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Analysts See Low Odds for Repeal of Hydrofracing Exemption

With much of the attention of Congress focused on climate change, odds are low that lawmakers will repeal the Safe Drinking Water Act (SDWA) exemption for hydraulic fracturing (hydrofracing) this year, said energy analysts with FBR Capital Markets last Wedneday.

"After extensive conversations with policymakers and industry sources, we believe that there is a much lower-than-expected likelihood that Congress will take action to curtail hydraulic fracturing in the next year and a half. In our view, there is a less than 35% probability that Congress will repeal the Safe Drinking Water Act exemption for hydraulic fracturing by the end of 2010," said analysts Benjamin Salisbury, Rehan Rashid and Robert MacKenzie of Arlington, VA-based FBR.

"We note that much of the attention of environmental policymakers is dedicated to climate change, and we do not anticipate rapid action [on hydrofracing]," they said.

In June Senate and House Democrats introduced bills to repeal the 2005 exemption from the SDWA for hydrofracing. The bill also would require oil and natural gas producers to disclose to the Environmental Protection Agency (EPA) the chemicals they use in their hydrofracing processes, although not the proprietary formulas unless there is a medical emergency (see NGI, June 15).

The Energy Policy Act of 2005 clarified that hydrofracing was not intended to be regulated under the SDWA, which seeks to protect the public water supply from toxic contamination. The oil and gas industry is the only industry exempted from the SDWA.

"We believe that momentum has shifted away from repealing the exemption toward a potential compromise that would require an extensive study of the threat posed by hydraulic fracturing," the FBR analysts said. The House in late June voted out a spending bill that calls on the EPA to study the risks of hydrofracing to the nation's drinking water (see NGI, June 29).

Producers contend that hydrofracing does not harm public drinking water and that stripping them of this exemption would stunt natural gas production, particularly from shale gas plays. Repealing the exemption for hydrofracing could add incremental initial costs of more than $100,000 per well for unconventional natural gas, according to the FBR analysts.

Hydrofracing involves the injection of fluids into wells at extremely high pressures to crack underground formations and stimulate the flow of oil and gas. More than 90% of oil and gas wells in the United States employ hydrofracing.

"We note the important role that affordable gas plays for U.S. manufacturing and, all else equal, expect Congress to carefully avoid disrupting natural gas production," the FBR analysts said. "The risk to this view is the increasingly negative news flow on fluid injection, which could swing public opinion and increase pressure on lawmakers."

Maintaining the status quo could be "incrementally positive" for producers leveraged to the shale plays that employ hydrofracing, such as Range Resources Corp., Southwestern Energy Co., Chesapeake Energy Corp., Petrohawk Energy Corp. and Comstock Resources Inc., and the leading hydrofracing services companies -- BJ Services Co., Halliburton Co. and Schlumberger Ltd.

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