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SandRidge Energy Inc. (SD): One Big Risk That Has Energy Companies Quaking

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Exploring for oil and gas is an inherently risky business. Producers first need to find commercially viable resources and then extract them at great cost. They do this while being mindful of their environmental surroundings as well as their shareholders’ expectations. With great expectations comes great pressure.

SandRidge Energy Inc. (NYSE:SD)

One of the most hotly contested pressure points surrounds the use of water. Oil and gas production requires lots of water, with hydraulic fracturing requiring several million gallons of water per well in many cases. Not only are there issues surrounding the use fresh water in the process, but an emerging issue is what to do with all that water after it’s been used in the drilling process.

The water used in fracking not only contains sand, but there is a real environmental concern about the chemicals used in the process. Once that water comes back up it needs to go somewhere and it needs to go there in a safe, secure, and environmentally responsible manner. The problem is that the current solution, wastewater disposal wells, could potentially create an even bigger problem: earthquakes.

Researchers now believe that a 5.7-magnitude quake near Prague, Okla., on Nov. 6, 2011, can be directly linked to disposal wells from oil and gas drilling. Overall seismic activity in the middle of the country had averaged about 21 seismic events per year from 1970 to 2000. However, there has been a significant increase in seismic events over the past few years with 50 events recorded in 2009, 87 in 2010 and 134 in 2011.

There have been rumblings in the past that energy production is linked to an increase in seismic activity. According to a recent article in The Wall Street Journal, one of the more profound examples of this can be found in The Netherlands. The linkage between production and seismic activity is such that the region’s top natural gas producer, a joint venture between Royal Dutch Shell plc (ADR) (NYSE:RDS.A) and Exxon Mobil Corporation (NYSE:XOM), doesn’t deny that its activity causes the quakes. In fact, it’s even willing to compensate area property owners for the damage. As you can see from the map below, it would be tough to deny that there is no link between production and seismic activity:

Source: The Wall Street Journal

In the U.S. most of the quakes haven’t been linked to drilling of oil and gas but instead to the disposal of wastewater from the process. This is risk that should have energy companies quaking; however, with risk comes opportunity, and one company is emerging with a solution to the problem.

Before we get to that company, let’s drill down into the wastewater disposal problem. In the Oklahoma quake, it’s believed that fluids from conventional drilling, not hydraulic fracturing, were the culprit. Energy companies had been pumping the fluids that result from the drilling process into abandoned wells for the nearly two decades. By 2006, pressure in these underground holding areas began to escalate as the wells began to fill up. This buildup of pressure, according to researchers, caused a series of earthquakes through 2011 with the largest one registering 5.7 in magnitude.

The evidence is not conclusive and many, including the state’s geological survey, disagree. However, that same evidence is compelling, and its occurrence is not limited to Oklahoma. Early last year Ohio had to suspend drilling wastewater disposal wells after a series of earthquakes centered on a disposal well. The largest quake, which registered 4.0 in magnitude, occurred on Dec. 11, 2011.

This could be a big blow to energy production and oil-field service companies which have spent billions to get rid of all the water used in oil and gas production. The industry has more than 150,000 active disposal wells, and more being drilled every year.

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