bottom line
What does all this mean to you as a Foolish investor? Simply this: I urge Fools with a taste for energy to look carefully at such solid and successful independent producers asChesapeake Energy (NYS: CHK) and Brigham Exploration (NAS: BEXP) . However, the possibility of overkill in the domestic regulatory arena induces me to also suggest that well-managed and technologically sophisticated world travelers like Chevron also be included in your portfolio and on your version of My Watchlist.

At the time thisarticle was published Motley Fool newsletter services have recommended buying shares of Chevron and Chesapeake Energy. The Motley Fool owns shares of Schlumberger. Try any of our Foolish newsletter services free for 30 days.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares of any of the companies named in the article above. The Motley Fool has a disclosure policy.

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