FRACKING

Fracking is an extraction technique used in the Oil and Gas industry. It is commonly
known as Hydraulic fracturing. The process of fracking involves breaking up the rock
formations by injecting water and other fluids (usually a combination of sand and
chemicals) at high speeds. This procedure helps in extraction of larger quantities of oil
and gas compared to the other techniques as it creates larger openings. This technique
is popularly used by the US Shale companies and has helped them in increasing their
oil and gas production over the last decade by nearly 75 percent mark.
Due to Fracking a type of gold rush has been created in the US economy. Expansion
of oil and gas refineries and creation of new E&P projects has not only led to increase
in the job creation but has also helped the consumers a lot as there has been an
increase in the supply of oil and gas products thus leading to reduction in the oil and
gas prices.
Fracking has also helped the US economy as the balance of energy trade has shifted
more in the favor of the country. Now, the US government is able to meet the local
demand of Oil and Gas products with more ease and has cut down on the imports of
these products.

RISKS INVOLVED IN THE FRACKING PROCESS

The process of Fracking is not popular among the environmental agencies. Various
environmental agencies argue that the process of fracking carries various risks to the
environment especially to the water supply (and thus by extension to public health as
well). Agencies argue that the chemicals used in the process trickle down through the
water table and get mixed with the ground water thus contaminating it. But since the
Exploration and Production (E&P) companies choose not to disclose the specific
concoctions that are used in their fracking processes, it is difficult to fully evaluate
potential risks.
Some of the risks and concers that are involved in the fracking process are mentioned
below

Contamination of groundwater

Methane pollution and its impact on climate change

Air pollution impacts

Exposure to toxic chemicals

Blowouts due to gas explosion

Waste disposal

Large volume water use in water-deficient regions

Fracking-induced earthquakes

Workplace safety

Infrastructure degradation

REGULATIONS AFFECTING FRACKING PROCESS

The regulations for the Fracking process vary across the states in US. On the federal
level, fracking is primarily regulated by the Environmental Protection Agency (EPA).
Many of the restrictions placed on fracking center around the treatment of water,
specifically through the Safe Water Drinking Act. Flowback of fracking water is also
regulated by the National Pollutant Discharge Elimination System, which is
authorized through the Clean Water Act.
Fracking has been used in the U.S. since the 1940s as a means of increasing the output
from oil and natural gas wells. The process involves pumping water into cracks in the
ground, forcing them further apart and allowing for a greater flow for the well.
Fracking makes it possible to extract oil and natural gas from shale rock fields that
were previously unreachable through normal drilling technology. Highly pressurized
water may be injected for days or weeks, possibly going further than a mile under the
Earth's surface. The enlarged well is then encased in cement to prevent any
contaminants from spilling into other natural environments or water supplies.
As the practice of hydraulic fracturing grew, so too did concerns about the chemicals
that could possibly be introduced by the process. While studies have shown that the
contamination of groundwater through shale fracturing is unlikely, the potential for
surface spills raises some concerns as well.
The Ground Water Protection Council and Interstate Oil and Gas Compact
Commission launched a website for voluntary disclosure of hydraulic fracking fluids
called FracFocus.org, although there has been some controversy about the accuracy of
listed
information.
The subsurface injection of fluids into the Earth falls under the regulatory control of
the EPA's Underground Injection Control program. Since the Energy Policy Act of
2005, however, fracking has been exempted from the definition of "underground
injection" as it relates to oil, gas or geothermal production activities. The only time
that fracking would be included is when diesel fuels are mixed with other fracking
fluids.
In certain states, such as Colorado, additional regulations have been added to monitor
and control the practice. Colorado requires that samples be taken from surface
water immediately downgrade from the oil and gas location. These samples must be
tested and pass several tests regarding the pH, alkalinity, polycyclic aromatic
hydrocarbons, conductance and other chemicals present in the water. As of 2015,
other states that have added requirements for sample testing include Ohio and
Pennsylvania.
In 2012, Vermont became the first state to ban the practice of hydraulic fracturing.
New York state followed in 2014. Reasons cited for these bans included a lack of

infrastructure to handle any potentially irreversible environmental damages and a lack

of understanding about the long-term impacts of fracking.
Outside of the U.S., hydraulic fracturing has drawn concerns from the European
Union, Russia and Canada. The practice was previously outlawed in the United
Kingdom and South Africa, although both bans were eventually lifted when no strong
evidence of environmental damage had been found.

ECONOMICS OF FRACKING
The economics of shale extraction is highly dependent on commodity prices. As and
when the prices of oil or natural gas increase, the companies involved in the E&P
sector have more incentive to explore and find new sources to increase the production.
This is because the higher market price of the commodity is sufficient to offset the
costs and risks of drilling reserves that are more difficult to reach.
It is normally very expensive to search for and drill into a new project. Even after
drilling begins, companies must plan for potential drops in price that could suddenly
compromise the profitability of existing projects. Fracking that makes money at $85
per barrel of oil may suddenly bleed money at $60 a barrel.
Some argue that natural gas prices have indirect costs. As gasoline, natural gas and
electricity prices drop, the need for alternative energy sources diminishes. This could
slow the pace of breakthroughs for non-fossil fuel technology. The desirability of
additional forms of energy is a subject of debate, but there is little doubt that
substitutes become less competitive when the price of the original good declines.
There are indirect benefits to drops in commodity prices. Even if oil companies lose
some profitability, lower commodity prices allow people to afford the standards of
living at a lower cost. This can help to reduce poverty and increase savings or
consumption on other goods.

OPERATIG EXPENSES FOR OIL AND GAS SECTOR

The oil and gas sector plays an important role in the economy by drilling, extracting,
and processing oil and gas. Because operating expenses vary widely with the size of
oil and gas companies, average operating expenses tend to be meaningless. Financial
professionals typically assess the average operating expenses by looking at the
average operating expenses margin, which is expressed as the percentage of operating
expenses in the sector's total revenues. In July 2015, the average operating expenses
margin for the oil and gas industry was approximately 33%. Given the average
revenue of $60 billion over the last four quarters, the average operating expense in the
oil and gas sector stands at approximately $19.5 billion per company.

Oil and Gas Sector

The oil and gas sector consists of fully integrated companies such as BG Group and
QEP Resources and companies that specialize in refining and marketing; exploring

and producing; providing oil and gas-related services and equipment; drilling; and
transporting oil and gas through pipelines. Of all the industries within the oil and gas
sector, oil and gas exploration and production has the largest number of firms, with
458 companies competing in the industry. The integrated gas and oil industry has the
lowest number of companies, which stands at 11 firms worldwide in July 2015.

Operating Expenses Margin

The operating expenses margin differs widely in the oil and gas sector. Oil and gas
drilling companies have the highest margin among all companies, at 85% of their total
revenues, resulting in a negative operating income margin of 24%. Oil and gas
refining and marketing companies boast the lowest operating expenses margin of
12.4%. The largest determinant of the size of the operating expenses margin is
depreciation expense and the ability of oil and gas companies to manage their fixed
costs such as selling, general and administrative expenses (SG&A)