Fracking, Earthquakes, and Ohio: How Regulators are Responding


Source: Wikimedia Commons

California, Alaska, even Hawai'i. These are the states that people normally associate with earthquake activity. Until recently, Ohio was most certainly not on that list. But over the past two years, that's changed.

Take Youngstown, Ohio, for example, which was highlighted in a Slate article last month. The city had experienced exactly zero earthquakes from 1776—when the state started keeping records--to 2011. But between January 2011 and February of 2012, the city had 109 earthquakes.

Though none caused any serious damage, it reveals a disturbing trend, and one that many now believe is being caused by the disposal of water used in the fracking process.

Government study unambiguous as to the culprit: fracking
In July, the U.S. Geological Service came out with a study that showed—in no uncertain terms—that the recent activity in Ohio and other eastern states is no fluke, with a huge deviation from normal starting to occur around 2006.

Source: USGS

Fracking itself isn't necessarily to blame. Instead, the report argues, "at some locations the increase in seismicity coincides with the injection of wastewater in deep disposal wells ."

Wastewater is what's left after the fracking process is done. Oil and gas companies have a responsibility to get as much of the water used in fracking out of the ground as possible. That water is then either treated, or disposed of into government approved "injection wells".

Because of water's weight, when these injection wells are filled, they can put enormous strain on tectonic fault lines, causing earthquakes as a means of relieving that stress.

Response from Ohio lawmakers
Because Ohio is among the top five states with natural gas wells, and because it also has several injection wells, state lawmakers are taking notice.

In May, a group of three state Democrats introduced a bill that proposes a ban on all injection wells within the state--where 178 of them are currently located.

Outside of the earthquake fears, lawmakers are also making moves to force companies extracting oil and natural gas to be more transparent into what chemicals are being used in the fracking process. A bill introduced in February would make it mandatory for companies to disclose all ingredients in fracking materials to medical staff and emergency responders—including "trade secret" ingredients, which are usually exempt from reporting.

How this could affect your investments
The five largest natural gas players with operations in Ohio as of the end of 2012—from most to least—are Chesapeake Energy , Gulfport Energy , Consol Energy , Hess , and Devon Energy .

Three of these companies don't stand to lose much if legislation makes it more difficult or prohibitive to frack or dispose of wastewater in Ohio.

Chesapeake had rights to 1.3 million acres in Ohio as of April, and recently saw a jump in liquids production from the Marcellus shale. But that area represents just a fraction of the company's 46,000 wells.

Devon is also geographically diverse. In January, the company put 240,000 of its acres in Ohio up for sale, and didn't address Ohio operations at all in its most recent earnings call .

And though Hess recently announced it was building a natural gas pipeline in Ohio, it also has a diverse enough base--including operations in the Bakken shale, Norway, and Russia--to avoid suffering any major losses due to unfavorable legislation.

Consol is slightly more susceptible to legislative changes, as it has a heavy footprint in Ohio. Consol owned 83,000 acres in Ohio at the end of 2013, and hopes to have commenced drilling on 16 wells in the area by year's end. The company also, however, has coal operations, and at the end of 2012, gas contributed just 13% of total revenues .

Gulfport is the company that has the most riding on Ohio. Though the company's primary operations are in Louisiana--where it plans to drill 36 wells during 2013--it has purchased 136,000 acres of land in Ohio. The company believes that well productivity on this land will spur future growth, as it hopes to drill 60 new wells in Ohio in 2013.

In the end though, I consider it highly unlikely that moves on chemical disclosures or injection wells would be a death blow to either company. Most likely, they would have to spend a little more money to transport their wastewater to another state which does allow injection wells.

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Fool contributor Brian Stoffel has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy and has the following options: long January 2014 $30 calls on Chesapeake Energy. 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. The Motley Fool has a disclosure policy.

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