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
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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