Investing in Fracking

Brian Hicks

Written By Brian Hicks

Posted March 10, 2014

Hydraulic fracturing, commonly known as “fracking,” is the drilling method that uses huge amounts of high-pressure, chemical-infused water and sand to free oil and natural gas deep within shale rocks beneath the Earth’s surface. It’s a process that has made a lot of us a lot of money, and some would say it helped save the U.S. economy from certain ruin.

Still, fracking has seen better days. Even with frequent technological developments and an added emphasis on safety and health standards, environmental groups are broadly opposed to the practice even if it’s actually for a net benefit.

You see, we’re still learning about the environmental impact it presents. There is no scientific proof that fracking creates any greater of a threat of pollution or health than our current dominant form of energy: coal.

With the explosive U.S. shale revolution, natural gas could take over as the leading generator of electrical energy over coal. Without fracking, there is no shale boom, and with no shale boom, we’re still stuck relying on coal – a dirty, washed up resource that is old and extremely pollutant.

The problem is: most Americans, according to a University of Texas study, found that 59 percent of us aren’t even familiar with the term “fracking.” Among those who are, 47.5 percent are in support of the process, while just 35.7 percent are opposed. That support exceeds opposition in all shale gas states except for New York.

But it looks like the fight against fracking has gone Hollywood on us. Just south of Dodger stadium is the Los Angeles City Oil Field that stretches about four miles, and the people there have had enough.
Los Angeles as a whole has 1,880 active wells and 2,932 that are abandoned, according to the California Department of Conservation.

In the News

By the end of last week, the Los Angeles City Council had spoken. Following a 10-0 vote to impose a moratorium on fracking, the council took further action to authorize a change in local land-use laws that would outlaw the practice in full.

All activity associated with well stimulation, including fracking, gravel packing, acidizing, and any combination thereof, including the use of waste disposal injection wells, would become strictly prohibited and punishable by law.

This would make the city of Los Angeles the only oil-producing city in California to ban the use of hydraulic fracturing, or fracking.

The vote has been spurred on by community groups who have campaigned against fracking for the better part of the last ten years.

Council members have said they will take this effort to other cities, extending an olive branch to places like New York and Dallas, where challengers have been successfully fought off by oil companies.

The moratorium will be upheld until the city of Los Angeles can verify that no harm will come to the public or its drinking water. It could potentially ignite a statewide ban on fracking.

The next step is for the moratorium to move to the city attorney’s office to become a zoning ordinance, and then will return back to the council for a final vote.

The Controversy

Maybe it’s not such a bad idea to ban fracking in place like Los Angeles.

It is in an urban setting, after all, and it definitely would be hazardous to small children and to those who are unknowing. And where there are people, there are bound to be problems, no matter the operation.
Supporters of the ban argue that fracking creates a negative impact on human and environmental health. InCalifornia, the environment is a primary concern. Seismic activity is already a huge issue, and a drought never before seen in the state’s history is chopping down agriculture.

A single well can use millions of gallons of fresh water, something California can ill afford to relinquish.

There are studies that link fracking to cancer, fetal health defects, damage to the endocrine system, and other chronic health threats. Of course, all of this evidence is non-concrete. Still, it leads to talk, and that leads to speculation.

As for acidizing and gravel packing, fracking opponents contend that it harms the skin and eyes, and creates respiratory problems, and can damage tools used in the processes.

The Investment

Because California is sliced by the San Andreas fault where two tectonic plates meet, it is prone to frequent underground disruption. There was a magnitude 6.9 earthquake just off the coast this very weekend. It might not be such a bad idea to think twice about fracking there since intense underground mining operations around the world have been shown to trigger small to moderate earthquakes.

Yet as energy investors, we can’t help but sing the praises of fracking. As a result, we need to be cognizant of its drawbacks when we look for money-making opportunities.

With or without California, production – especially of natural gas – has ignited a renaissance in manufacturing, as companies are turning to natural gas to meet their energy needs.

That means fracking is here to stay. Sand suppliers like U.S. Silica Holdings, Inc. (NYSE: SLCA) are going to be strong; look out for BASF (OTC: BASFY), the chemical company, and pipeline manufacturers like Kinder Morgan (NYSE: KMI).

As for California, companies operating there, which predominantly consist of Western States Petroleum Association (WSPA) members, are going to be looking to re-strategize their positions in that state. But it’s no cause for alarm.

We should remain optimistic, no matter what direction the fracking landscape may take. Shale gas and oil production need to be regulated, and the enormous benefits for Americans that fracking brings need to be realized.

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