Possible Fracking-Earthquake Link Could Challenge Oil And Gas Industry

Includes: APC, CHK, DVN
by: Daniel Jennings


Several earthquakes in the central United States were caused by fracking, a US Geological Survey geophysicist has concluded.

The fracking-earthquake claims could become the basis of lawsuits against oil and gas drillers.

Earthquake fears could fuel anti-fracking hysteria that could lead to bans or restrictions.

Recent scientific research about hydraulic fracking's link to earthquakes could lead to massive new lawsuits against oil and gas producers. The tentative research could also affect the producers of oil and gas development in the U.S. and the value of energy stocks.

A growing number of scientists believe that there could be a link between fracking operations and earthquakes, recent news stories indicate. The evidence is far from conclusive, but it is compelling. The most interesting claims about fracking and earthquakes include the following:

· Several large earthquakes in the central U.S. were caused by the wastewater injection process used in some fracking operations, United States Geological Survey (USGS) geophysicist William L. Ellsworth concluded in a July 2013 paper for the journal Science. The largest of these quakes destroyed 14 homes and injured two people in Central Oklahoma.

· Oklahoma experienced 238 earthquakes between January and November of 2013, Reuters reported. One hundred of those quakes were 3.0 on the Richter scale or higher. The state experienced only three earthquakes of more than 3.0 between 1991 and 2008. The amount of fracking in Oklahoma increased by 50% between 2000 and 2012.

· The number of earthquakes in the central and eastern U.S. has jumped dramatically in recent years, the USGS reported. The agency recorded 450 quakes of more than 3.0 on the Richter scale between 2010 and 2013. In contrast, there were only around 20 earthquakes of that magnitude a year between 1970 and 2000.

· The Ohio Department of Natural Resources has issued new guidelines for drilling operations in that state that are designed to limit the potential of quakes, Reuters reported.

· The likelihood of fracking-induced quakes has convinced Ray Beiersdorfer, a geologist at Youngstown State University in Ohio, that oil and gas drillers should be required to put up a bond to cover potential damage, NBC News reported.

Fracking and Earthquakes: The Good News and the Bad News for the Oil and Gas Investor

There's good and bad news for oil and gas investors in the fracking earthquake debate. The good news is that only a small percentage of fracked wells produced earthquakes, Ellsworth found. That indicates drilling could be modified to alleviate the danger.

The bad news is that even a suspected connection between earthquakes and fracking could greatly increase liabilities and legal costs for oil and gas producers. Courts are already handing down anti-fracking verdicts based on questionable science.

A Texas jury awarded a couple that claimed fumes from a drilling site made them sick $3 million in April. The evidence presented in that case was far from conclusive. The evidence for the fracking earthquake connection actually seems a little more conclusive.

It is not hard to imagine juries siding with property owners that claim their homes or businesses were damaged by earthquakes caused by fracking. Juries are, after all, swayed by emotion and rhetoric, not science. The average juror is much more likely to side with Joe the homeowner than the big bad oil company.

Fracking-Earthquake Lawsuits Likely

Lawsuits over fracking quakes are likely because most homeowners' policies don't cover earthquake damage. Earthquake damage, as California residents know, is covered by a separate policy.

Most people outside California don't have earthquake insurance. To make matters worse, earthquake insurance might not cover manmade earthquakes. That means lawsuits might be property owners' only means of raising funds to cover damage costs.

The Texas case provides a template for fracking-quake suits. The attorneys in that case argued successfully that drillers deprived homeowners of their property rights. The same tactic could easily be used in a quake case.

Earthquake Fears Could Lead to More Calls for Fracking Bans

Fear of property damage caused by earthquakes would be a powerful tool in the arsenal of fracking's political foes. Homeowners, real estate investors, and others that might not normally listen to environmentalists might side with them to protect their investments.

Another argument that foes will probably employ is that fracking quakes would lower property values or raise insurance rates. All critics would need for these arguments is a few good propagandists and a little circumstantial evidence, which already exists.

The earthquake fears are only going to fuel the demand for bans or restrictions on fracking. That could create an interesting opportunity for investors by restricting the supply of oil and gas and raising the value of existing wells. That might benefit those companies that got in on the shale boom early.

One Producer Could Benefit

It could also raise the value of companies with lots of producing wells such as Devon Energy (NYSE: DVN), which has 5,300 producing wells in the Barnet Shale alone. Devon also owns 1,450 producing wells in the Anadarko Basin.

Devon is already benefiting from the energy boom in a big way. Its TTM revenue rose from $8.97 billion in March 2013 to $12.15 billion in March 2014. That's an increase of $3.18 billion in a year.

Losers could be companies that are making big shale plays right now, such as Chesapeake Energy (NYSE: CHK) and Anadarko Petroleum (NYSE: APC). These companies are doing real well right now; Anadarko's TTM revenue went from $13.86 billion in March 2013 to $16.53 billion in March 2014, an increase of $2.67 billion. Chesapeake's TTM revenue picture is even brighter; it reported a TTM figure of $13.32 billion in March 2013 and one of $19.13 billion in March 2014, an increase of $5.81 billion.

Limitations on drilling created by earthquake fears might benefit all three of these drillers by making their existing wells more valuable and by increasing drilling costs, which could give large operators with lots of cash a competitive advantage. The scope of such benefits remains to be seen.

The fear of fracking-induced earthquakes is going to affect the way oil and gas producers do business. The extent of those changes and those fears remains to be seen.

Disclosure: I am long CHK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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