The EPA May Be About to Step on the Gas

In late 2011 The Wall Street Journal noted, regarding the potential for an overzealous Environmental Protection Agency to bring about a moratorium on U.S. fracking, "The agency is dominated by the anticarbon true believers, and the Obama Administration has waged a campaign to raise the price and limit the production of fossil fuels."

Questionable findings
If you recall that phraseology, you probably also remember that the Journal's scathing assessment of the agency resulted from an EPA "draft" report indicating that hydraulic fracturing may have contaminated the drinking water in Pavillion, Wyoming, a metropolis whose 175 citizens constitute a grouping a quarter the size of my high school class. While "fracking" in the area may indeed have been the result of the drilling of about 100 wells by EnCana (NYS: ECA) , there are a couple of elements in the draft that give one pause:

  • The EPA maintains that it found 2-butoxyethyl phosphate in the town's drinking water. Fortunately -- or unfortunately -- 2-BE is a fire retardant not typically associated with oil and gas, but it is common in plastics used in drinking wells.

  • While the fracking near Pavillion generally occurs at depths between 1,000 feet and 1,500 feet -- far above the 10,000-foot minimums in most venues -- it nevertheless is conducted well below water tables that are normally no more than 500 feet deep. As such, and as I've noted in past Foolish articles, one industry expert has pointed out that "it would defy physics" for fracking chemicals to make their way into groundwater.

Whatever its cause, however, the Wyoming controversy wasn't the only fracking-related incident to rear its ugly head in the past year. Last April, for instance, Chesapeake Energy (NYS: CHK) -- the nation's second-largest producer of natural gas and the proverbial parent of many of the nation's unconventional drilling plays -- had a well get away in Bradford County, Pennsylvania, beneath which sits the Marcellus Shale. The errant well was brought under control with the help of a Halliburton (NYS: HAL) unit, but not before it had spilled chemically treated water into a creek 150 miles northwest of Philadelphia.

The brewing federal-state battle
While the list of mishaps is likely to lengthen, given the nature of oil and gas production, the key question that has emerged for the world of fracking -- which has boosted U.S. gas reserves exponentially -- is who will end up holding the regulatory billy club over the industry. The contest is between the states and the joint efforts of the Interior Department and the EPA. For the sake of perspective, in 2005 Congress made it clear that its intent was not that the EPA should control hydraulic fracturing under the Safe Drinking Water Act. You won't be surprised to learn that the states prefer to maintain their individual controls.

Nevertheless, at the incessant prodding of a host of environmental groups, the EPA has taken the skirmish above ground, where its authority is less questionable. Next week -- Tuesday the 17th, to be precise -- the agency will issue a final set of regulations relating to air emissions emanating from oil and natural-gas drilling and completion operations. According to EPA predictions, the new regs will reduce volatile organic compound emissions from fracking operations by 25%, air toxics by a number approaching 30%, and methane by about 26%.

Apparently a major part of the anticipated regs will involve requiring the industry to perform "green completions," which, according to a spokesman for one environmental group, will prove cost-effective by permitting the companies to capture the methane that now is wafting into the atmosphere. Devon Energy (NYS: DVN) has routinely used such techniques in Texas' Barnett Shale -- among other sites -- for nigh onto a decade. The process involves employing portable equipment to capture for resale much of the methane that would otherwise escape.

The Grand Old Party and the frackers
But the Feds are hardly free to impose their fracking edicts across the board. Indeed, they're receiving enemy fire from both Senate Republicans and industry types. Oklahoma's James Inhofe, the ranking Republican on the Senate Committee on Environment and Public Works, is leading the charge -- backed by seven of his compatriots -- by introducing legislation that would put the brakes on the administration's attempts to further meddle in fracking.

The bill mandates that only the states may exercise regulatory authority over hydraulic fracturing on federal lands within their boundaries. As Inhofe has said, "States better understand their unique geologies and interests."

The GOP Senators' bill isn't likely to go far, but it establishes the party's bona fides as supporters of the energy industry and the jobs it provides. Furthermore, the group is receiving active cover from industry types, including ExxonMobil (NYS: XOM) CEO Rex Tillerson, who carried a banner for state-controlled regulation at his company's annual analyst conference last month. "Our regulatory process has become so complicated by so many duplicative agencies, by so many mandates from Congress, that now it has become a way to stop things from happening," he said.

Jack Dalrymple, the Republican governor of North Dakota, the primary locus of the prolific Bakken Shale, has chimed in with the observation that EPA restrictions on fracking "would have a huge economic impact on our state's energy development. We believe strongly that this should be regulated by the states."

The Foolish bottom line
It's clear that the 10th amendment to the U.S. Constitution -- which limits the powers of the federal government to those delegated to it by that same constitution -- has essentially been shunted aside by the current administration. Nevertheless, it's unlikely that the de facto coalition of the states and the industry will go down without a fight in the expanding fracking fracas.

As such, energy investors -- ideally all Fools -- would be well-advised to keep close tabs on this battle by clicking on the links below and adding the companies named above to their personalized watchlists.

At the time thisarticle was published Fool contributorDavid Lee Smithdoesn't own shares of any of the companies named in this article. The Motley Fool owns shares of Devon Energy.Motley Fool newsletter serviceshave recommended buying shares of Chesapeake Energy, Devon Energy, and ExxonMobil. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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