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Offshore drilling woes may land on shore

By Steve Hargreaves, senior writer


NEW YORK (CNNMoney.com) -- Restrictions on new oil and gas drilling could soon spread from the Gulf of Mexico to onshore operations.

There's currently a moratorium set to last until Nov. 30 on drilling rigs used for deepwater operations in the Gulf. It is designed to halt new operations until the causes of the BP accident are known and new safety procedures can be put in place.

But the incident has heightened concerns over other forms of oil and gas drilling -- specifically in the prolific but controversial shale formations.

The shale areas, so-named due to the type of rock they contain, are relatively new areas for natural gas production in the United States. They are thought to hold vast amounts of the fuel used mostly to generate electricity and a cleaner alternative to coal.

But the shale is often located near major population centers, and concerns have arisen that drilling will contaminate drinking water.

Many residents that live in or near the shale areas have formed groups calling for tougher regulations. But so far they've enjoyed little support from the Obama administration or other powerful politicians.

That may be shifting.

"The perception of risk has changed, and the reason for it can be summed up in one word - Macondo," said Kevin Book, a managing director at Clear View Energy Partners, referring to BP's leaking well.

Book is among the analysts that believe tighter federal regulations on shale drilling are coming, perhaps sometime in 2011.

As evidence of the shift, he cited recent comments from Sen. Mike Doyle, D-Penn. Doyle hails from a shale gas state, and as recently as this spring was declaring the United States the Saudi Arabia of natural gas.

Yet in a recent congressional hearing, Doyle told Exxon Mobil chief executive Rex Tillerson that the gas will stay in the ground until the industry can get it out safely.

There are already a few bills in Congress that would increase government regulations on shale drilling.

A spokeswoman for Rep. Diana DeGette, D-Colo, said several new sponsors have signed on to the lawmaker's bill to boost regulations following the BP disaster.

One part of that bill - a provision requiring companies to disclose what types of chemicals they use to bring a new well online - may even be brought to the House floor in the next few weeks, said the spokeswoman.

The BP spill has "brought attention to the issue," she said. "We're definitely seeing an increase in momentum."

What regulations?

Currently, most oversight of shale gas drilling is done by the states. If the federal government played a larger role, it might impose stricter standards on how the wells are cased with steel, increase the distance between drill sites and water sources, and require better cleanup of the fluids used to extract the gas, said Robert Nelson, senior director for global gas at Cambridge Energy Research Associates.

Nelson isn't expecting additional regulations, although he said it's something he's keeping an eye on.

"In the current environment, it's a possibility," he said.

So how much would the additional regulation cost consumers?

Book said it might cost producers an extra 75 cents per million British Thermal Units of gas if the government clamped down on shale drilling. That may put some of the less profitable players out of business, but would still likely leave plenty of companies to produce the gas.

A 75 cent increase in production costs may translate into a $1.50 to $2.25 increase in wholesale prices if it was accompanied by an uptick in economic activity, said Paul Smith, chief risk officer for Mobius Risk Group, a firm that advises energy producers and big energy consumers.

That would mean natural gas prices going from their current $4.50 a BTU to around $6 or $7 - higher prices for sure, but significantly less that the $15 hit during the energy spike a few years back.

Beyond gas

Any new regulations could also be part of a broader push by the administration to get tough on the fossil fuel business following what appears to be a dead deal to charge companies to emit carbon dioxide.

The Obama administration was pushing a compromise energy proposal - pay for greenhouse gas emissions, and get greater access to fossil fuels. That deal is now all but dead, as most Republicans and many Democrats failed to support it over concerns it would be too costly, or simply because they think global warming is not a big problem.

Book said other regulations on the fossil fuel industry could be coming, including tighter clean air laws and additions to the endangered species list.

"It was a contingent bargain, and the bargain didn't happen," said Book. "There's a whole bunch of ways to go after the fossil fuel industry, and they'll all be tried."  To top of page

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