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Commodities

Domestic Reserves of Natural Gas
To Go Untapped?

Democrats are rethinking policies allowing extraction of gas locked up in rock. An ExxonMobil venture hangs in the balance.

Stricter environmental oversight of natural gas drilling is in the works. Congress is poised to lift an exemption from safe drinking water rules for hydraulic fracturing, a process for extracting gas from shale formations by injecting a mix of sand, water and chemicals into the shale at high pressure.

The process promises to greatly expand domestic production of natural gas, increasing energy independence. Moreover, to the extent it encourages power companies to shift from coal to natural gas as a fuel for generating electricity, hydraulic fracturing could ease the shift to a lower carbon economy.

“This hydraulic fracturing is a technique that has made major advances in the past few years and totally changed the outlook for natural gas supply,” says William J. Hederman, senior vice president for energy policy at Concept Capital’s Washington Research Group.

But despite the technology’s promise as a way to help reduce greenhouse gas emissions, it is winning few friends among environmentalists and public health advocates. Critics have long alleged that the chemicals used in the process seep from the wells into the surrounding soil, contaminating the groundwater. In addition, drillers draw the large volumes of water they use in hydraulic fracturing from nearby rivers and streams, threatening agriculture, fishing and recreational businesses along those waterways. The issue has become particularly controversial in New York state, where any groundwater pollution could endanger the drinking water supply of New York City.

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The Bush administration’s Environmental Protection Agency released a study in 2004 concluding that hydraulic fracturing posed little or no risk of contamination to groundwater. The report was contradicted almost immediately by an EPA whistle-blower, who noted that five of the seven members of the report’s external review panel appeared to have conflicts of interest. Nevertheless, the Republican-led Congress followed the agency’s official position, waiving Safe Drinking Water Act requirements for companies using the process.

The Obama administration’s EPA is preparing its own study on the potential water contamination risks of hydraulic fracturing. That will provide congressional Democrats with much of the leverage they’ll need to repeal the waiver sometime next year.

As a result, vast reserves of shale gas may go untapped for years. Many independent drillers will abandon the effort rather than bear higher costs of safeguarding water. “Independents do most of the drilling in the U.S.,” says Frank Verrastro, director of the Energy and National Security Program at the Center for Strategic and International Studies. “If independents aren’t able to afford it, big majors could move in, but they also have LNG [liquefied natural gas] investments.”

But deep-pocketed energy firms may focus on LNG imports and other natural gas sources rather than spend extra resources to comply with stricter regulations. For example, Exxon Mobil Corp. last week announced that it would purchase Fort Worth, Texas-based XTO Energy for $31 billion. The merger agreement, however, includes a clause that would nullify the deal if Washington enacts legislation that would make hydraulic fracturing too costly.

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Rep. Ed Markey (D-MA), chairman of the energy and environment subcommittee of the House Energy and Commerce Committee, has already taken an interest. Markey says that, while the Exxon-XTO deal highlights the importance of natural gas to reducing America’s carbon footprint, “this proposed merger also raises a number of issues with respect to the future direction of the U.S. domestic oil and gas industry, competition within the industry, and the potential environmental impact of increased unconventional natural gas development.” He plans to hold hearings on the merger early next year.

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