Thursday, August 25, 2011

SEC Looking at Potential Risks Fracking Could Pose to Investors

The Securities and Exchange Commission (SEC) has been investigating whether companies are overstating the long-term productivity of their natural-gas wells.  Now the SEC  is asking oil and gas companies to provide it with detailed information, including chemicals used and efforts to minimize environmental impact, particularly water usage, about their use of a controversial drilling process used to crack open natural gas trapped in rocks. The SEC's interest in fracking is in ensuring investors are being told about risks a company may face related to its operations, such as lawsuits, compliance costs or other uncertainties. 

Other federal agencies like the Environmental Protection Agency are collecting information about fracking, but those efforts are separate from the SEC.  In addition to a fracking study being conducted by the EPA, the Department of Energy and the Interior Department have also been examining the practice. Some states have fined drilling companies for environmental problems.

The SEC's requests drew criticism from some in the industry about potential regulatory overkill.  The process, which involves pumping water, chemicals and sand underground to free difficult-to-reach natural gas in shale basins, has come under criticism from environmental groups ad some lawmakers over concerns toxins in the mix may contaminate air and water. Fracking fluids include some toxic chemicals, based on company disclosures of chemicals such as benzene and formaldehyde for congressional reports and at voluntary disclosure sites.

The SEC is the federal government's investor-and-markets watchdog and is stepping into the heated environmental debate surrounding hydraulic fracturing, or "fracking."  State and federal environmental officials have also been putting greater pressure on the industry.  For the moment, the SEC isn't requiring broad, standardized disclosure of fracking information to the public. Instead, oil and gas companies are being asked by the agency's office that oversees corporate disclosure to supply information confidentially to the SEC, and the agency, in turn, will likely require them to publicly disclose some of that information.

Natural gas currently provides about 25% of total U.S. energy and is projected to increase to 45% by 2035, according to the U.S. Energy Information Administration.

Battles over disclosure have already broken out at the state level, including in states such as New York and Pennsylvania that sit on the giant Marcellus Shale, an underground formation that has become a fracking hotbed because of the large quantities of natural gas there. Regulators in several states have identified cases in which drilling—although not necessarily the fracturing process in particular—has allowed natural gas to seep into residential water wells, and at least one scientific study has linked drilling and gas contamination more broadly. But there have been few if any documented cases of contamination by the chemicals used in hydraulic fracturing. The industry acknowledges that improperly constructed wells can allow gas to escape, but says such cases are rare and aren't directly tied to fracturing itself.

Fracking is primarily regulated by states and is largely exempt from some federal statutes, such as the Safe Water Drinking Act. The EPA's study on whether fracking affects drinking water is to be released at the end of 2012. For the study, nine companies provided information on the chemicals they use after an agency request last year. (WSJ, 8/25/2011)

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