Hydraulic Fracturing: Marked for Death or an Inevitability?

Posted by Wealth Wire - Friday, July 8th, 2011

Within the last few years, one of the most media-vilified aspects of U.S. oil and gas production has been hydraulic fracturing. Believe us when we say there's no shortage of accusations...

But is all the negative press warranted?

While everyone will eventually come to grips with their answer to that question, the prospect of a complete ban on hydraulic fracturing in the United States is much less likely to happen without concrete evidence proving the charges against it.

Recently, companies have been able to tap into previously unattainable oil and gas resources by combining the hydraulic fracturing process with new drilling techniques. It's a perfect marriage for these producers to take advantage of emerging shale plays.

Something Old, Something New

Let's start from the beginning.

What is hydraulic fracturing?

Though the controversy surrounding the hydraulic fracturing process has been played out in the media during the last few years, this method has actually been around since the 1940s. Since then, more than 2 million fracture treatments have occurred.

The first well fracture well took place in Kansas in 1947 by Stanolind Oil Company. Two years later, Haliburton was granted a patent to use their Hydrafrac Process.

In other words, the process itself isn't new. For the last two decades, companies have used the recent advancements made in horizontal drilling to extract oil and gas from the various shale formations across the United States and Canada.

And they've done so with tremendous success.

We all know the story of oil production in the United States. Since peaking approximately four decades ago, our oil production has declined by more than 42%:

US Crude production

The only bit of good news producers have had is from emerging shale plays.

Without the use of coupling horizontal drilling with hydraulic fracturing, that decline would have continued. In North Dakota alone, production has grown 300% since 2004. The nearly 400,000 barrels produced there every day would be completely inaccessible, and that loss alone would erase any production gains made within the last few years.

According to the latest Baker Hughes rig count, almost 60% of the 1886 active rigs are drilling horizontally:

baker hughes trajectory

The inconvenient truth here is that without developing these shale formations, not only would the United States become more dependent than ever on oil imports; but we would be hard-pressed to meet demand.

According to the EIA, our consumption is already back over 19 million barrels per day.

And let's be honest with ourselves here, do we really want to be beholden to more Saudi oil?

Something Blue

Like everything else, hydraulic fracturing does have several drawbacks which companies must adapt to and overcome to progress.

During the process, millions of gallons of fracturing fluid are injected into the well in order to fracture the rock, giving it a higher permeability and allowing the oil and gas resources to flow more freely.

Fracture fluid makeup

Consisting of 99% water and sand and 1% of other additives, the fluid is injected into the well in order to fracture the rock, giving it a higher permeability through which the oil and gas resources can flow more freely to the well.

In the fracturing process, an average of 4.5 million gallons of water is used. Although the amount of water usage itself is a concern, the 1% of chemical additives is what's really drawing the opposition's ire...

Unfortunately, there's no hard proof to validate the speculations of contaminated drinking water.

In a House Oversight and Governmental Reform Committee hearing on May 24, 2011, Environmental Protection Agency head Lisa Jackson reiterated that point, saying, “I am not aware of any proven case where the fracking process itself has affected water, although there are investigations ongoing.”

The jury will be out for another three years — at least, that's when the EPA's study on hydraulic fracturing is expected to be released.

In a typical well, the rock formation being fractured lies at a depth of more than 7,500 feet. Water aquifers are found at a depth of about 1,000 feet.

In the meantime, drillers will have access to about 85% of New York's portion of the Marcellus shale, now that the moratorium on hydraulic fracturing has been lifted. The only areas where the process is still banned are public lands in the Syracuse and New York City watersheds.

How to Invest in Hydraulic Fracturing

Interestingly enough, our best hydraulic fracturing investment doesn't even own a single acre of shale property — nor does it physically conduct the hydraulic fracturing operations.

The company is Carbo Ceramics, and it is perhaps one of the best companies still flying beneath the radar of mainstream investors. Still, I'll wager that many of my veteran Energy and Capital readers will recognize this opportunity in a heartbeat.

What Carbo does, in fact, is improve upon the hydraulic fracturing process.

Through its various products, the company provides drillers with ceramic proppant.

Typically, a company looking to stimulate the rock formation through hydraulic fracturing will use sand as a proppant. A solid proppant is necessary to keep the fracture after the fluid injection, making the formation more permeable and allowing the oil and gas resources to flow into the well...

carbo proppant

Shale companies are much more efficient using Carbo's ceramic proppants. In fact drillers are able to increase productivity in the well by as much as 30%, as well as tack on an additional 30% of the estimated ultimate recovery.

And as far as performance goes, we're hard-pressed to find a better company:

CRR CHART

Within the last two years, investors have made a small fortune with Carbo's performance as shares increased more than 500%!

Moreover, every energy investor has felt a sting in the latest market correction — except Carbo shareholders.

Since the beginning of March 2011, Carbo has actually jumped 42%. And going forward, Carbo Ceramics will be one of the safest hydraulic fracturing plays in the market.

Without a smoking gun in the hydraulic fracturing process, U.S. drillers will continue targeting our oil- and gas-rich shale formations.

Keith Kohl is an editor at Energy and Capital.

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