New Fracking Rules and Your Portfolio

On Friday, the Interior Department released the first-ever set of rules on hydraulic fracturing and horizontal drilling in the United States.

Before I delve into the details, let me just say that I don’t think these regulations will have a huge impact on the industry.

“A duplicative layer of new federal regulation is unnecessary,” says Erik Milito of the American Petroleum Institute, an oil lobby.

Milito’s position is that new regulations could harm players in the industry. But others with intimate knowledge of drilling practices admit that the new regulations may only have an effect on smaller companies.

Most of the big players in shale drilling are already going above and beyond the levels required by the new regulations, and a few states have already enacted their own regulations on fracking.

The big worry from the industry is that as other states start to regulate the controversial drilling technique, they will adopt the same — if not tougher — rules as the Obama administration and the Interior Department.

Others beyond the petroleum industry expressed concern that if the rules push margins above a safe level for energy producers, it could result in more bankruptcies and big problems for investors and employees of oil companies.

Then there’s the worry that prohibitive and costly regulations could send gasoline prices higher at the pump, where consumers reap major financial benefits now that oil prices are so low.

But, again, these are fears and not necessarily what’s going to happen. The truth is, these new regulations are rather tame and won’t have an effect on your investments.

However, there is a set of regulations coming that could deal your portfolio a serious blow — or windfall, if you handle it properly…

New Rules Hurt Your Portfolio?

Friday’s rules come to us after more than three years of conferencing between oil and gas companies, states, environmentalists, and the Interior Department.

But like I said before, these rules are little more than a public showing…

For one, they only apply to wells on federal and tribal lands — in other words, just 5% of oil production and 11% of natural gas production.

Plus the most “expensive” parts of the rules won’t be imparted on companies. Rather, the government will have to pay employees to inspect the cement walls in wells and underground chemical storage tanks.

Drillers, meanwhile, will have to disclose chemicals used in a fracking operation within 30 days of completion and provide detailed well geology to the Bureau of Land Management.

These two stipulations seem to be the only things that would give producers any more of a burden than they already have. And even then, the burden is less a financial one than it is a strain on time for management teams.

See, that’s not too bad, right?

I mean, as far as investment is concerned, these rules won’t bust margins or ruin stock prices more than a 1% drop in oil prices or a bad quarter of earnings.

In fact, I wouldn’t be surprised if the Interior Department published these rules as a litmus test before other more prohibitive rules are drafted to better align with President Obama’s environmental agenda.

We saw the same thing way back before rules on carbon emissions were released last year; the EPA and the President spread word of them in an attempt to soften the blow on their final release.

And now, it looks like the latest flurry of drilling regulations is setting us up for another round of stronger rules against the oil and gas industry.

Protect Your Investments

If you remember, in January, the White House and EPA released rules on methane emissions from the oil and gas industry.

That round of regulations, much like the ones announced on Friday, wasn’t as damaging as it could’ve been because it only limited methane emissions on new wells drilled by oil and gas companies.

Add to that the fact that it was merely a 45% reduction required by 2020, and you’ll see that those rules weren’t going to cause drillers too many problems. Instead, it’s the next wave of rules — the ones we haven’t seen yet — that will really hit producers.

When the Obama administration released the flaring rules in January, it also gave a rough timeline by which we could track when the next round of flaring rules will hit the books.

According to them, you and I can expect to see the next round of regulations sometime this summer, and when we do, it’s imperative that we’re prepared.

My prediction is that the new rules will make the previous methane restrictions apply to legacy wells — wells that are already producing — and possibly raise the amount that companies have to reduce.

If this happens, many drillers will face serious and perhaps irreversibly damaging costs on operations: They would have to stop drilling, compress gas, and ship it before production could continue.

But, as I like to remind you often, you and I have no control over the coming regulations. The only thing we can control is our investments.

With that in mind, the threat of new regulations has companies on the front foot, attempting to harvest leaked gas before they face large fines and sanctions from the government. To do this, companies need pipelines, compressor stations, and storage facilities that can easily harvest all of the excess gas produced during shale oil production.

Right now, there are companies vying for this lucrative business. And the Bakken is where the most work is needed.

My associate Keith Kohl recently put together a presentation about a company that’s already building and operating the necessary infrastructure to help drillers dodge new regulation.

I urge you to check out Keith’s latest investment and decide if you want to be part of this booming trend in North Dakota and the rest of the U.S.

Good Investing, 

Alex Martinelli

With an eye squarely focused on the long-term, Alex Martinelli takes the art of income investing to a higher level within the energy sector. His research has helped hundreds of thousands of individual investors identify well established companies that have a long history of paying out dividends to their shareholders. For more info on Alex, check out his editor’s page.