UPDATE 8-Saudis order oil cuts to U.S., Europe before non-OPEC talks
* Saudis maintain high oil exports to Asia (Adds Saudi energy minister)
(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON Dec 9 Preliminary evidence that hydraulic fracturing may have contaminated drinking water at a small hamlet in Wyoming shows why the industry urgently needs to embrace intelligent regulation and engage with safety officials if North America's unconventional oil and gas reserves are to be exploited fully.
Responding to complaints about foul-tasting water in local wells at Pavillion (population 165), investigators found concentrations of benzene and dissolved hydrocarbons near pits used for storage of drilling waste, and dissolved chemicals and methane associated with fracking in two wells drilled 200-300 metres down into the drinking water aquifer.
In a draft report released on Thursday, the Environmental Protection Agency (EPA) concluded leaking waste had contaminated the nearby shallow wells. The most likely explanation for contamination at deeper levels was that methane and fracking fluids migrated up from the fracking zone into the overlying aquifer.
Like the battle over routing the proposed Keystone XL pipeline, the issue of groundwater contamination in Pavillion has a broader political importance that transcends the risk of pollution in the local area.
Possible contamination at one tiny town in America's least-populated state risks becoming the epicentre of a national battle over fracking. Sensible exploitation of shale gas and oil that could provide affordable energy, lower greenhouse emissions and reduced dependence on imported energy all hang in the balance.
EPA emphasised its findings are provisional and subject to an independent scientific review to ensure a transparent and rigorous process, after an opportunity for public comment.
The agency noted the findings are specific to Pavillion, where gas-bearing formations are unusually shallow and close to the drinking water aquifer. "Production conditions (are) different from those in many other areas of the country."
It reiterated "natural gas plays a key role in our nation's clean energy future, and the Obama administration is committed to ensuring that the development of this vital resource occurs safely and responsibly".
Nonetheless, the draft has ignited a predictable firestorm. Fracking opponents have seized on it as evidence that the technology is unsafe and should be heavily restricted or banned.
"No one can accurately say that there is 'no risk' where fracking is concerned. This draft report makes obvious that there are many factors at play, any one of which can go wrong. Much stronger rules are needed to ensure that well construction standards are stronger," the Natural Resources Defense Council said.
The industry and some congressional Republicans backed Encana Corp, owner of the gas field in Pavillion, when it promptly hit back, blasting the report's methodology and reliability.
"The synthetic chemicals could just as easily have come from contamination when the EPA did their sampling or from how they constructed their monitoring wells," said Doug Hock, a company spokesman.
No form of energy is without risk. Conventional oil and gas wells leak. Nuclear power stations melt down. Coal-fired power stations emit lots of mercury and greenhouse gases. And wind farms kill migrating birds and disfigure the landscape.
Like any other technology, fracking imposes its own costs and benefits, but there is no reason to think it is inherently any worse than conventional oil and gas production or other forms of energy.
The first frack job dates back to 1947, and up to 95 percent of all oil and gas wells drilled today are hydraulically fractured, accounting for 43 percent of total U.S. oil production and 67 percent of natural gas production, according to a report prepared by the National Petroleum Council for the U.S. Department of Energy.
From time to time, it is inevitable fractured wells will contaminate drinking waters. There is no such thing as zero risk. The challenge is to manage risks carefully and ensure those affected are properly compensated when things go wrong.
In theory, it should be possible to design a system of intelligent regulation that maximises the benefits from unlocking unconventional gas and oil reserves while minimising adverse impacts on local communities -- from groundwater contamination, disposal of briny waste water, use of freshwater supplies and the enormous increase in traffic.
In practice, this remains a depressingly distant goal. EPA, environmental groups and the oil and gas industry must all share the blame for inadequate fracking regulation and an increasingly hostile political environment for a technology that promises to transform the energy supply picture in coming decades -- but only if voters allow it to be deployed more widely.
SOCIAL LICENCE TO OPERATE
To be fair, there are signs the industry recognises the problem. The National Petroleum Council's landmark report published in September 2011 was entitled, "Prudent Development: Realising the Potential of North America's Abundant Natural Gas and Oil Resources."
The report recognised "if these resources are to be available and economic for development, continuous attention to reducing risks is essential to ensure pollution prevention, public safety and health, and environmental protection. These outcomes are important in their own right, but also to enjoy access to the resources for extraction."
This was an oblique way of saying the industry needs to demonstrate social and environmental responsibility if it is to obtain authorisation to drill. The authors admitted, "while most natural gas and oil companies operate at a high environmental performance level, some companies are not as far along".
Real changes in behaviour, not just PR campaigns, are crucial. "Maintaining access to the resource does not depend on changing public perception so much as earning public confidence with excellent performance," the report said.
But the 111 pages devoted to operations and the environment were notably short on concrete suggestions. The industry is still reflexively hostile to government restrictions, even though they can be an effective way to drive best practice and solve the free-rider problem, when some operators cut corners and create accidents that affect the industry as a whole.
Encana's furious response is typical of the combative, no-holds barred, litigation-driven approach to any and all evidence of environmental problems.
On the other side, environment lobbyists tend to conflate local pollution with broader concerns about global warming -- using the former to set impossibly high standards for oil, gas and coal producers to drive them out of business in favour of cleaner sources of energy such as wind and solar.
EPA also has often confused its technical role as a pollution regulator with its broader one as a policy advocate for carbon controls. As a result, it is seen by many in the oil and gas industry as instinctively hostile and has forfeited its credibility as a neutral umpire and regulator.
All sides have an urgent interest in better regulation. While fracking was mostly about gas, it has been treated by Congress and local lawmakers as primarily an environmental issue. But as it moves into the oil patch, fracking is set to become an issue of national energy security.
Environmental aspects will be much lower down Congress' list of concerns. Now is the time for EPA and environmental groups to compromise if they want a stronger regulatory framework. If they refuse, they risk over-reaching and seeing their concerns swept aside, which is what happened with cap-and-trade.
Better regulation is in the industry's interests too. Fracking is only one major incident away from a clampdown. Pavillion is too small and far away to create much of a backlash. But a major scare near one of the big urban centres could dramatically damage the industry's long-term prospects.
Many frack jobs at the moment are entrusted to small independent operators who have an interest in cutting costs. More effective engagement with regulators is part of the social licence to operate the industry needs to remain viable and secure access to an enormous source of cheap and useful energy.
* Saudis maintain high oil exports to Asia (Adds Saudi energy minister)
* Russia energy minister says no oil talks with OPEC on Friday
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