Chesapeake Energy Chief Operating Officer Questions The EPA’s Fracking Findings

EPA Testing Wells Are Compromised

In my posi­tion, I reg­u­larly speak to my coun­ter­parts in our indus­try. When dis­cussing this mat­ter with indus­try sources, I have learned that the EPA’s test results should not be sur­pris­ing as the two mon­i­tor­ing wells used to col­lect sam­ples were drilled into hydrocarbon-bearing zones. As you know, ele­vated lev­els of methane and other petro­leum related com­pounds, such as ben­zene, are nat­u­rally occur­ring in such zones. The bot­tom line is frack­ing did not put them there, nature did. Fur­ther­more, when the EPA tested exist­ing domes­tic water wells in the area, they found no indi­ca­tion of any oil and gas impacts. Only when they drilled their own, much deeper mon­i­tor­ing well did they encounter the hydrocarbons.

EPA Doesn’t Fully Believe It’s Conclusions

It is impor­tant to note that through­out the report the Agency hedges its bets by reg­u­larly using words such as “likely” or “might” before address­ing key find­ings. In fact, the EPA’s own press release announc­ing the report says, “the draft report indi­cates that ground­wa­ter in the aquifer con­tains com­pounds likely asso­ci­ated with gas pro­duc­tion prac­tices, includ­ing hydraulic frac­tur­ing.” Unfor­tu­nately, many in the news media either inad­ver­tently or inten­tion­ally missed this nuance and reported a direct causal link between hydraulic frac­tur­ing and the com­pounds detected in two EPA-drilled mon­i­tor­ing wells.

EPA Released Results Without a Full Review

I also think it is impor­tant to point out that this draft report has not yet been sub­jected to the stan­dard scrutiny of a sci­en­tific peer review, and its alleged “find­ings” will almost assuredly not with­stand that process. The way this release was han­dled seems to any objec­tive observer to point to the EPA being more inter­ested in their PR strat­egy and in estab­lish­ing a con­nec­tion between hydraulic frac­tur­ing and water con­t­a­m­i­na­tion than in find­ing the truth.

Why You as An Investor Should Consider Investing in Unconventional Energy Players

Before you invest in companies like Chesapeake that rely on hydraulic fracturing you need to be comfortable with the process. I am, as I believe it can be done safely. That doesn’t mean that I think accidents won’t happen, but there are thousands of these wells drilled every year and so far we have one (maybe) instance of contamination.

Now the reason I am focused on these companies is the huge upside option that they provide relating to further improvements in technology. The unconventional plays that these companies produce oil and gas from contain enormous amounts of oil and gas in the ground. Current technologies, which have made these plays commercially viable, still only recover a fraction of that oil.

Imagine the increase in value of these companies if the technology continues to improve and more of that oil and gas is recoverable. Recoverable reserves increase, but there are no additional land costs and very little incremental infrastructure costs.

Consider a company like EOG Resources (EOG).

EOG estimates that there are approximately 21 billion barrels of oil within EOG’s 561,000 Eagle Ford acres. EOG’s current stated recoverable amount from the Eagle Ford is 900 million barrels. That represents only about a 4.3% recovery factor.

Now what happens if EOG increases that recover factor by only 1%? A 4.3% recovery factor means 900 million barrels to EOG. A 5.3% recover factor would increase recoverable oil by almost 20%, which in this case is an incremental 200 million barrels.

This is where the next homerun will come from in the energy industry. Learning how to extract more oil from these unconventional plays.

It all comes down to real estate. Either you have locked up land with huge amounts of oil in place on these unconventional plays or you haven’t. As these relatively new technologies continue to develop that land is only going to increase in value.

Whether that increase in recovery comes from downspacing, water flooding, new fracking techniques I don’t know. The industry will figure that out through trial and error.

Disclosure: I am long CHK.

H/T: Canadian Value