Over the past three years, major oil and gas companies have invested billions of dollars in natural gas exploration in the U.S., using hydraulic fracturing to develop oil and gas shale deposits in difficult-to-access regions. Both Kohlberg Kravis Roberts & Co. LP and Blackstone Group LP have embarked on joint ventures to harness the shale deposits.
But hydraulic fracturing -- more commonly known as fracking -- has also been linked to a host of environmental hazards. The technique involves forcing enormous quantities of water, sand and chemicals into deep shale rock under high pressure to free trapped gas. Amid rising demand for cleaner, more economical fuel, the process has spurred a boom in drilling. The U.S. Department of Energy says shale gas will make up 20% of total U.S. gas production by 2020.
But scrutiny of the technology has mounted amid concerns over potentially harmful effects including water contamination. Environmental groups say fissures resulting from fracking can create pathways for chemicals or gas to seep into aquifers. Industry experts counter that shales are separated from aquifers by thousands of feet of impermeable bedrock.
New York enforced a temporary moratorium on drilling permits last year, pending comprehensive studies and guidelines. The Environmental Protection Agency's own study is under way, but initial results are not due out until the end of 2012.
"We are currently in a gold rush period. The technology has gotten ahead of science and policy," says Erik Schlenker-Goodrich, a director at Western Environmental Law Center, a Eugene, Ore., public-interest law group.
To be sure, the drilling technique has been around for years, and industry practitioners maintain it has had a relatively safe record. "Hydraulic fracturing has been used since 1949; it's very common in Texas, Oklahoma and Louisiana, and there hasn't been much controversy [in those areas]," says Larry W. Nettles, an environmental lawyer at Houston's Vinson & Elkins LLP. "There hasn't been a fracture that has ripped through a mile of rock."
The most recent investments in shale have come from big industry groups. In February BHP Billiton Ltd., the world's largest mining company, agreed to buy Chesapeake Energy Corp.'s Fayetteville Shale gas assets in Arkansas for $4.75 billion, giving it the second-largest position in one of the largest gasfields. PetroChina Co. Ltd. said it would pay $5.4 billion for a 50% stake in Encana Corp.'s Cutbank Ridge Shale gas project in Canada.
Last year KKR created KKR Natural Resources with Tulsa, Okla.-based Premier Natural Resources LLC to focus on oil and gas investments. The joint venture has since acquired assets in the Texas Gulf Coast and the Permian Basin worth $40 million; Barnett Shale properties in North Texas in January; and properties in that same shale formation that it bought in April from Carrizo Oil & Gas Inc. for $104 million.
Blackstone teamed up with shale gas developer Alta Resources LLC, pledging up to $1 billion to buy and develop unconventional oil and natural gas assets in North America, primarily targeting shale fields. Blackstone already is involved in a shale drilling venture with GeoSouthern Energy Corp. Others such as EnCap Investments LP have invested in operators or services companies. KKR and Blackstone declined comment for this story.
Nettles says much of the controversy to date is localized and involves recent work in New York and Pennsylvania. One of the biggest issues in Pennsylvania along the Marcellus Shale is that companies were disposing water in waste treatment centers ill equipped to clean the water of the toxins before releasing it back into the water supply. In more established areas, like the South, Southwest and Colorado, wastewater is disposed of in deep saline wells.
In an earlier interview, Blackstone's David Foley said it's possible to drill without damaging the environment. "When people have gotten into trouble, it's because they haven't paid attention to some basic common sense about what areas are appropriate to use this technique in, and which are not," he said.
Still, there are broader questions on the negative consequences of shale exploitation regarding the depletion of water supply, particularly in times of drought, as well as the resulting methane leaks arising from the entire process that, according to a recent Cornell University study, could cause greenhouse gases even dirtier than coal-fired fuel.
It's too early to tell where the EPA and the states will stand on the debate. As Matthew H. Ahrens at Latham & Watkins LLP says, "Where [legislation] is today may be very different than where it will be two years from now."
David Carey contributed to this story.