Tags: Drought | Oil | Fracking | energy

CNNMoney: Drought Hurting Oil-Fracking Production

By    |   Wednesday, 01 August 2012 09:28 AM

While the drought that has well over half of the country in its grip has decimated crop yields, particularly corn, it is now impacting energy production, CNNMoney reports.

The drought is affecting energy production in West Texas, North Dakota, Kansas, Colorado and Pennsylvania, states in which hydraulic fracturing, also known as fracking, has become popular.

Fracking involves injecting water, chemicals and sand into the ground at high pressure to split shale rock and release natural gas or oil, The Associated Press reports.

Each shale well needs between 2 million and 12 million gallons of water to frack, according to CNNMoney.

"We're having difficulty acquiring water," Chris Faulkner, CEO of Breitling Oil and Gas, an oil company with operations in many of the shale regions, tells CNNMoney.

In fact, two counties in Pennsylvania have stopped issuing permits for oil companies to draw water from rivers, Faulkner notes.

In Kansas, much of the water for fracking is supplied by wells owned by farmers. Faulkner says that he used to be able to buy water from farmers for $0.35 per barrel, but now the farmers are saying no to offers of $0.75 or more.

Between 10 percent and 12 percent of the wells Faulkner’s firm planned on fracking have been delayed.

“As the drought continues, those numbers will rise,” he tells CNNMoney.

Neal Dingmann, an analyst at SunTrust Robinson Humphrey, says this problem is happening industrywide.

Dingmann, who covers many of the smaller and mid-sized companies that frack, tells CNNMoney that he expects to see a 5 percent reduction in new wells by the companies he covers.

The decrease in shale wells will not have a meaningful effect of oil or gasoline prices, as the oil from shale rock is a small portion of overall U.S. oil production, according to CNNMoney.

However, a lot of the country’s natural gas is produced by fracking. Natural gas cannot be easily transported, so the price is impacted by local conditions.

While most of the 70 percent increase in natural gas prices during the last several months has been due to increased demand for air conditioning and a switch by many utilities from coal to natural gas, some say part of the blame is because of the drought-induced production problems.

"Another rally in natural gas as drought concerns [deepen] may lead to a cessation of non-conventional shale production," Stephen Schork, an energy trader and publisher of the industry newsletter the Schork Report, wrote in a note last week, according to CNNMoney.

At the beginning of the year, Spears & Associates Inc., a petroleum industry research firm, predicted the worldwide market for fracking was expected to increase 19 percent this year to a record $37 billion, one-third the pace of expansion in 2011, according to Bloomberg.

North America accounted for 87 percent of the fracking market last year, Bloomberg reports, and the global fracking market grew 63 percent in 2011 to $31 billion, Spears said.

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