The Frac Facts

by: Michael Filloon

Fraccing has caused concern in recent months. Reports of possible pollution have pushed down the stock prices of oil service companies levered towards pressure pumping:

  1. Basic Energy Services (NYSE:BAS)
  3. C&J Energy Services (CJES)

All three are down significantly since August of 2011, as uncertainty has hit the oil and gas service industry. Looking at growth estimates, all three of these stocks are a value. Wall Street isn't worried about whether fraccing is safe, it is worried about possible EPA regulations.

Fraccing is not a new technology. It has been used safely for decades. It is important to understand the process of horizontal drilling, to understand why this process is safe. Northern Oil and Gas has a very good video on this process that shows how little contact groundwater has with drilling fluids and zero contact with completion fluids. The most important variable is the casing, of which there are a several "layers" in each well.

  1. The first 30 to 60 feet the well is sealed off by the production casing, intermediate casing, surface casing, conductor casing, with mud and cement between each of these casings.
  2. The conductor casing terminates between 30 to 60 feet, and at 500 to 1500 feet the surface casing terminates.
  3. The intermediate casing terminates several thousand feet below the surface, which leaves the cemented production casing.

Even with all of these layers working as a barrier there can still be human error, but fraccing is a sound and proven process. There has been no documented findings of frac fluid in ground water. This was also found true in the late nineties when pollution related to coal bed methane production was not linked to fraccing, but the dumping of polluted water into rivers.

Each company has its own different recipe for frac fluid. Ingredients of this fluid have drawn heavy interest, as companies did not want the competition to get a hold of this valuable information. Other companies were happy to disclose, posted the information on the internet for all to see. All chemicals used at a well site must be listed in MSDS sheets on location, so it is not a big secret what is being used, more a question of how much. Frac fluid is 99% water and sand/proppant. Other chemicals such as biocides or friction reducers are a very small portion of this mix. Companies like Flotek (NYSE:FTK) have designed clean frac fluids that are biodegradable.

Environmentalists have complained that fraccing needs to be regulated. Fraccing is regulated by several federal acts and regulations, except for the Safe Drinking Water Act. Each state is responsible for regulating the oil and gas industry and how it affects drinking water. Fraccing is regulated closely as the state is known to check out well sites randomly, performing water tests and making sure regulations are being followed.

Approximately six million gallons of water are used to frac a single well in the Bakken. Of this, one million gallons will return from the well as flowback. There is more to this than just six million gallons of water. It takes twelve hundred truck loads to bring six million gallons of clean water to the well site. The one million gallons of flow back takes over 200 truck loads to disposal wells, where this flow back is dumped a mile under the ground. Heckmann Corp. (HEK) is a company that provides the service of disposing of frac water. Frac water disposal wells have also been linked to causing earthquakes. For this to occur the disposal well must be near a fault line. From what I understand all of the earthquakes have been minor.

The large amount of water used in fraccing has brought concern. The large amounts of fresh water used has already caused problems in the Eagle Ford and Marcellus shale areas. Water shortages have prompted the filtering of flow back to a purity level that can be re-used to frac new wells. Water filtration systems have been designed by companies like General Electric (NYSE:GE), which use either filters or chemicals to clean frac water. Ecosphere (OTCPK:ESPH) produces mobile water filtration units that use heat and oxygen to clean water, without the use of filters or chemicals.

In North Dakota there has been a significant issue with the use of reserve pits for the storage of flowback. Even when these pits are lined, it still can leak and pollute soil. Since these pits are in the ground it is difficult if not impossible to know if this has occurred. Companies like Poseidon Concepts (OTCPK:POOSF) provides frac water storage units that are above the ground, can be heated, and better handle problems with pollution.

The Bakken has been somewhat insulated from water problems associated with fraccing. North Dakota has a significant amount of water, and estimates show it should be able to handle fraccing the Bakken/Three Forks. Even when wells have blown, none have shown groundwater pollution associated with chemicals used for fraccing. There have been complaints of pollution from reserve pits, but the state is working on phasing these out. In my opinion the most pressing problem is with wasted water in the Bakken. Trucks can wait three to four hours at disposal wells, plus added congestion to the highways and county roads have been tough on state infrastructure. I am not one for regulation, but the recycling of water could have added benefits.

Disclosure: I am long OTCPK:ESPH, FTK.