Chesapeake Energy Corporation (CHK), Gulfport Energy Corporation (GPOR), CONSOL Energy Inc. (CNX) – Fracking, Earthquakes, and Ohio: How Regulators are Responding

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Source: Wikimedia Commons

California, Alaska, even Hawai’i. These are the states that people normally associate with earthquake activity. Until recently, Ohio was most certainly not on that list. But over the past two years, that’s changed.

Take Youngstown, Ohio, for example, which was highlighted in a Slate article  last month. The city had experienced exactly zero earthquakes from 1776—when the state started keeping records–to 2011. But between January 2011 and February of 2012, the city had 109 earthquakes.

Though none caused any serious damage, it reveals a disturbing trend, and one that many now believe is being caused by the disposal of water used in the fracking process.

Government study unambiguous as to the culprit: fracking

In July, the U.S. Geological Service came out with a study that showed—in no uncertain terms—that the recent activity in Ohio and other eastern states is no fluke, with a huge deviation from normal starting to occur around 2006.

Source: USGS

Fracking itself isn’t necessarily to blame. Instead, the report argues, “at some locations the increase in seismicity coincides with the injection of wastewater in deep disposal wells .”

Wastewater is what’s left after the fracking process is done. Oil and gas companies have a responsibility to get as much of the water used in fracking out of the ground as possible. That water is then either treated, or disposed of into government approved “injection wells”.

Because of water’s weight, when these injection wells are filled, they can put enormous strain on tectonic fault lines, causing earthquakes as a means of relieving that stress.

Response from Ohio lawmakers

Because Ohio is among the top five states with natural gas wells, and because it also has several injection wells, state lawmakers are taking notice.

In May, a group of three state Democrats introduced a bill  that proposes a ban on all injection wells within the state–where 178 of them are currently located.

Outside of the earthquake fears, lawmakers are also making moves to force companies extracting oil and natural gas to be more transparent into what chemicals are being used in the fracking process. A bill  introduced in February would make it mandatory for companies to disclose all ingredients in fracking materials to medical staff and emergency responders—including “trade secret” ingredients, which are usually exempt from reporting.

How this could affect your investments

The five largest natural gas players with operations in Ohio as of the end of 2012—from most to least—are Chesapeake Energy Corporation (NYSE:CHK)Gulfport Energy Corporation (NASDAQ:GPOR)CONSOL Energy Inc. (NYSE:CNX)Hess Corp. (NYSE:HES), and Devon Energy Corp (NYSE:DVN).

Three of these companies don’t stand to lose much if legislation makes it more difficult or prohibitive to frack or dispose of wastewater in Ohio.

Chesapeake Energy Corporation (NYSE:CHK) had rights to 1.3 million acres in Ohio as of April, and recently saw a jump in liquids production from the Marcellus shale. But that area represents just a fraction of the company’s 46,000 wells.

Devon Energy Corp (NYSE:DVN) is also geographically diverse.  In January, the company put 240,000 of its acres in Ohio up for sale, and didn’t address Ohio operations at all in its most recent earnings call .

And though Hess Corp. (NYSE:HES) recently announced it was building a natural gas pipeline in Ohio, it also has a diverse enough base–including operations in the Bakken shale, Norway, and Russia–to avoid suffering any major losses due to unfavorable legislation.

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