The need for higher standards in emerging shale plays could push some companies out of the business, a Talisman Energy Inc. executive told a Philadelphia audience Thursday.

The natural gas industry “cannot and should not wait for regulations to raise the bar,” Paul Smith, executive vice president of North American operations for Talisman, said at the Shale Gas Insight 2011 conference hosted by the Marcellus Shale Coalition.

“In the eyes of our stakeholders, I am a firm believer that all of us in this industry are only as good as the operator with the lowest standards, and this poses a major challenge in a fragmented industry with hundreds of shale gas operators,” he said. “I believe further industry consolidation is inevitable, as industry and regulators come together to raise the bar on what is required to responsibly develop this unique resource for generations to come.”

Although many of the largest shale producers now disclose the chemicals they add to hydraulic fracturing fluids, “local regulators will need to enforce disclosure in order to force reluctant players to join the rest of the industry,” Smith said (see Shale Daily, Sept. 8a; April 13).

He also said that the industry should be working toward recycling 100% of the water it uses for operations “and nothing less,” a goal that Talisman has “almost achieved” in the Marcellus. In addition to recycling, he said companies should be considering innovative water sourcing solutions, such as the water pipeline Talisman built in western Canada. But, he added, the U.S. Environmental Protection Agency could help by making it easier to permit and use injection wells to eliminate the need for water disposal facilities.

Generally, though, Smith said regulations should stay at the state level because of the geological differences not only between basins, but also within basins. He added, though, that regulations at the local municipal level could cause “too much fragmentation.”

The industry, he said, should collaborate to create best practices for development. “It is important to note there is not a one size fits all to well integrity best practices,” he said.

Smith did not say what direction he thought any future consolidation of the industry might take, but until now it has involved big players buying the assets of midsized players.

Some of the bigger deals in the Marcellus and Utica shales include Chevron Corp. acquiring assets from Atlas Energy Inc. and Chief Oil and Gas Corp.; ExxonMobil Corp. buying XTO Energy Inc.; Shell Oil buying East Resources Inc.; and joint ventures such as this week’s deal between Hess Corp. and CONSOL Energy Inc., which are partnering in the Utica (see Shale Daily, Sept. 8b; May 25).

Talisman, based in Calgary, is one of the largest companies operating in the Marcellus. The company finished 2010 producing 315 MMcf/d and expects to beat its guidance of 350-400 MMcf/d for this year.

Talisman took an unusual approach to the Marcellus by building midstream infrastructure to support its drilling and by signing long-term supply contracts early, both ways of making sure the company could sell its natural gas production as quickly as possible, Smith said.

But that production could be jeopardized by a severance tax, Smith said, because the dry gas corridor of northeastern Pennsylvania — home to most production and drilling — is marginal at current prices. “The idea of a severance tax should only be introduced in the right format and at the right time and this is not the right format or the right time.”