Drought strains U.S. oil production

@CNNMoney July 31, 2012: 4:55 AM ET
Excavators prepare water for the oil industry in Kansas. The drought is restricting water available for fracking, which could harm U.S. oil production.

Excavators prepare water for the oil industry in Kansas. The drought is restricting water available for fracking, which could harm U.S. oil production.

NEW YORK (CNNMoney) -- One of the worst droughts in U.S. history is hampering oil production, pitting farmers against oilmen and highlighting just how dependent on water modern U.S. energy development has become.

Over 60% of the nation is in some form of drought. Areas affected include West Texas, North Dakota, Kansas, Colorado and Pennsylvania, all of which are part of the recent boom in North American energy production.

That boom is possible partly by hydraulic fracturing. Known as fracking for short, the controversial practice gets oil and natural gas to flow by cracking shale rock with sand, chemicals, pressure and water.

Lots of water. Each shale well takes between two and 12 million gallons of water to frack. That's 18 Olympic-sized swimming pools worth of water per well.

"We're having difficulty acquiring water," said Chris Faulkner, CEO of Breitling Oil and Gas, an oil company with operations in many of the new shale regions including Bakken in North Dakota and Marcellus in Pennsylvania.

Faulkner said officials in two Pennsylvania counties have stopped issuing permits for oil companies to draw water from rivers, forcing them to go further afield to obtain the crucial resource.

In Kansas, he said much of the industry's water comes from wells owned by farmers. Farmers used to sell him water for 35 cents a barrel. Now, he said, they are turning down offers of 75 cents or more.

As a result, between 10% and 12% of the wells Breitling planned on fracking have been put on hold.

"As the drought continues, those numbers will rise," said Faulkner.

Similar problems are happening at companies industry-wide, said Neal Dingmann, an analyst SunTrust Robinson Humphrey in Houston who covers many of the smaller and mid-sized companies that operate in the new shale plays.

Dingmann said he expects to see maybe a 5% reduction in new wells by the companies he covers.

Those numbers aren't expected to have a meaningful impact on oil or gasoline prices.

Oil from shale rock is just a small portion of overall U.S. oil production, which in turn contributes just a fraction to global oil supplies, the main determinant in prices.

Plus, the drought is not expected to continue forever.

But shale oil is playing an important part in new U.S. supply growth, and the drought illustrates how vulnerable that production is to disruptions in the availability of water.

Other segments of the energy chain are also being hit by the drought.

Much of the country's natural gas is produced by fracking. Unlike oil, natural gas can't be easily shipped around the world, so its price is more closely tied to local conditions.

Natural gas prices have surged some 70% over the last couple of months. The runup is mostly due to increased demand for air conditioning during the heat wave and a switch to natural gas from coal by many utilities. But at least one analyst puts part of the blame on drought-induced production problems.

"Another rally in natural gas as drought concerns 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.

Corn-based ethanol prices have jumped roughly 30% since the start of June, in step with corn prices that have reached record highs. Ethanol makes up about 10% of a gallon of gas in most parts of the country.

The recent rise in gasoline prices has more to do with rising oil prices, which are being driven by the standoff with Iran and hopes for a looser monetary policy rather than drought conditions the United States. But the higher ethanol prices are probably playing a small part, said Brian Milne, refined fuels editor at the information provider DTN.

Another water-dependent link in the nation's energy supply chain is transport -- specifically, barges on the nation's canals and rivers.

Andrew Lebow, an broker at Jefferies Bache in New York, said people are concerned that some energy terminals will have a hard time getting supplies if low water levels make routes impassable.

"I don't think the impact will be widespread," said Lebow. "But you could see prices rise in some areas."  To top of page

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