Earthquakes and the Energy Market


Residents of Great Plains states like Oklahoma and Texas have long since been used to a variety of natural disasters ranging from 300 mile per hour tornadoes to droughts where months pass by without precipitation.  The rise of the fracking industry may have spawned a new concern in America's heartland, however, a concern that's particularly alien to the residents.  A generation ago, Oklahoma enjoyed as few as two earthquakes per year at or above a 3.0 on the Richter scale (damage being rare below the 5.0 marker), while today they get two such earthquakes per day.  Such a sudden shift in plate tectonics comes at the hands of a thirsty oil market and puts the fracking business in a new peril, just as the industry thought they had escaped from a prior peril.  What do these seismic rumblings mean for the US oil and gas industry?

Rock Docs

Geologists have enjoyed steady employment in the energy industry for the past 200 years.  Of the 35,000 geologists employed in the United States, approximately two in three work directly or indirectly for oil and gas companies that exploit the fossil fuels stashed within the Earth's crust.  While the current fracking boom means big business for geologists and seismologists, what comes up has rather often come back down.  The oil crashes of the 1970s and early 1990s meant major layoffs and salary reductions for geologists working in the energy field; the disastrous performance of oil in 2014 hasn't soured the job market as drastically, but has still resulted in plenty of companies and jobs going belly-up.  Rock scientists who study concentrations of oil and natural gas in rock layers now have a new task on their collective plates: analyzing the rate and severity of earthquakes created by hydraulic fracking in order to determine the sustainability (or lack thereof) of the most popular energy extraction technique in the United States.

Technique and Time

As in many cases, hydraulic fracking (the suction process that brings oil to the surface) doesn't cause earthquakes.  Instead, the injection of water down into the shale rock beds has put extra pressure on fault lines running throughout the planetary crust.  This results in grinding and slipping a mile below the surface, the resonance of which manifests at the surface in the form of an earthquake.  Oklahoma and Texas enjoy particularly lax laws about water injection and fracking thanks to the dominance of the oil industry (no two states offer higher starting salaries for petroleum geologists) in tandem with an availability of fresh water flowing forth from the Rocky Mountains.  The same water-injection technology that's given America a far greater degree of energy independence has resulted in a variety of environmental issues, some meager and some disastrous.  The severity of the Great Plains earthquakes may be measured in numbers: in 2013, Oklahoma suffered from over 600 3.0 or greater earthquakes and at their current pace could eclipse 1000 by the end of 2015.  That puts them ahead of any other state, including California and Alaska, both of which sit directly on one of the largest fault lines on the globe. 

Energy Concerns

To what degree will the earthquakes trend affect fracking?  There's no question that for the immediate future, fracking will continue.  Energy companies contribute to about one in four dollars paid to the state economies of Kansas, Oklahoma, and Texas, with an even higher figure for the oil-boom states of North and South Dakota that are so swollen with job opportunities that Wal-Mart has to pay employees fifteen dollars an hour to remain competitive.  While fracking remains, the seismic tremors have put some oil companies in a pinch.  An active class-action suit against oil companies in Oklahoma seeks financial recompense of twenty million dollars for property damage incurred across a dozen counties.  While insurance may cover earthquake damage, few policy-holders in the Great Plains states bother to pay the premium for earthquake damage in a spot that theoretically should be sound as a pound in the center of the North American continental plate.  Furthermore, some insurance companies won't pay out claims stemming from man-made earthquakes -- their philosophy centering around the need for insurance against an act of God rather than an act of man.  This means the courts are one of the only ways for citizens to seek redress: Continental Resources (CLR on the New York Stock Exchange, trading at $46.11 a share) issued a financial release noting that legal action thanks to seismic damage represented one of the largest potential threats to their shareholders. 

Payments and Profits

When it comes to threats faced by the oil business and energy commodities, earthquakes may not rank as high on the list as foreign competition but still merit consideration.  States like Kansas and Oklahoma cannot merely turn off the taps and wait for geologic stability, not when no other industry provides as much revenue as oil and natural gas, meaning that their collective oil production of nearly ten million barrels of oil and .75 billion cubic feet of natural gas per day remains greenlighted.  Some particular cases will determine the degree to which hydraulic fracking can or cannot occur within the margins of profitability.  The Ladra Case, named for the plaintiff who brought the suit against oil concerns after the worst earthquake in state history, will soon appear on the Oklahoma Supreme Court's docket; a ruling in the plaintiff's favor will mean huge financial commitments for oil companies and a certain rise in the price of the commodity.  What's bad news for oil companies always turns out to be good news for oil investors, as it drives supply down while maintaining demand.  Given that oil sits below the $60 per barrel margin and natural gas rings in at less than $3 (the latter being the lowest its fallen in 2015), it's a great time to get in while the price is low and the chance for consistent growth appears strong.

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