If you are invested in Cheapeake Energy (CHK), EOG, Exxon (XOM), Statoil (STO), Total (TOT) and virtually any other E&P these days, you are invested in a company for which hydraulic fracturing is going to be important going forward. “Fracking” has opened up all kinds of previously uneconomic oil and gas resources trapped inside rocks. I’ve actually been focusing on buying some Canadian unconventional players as I believe the value of their assets are undervalued and that value will increase over time as technology continues to improve. Invest in the companies that have locked up exposure to vast amounts of oil in place and let them figure out a way to get more oil out. My favorites are Petrobank Energy (PBEGF.PK), Penn West Energy (PWE), Skywest Energy (SKYW) and Westfire Energy (WFREF.PK). One thing that has troubled me somewhat though are the fairly frequent headlines that suggest hydraulic fracturing (which is key in exploiting unconventional resources) should be stopped. For example, France has banned fracking over concerns about what it might do to ground water, whjle the Canadian province of Quebec has done the same thing as they study the safety of fracking. These actions certainly have to get an investor’s attention, but when you spend some time actually reading about fracking and the history of it, you have to wonder if these bans aren’t the result of hysteria created by people who know little about the process.
Consider the following:
- In order to reach underground water, companies would have to penetrate 10,000 feet of rock or more with their fracturing. The actual fractures struggle to permeate 100 feet of rock.
- When you see people lighting their water on fire in a video, you need to realize that this has nothing to do with fracking; it has to do with a faulty cement job on the well. Thousands of wells have been drilled in North America conventionally that could cause the same problem.
- The depth of most unconventional resource deposits is between 6,000 and 10,000 feet. The depth of most underground aquifers is 500 feet. As mentioned before, the fracking is not even close to the water.
- The rock in between the thousands of feet from where the water is to where the fracking occurs is completely impermeable. If it wasn’t, the gas or oil would never have been trapped in place to begin with.
- Environmentalists looking to stir up hysteria over the process like to list all of the chemicals that are in a fracking treatment. What they don’t tell you is that 99.5% of the treatment is water and sand.
- It is vitally important to the oil companies to keep their fractures within a small 100-foot area; otherwise, they lose control of their production as other zones contaminate the process.
- Hydraulic fracturing has been used by the oil and gas industry since the 1940s.
Not for a second do I think that I can do this subject justice. But if you are an oil and gas investor, you need to understand the process. Once you do, it is pretty clear that this process is not something to be worried about. One great source to learn more on the subject is supplied by Chesapeake Energy, which links you to all kinds of third-party information. What we are seeing is that regions that are unfamiliar with the oil and gas industry like France and Quebec listen to the extreme views and not a rational review of the facts. When an actual unbiased investigation into fracking is conducted -- such as that by the House of Commons Energy and Climate Change Committee in the UK -- the conclusion on fracking tends to be as follows:
We conclude that hydraulic fracturing itself does not pose a direct risk to water aquifers, provided that the well-casing is intact before this commences. Rather, any risks that do arise are related to the integrity of the well, and are no different to issues encountered when exploring for hydrocarbons in conventional geological formations. We recommend that the Health and Safety Executive test the integrity of wells before allowing the licensing of drilling activity.
Society tends to assume that anything related to the oil industry is evil. A few hours' reading can convince a person otherwise about hydraulic fracturing.