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A new method of extracting natural gas has yielded a bounty of supply, along with health and environmental concerns.

By Jacquelyn Pless

No energy is produced without some consequences.

Natural gas is a perfect example. Despite the tremendous economic benefits created by the recent abundance of cheap natural gas, critics are raising alarms about how it’s extracted.

Hydraulic fracturing, or “fracking,” combined with horizontal drilling, is a leap forward in technology, allowing energy companies to tap into previously inaccessible resources. The technology has opened up reserves that were too expensive to develop just a decade ago. The process pumps millions of gallons of a liquid—usually water mixed with sand and chemicals— underground to force open cracks in the rock so the natural gas can be removed from the shale rock formations.

Rapid expansion of fracking near densely populated areas, however, has shifted focus to its potential effects on public health and the environment.

“Natural gas is very important to the well-being of New Yorkers, to our economy and, to an extent, our environment,” says Assemblyman Kevin Cahill (D). “While deriving more of our energy from New York sources would certainly serve many public policy goals, it is not something we should advance at all costs and without regard to the environmental threat.”

A growing concern is the contamination of drinking water. Some fracking fluids contain hazardous chemicals that, if mismanaged, could spill into groundwater, rivers or streams. Another worry is that fracking requires large amounts of water, which could lead to damage of aquatic habitats or reduce the amount of water available for other uses. Fracking also produces wastewater that must be regulated and treated properly before it is disposed. Treatment and disposal remain a regulatory challenge.

Its effects on air quality and climate change also are concerns. During the drilling process, chemicals such as benzene and methane are released into the air. In fact, natural gas producers are among the largest methane-emitters in the country, according to the U.S. Environmental Protection Agency. The agency proposed a rule—not yet in effect—in July 2011 to reduce smog-forming chemicals released during oil and gas production.

Wildlife and plants also may be disturbed in the process. Finally, recent rumblings in Ohio and Oklahoma have drawn attention to a potential link between earthquakes and pumping fracking waste into deep wells.

The natural gas industry supports “state regulation of key environmental challenges,” says Christopher B. McGill, managing director of policy analysis for the American Gas Association. The industry would like to see more collaboration between state and federal regulators, he adds.

Natural Gas By the Numbers

90 Years
Estimated supply of domestic natural gas at current consumption levels

24 Trillion
Cubic feet of natural gas used annually in the United States.

26 percent
Amount of the nation’s electricity generated by natural gas in 2011

Nation’s top producer of natural gas.

New wells fractured each year to produce natural gas

Wells re-fractured each year to produce natural gas

States that have enacted hydraulic fracturing related legislation this session

States that have introduced legislation addressing hydraulic fracturing

Bills introduced that address hydraulic fracturing.

Balancing Act

The hydraulic fracturing debate has turned into a balancing act. State legislators and regulators want to protect the environment and public health, but they also recognize the benefits from the revenue the industry brings to state and local economies. A study by IHS Global Insight estimates shale natural gas production generated $18.6 billion dollars in federal, state and local government taxes and federal royalty revenues in 2010.

At least 137 bills in 24 states have been introduced that specifically address hydraulic fracturing, and legislation has passed in Indiana, North Carolina, Pennsylvania, South Dakota and Tennessee.

Most of the legislation this year would require better monitoring of chemicals and additives in fracking fluid, stricter disclosure of ingredients, and better monitoring of water withdrawals and waste treatment and disposal.

At least nine states already have some form of disclosure requirement, and 15 states have proposed related legislation this session. In June 2010, Wyoming became the first state to approve rules requiring public disclosure of the chemicals in fracking fluid. Colorado has the most comprehensive rule so far. It requires drillers to disclose not just chemical names, but also their concentrations.

“What I have seen is that the majority of the industry is using best practices and the minority is not,” says Colorado Senator Gail Schwartz (D), chair of the Agriculture, Natural Resources & Energy Committee.

“Our new fracking rules are very strong and will require disclosure and transparency we did not have in the past, and encourage industry to move toward best practices,” she says. “I have heard from some health officials that air quality is a concern so we need to make more progress with air quality. Putting these gases into the atmosphere is not a good approach.”

Texas was the first state to enact legislation in 2011. “We passed House Bill 3328 to direct gas well drilling operators to disclose the amount of water and the type of chemicals used in the ‘fracking’ process,” says Texas Senator Jane Nelson (R). “Families in our community have asked that light be shed on the types of substances being injected into the ground. I think that the public’s confidence in hydraulic fracturing will be strengthened simply by lifting the curtain and disclosing this information.”

McGill says the industry does not have a problem with the regulations and backs “full disclosure of constituents in fracturing fluids. If proprietary information on amounts in mixtures can be protected, then do so. However, transparency and disclosure should be the standard.”

Generating Revenue

Most natural gas-producing states have some form of severance tax that is imposed on resources removed from the ground and usually is based on the market price of the resource. As a result, revenue generation can fluctuate as the value of natural gas changes.

In 2010, more than $11 billion was generated from severance taxes alone. In energy-rich states such as Alaska, Montana, New Mexico, North Dakota, Oklahoma and Wyoming, between 10.5 percent and 74.3 percent of the total state tax revenue came from severance taxes, according to the U.S. Census Bureau.

As of February, 36 states had severance taxes and all but five of them specifically tax oil and gas extraction. Eleven states are considering legislation this year to impose new, or amend existing, oil and gas severance taxes.

Tax structures and revenue allocations vary, but most of the revenue goes into state general funds and is used to pay the costs associated with resource extraction, such as road construction and maintenance, conservation and environmental cleanup. Some money goes to local governments affected by increased drilling. Alaska, New Mexico and Wyoming, for example, reserve a portion of collected taxes for long-term accounts and use the interest to help balance state budgets.

States also can generate revenue with impact and permit fees. Pennsylvania, the largest natural gas-producing state without a severance tax, recently enacted an impact fee, which will go mainly to local communities.

“The legislation provided a way for local governments to address local impacts resulting from natural gas activities,” says Representative Brian Ellis (R) of Pennsylvania. “A majority of the impact fee assessed on well operations goes back to local communities. Second, it provided us an opportunity to update a variety of environmental safeguards, enabling Pennsylvania to keep pace with the advancements in drilling techniques.”

Hydraulic fracturing has transformed the domestic natural gas outlook, but states are moving forward with caution .

“The natural gas in the Marcellus Shale deposit is not going anywhere, so there is no need to rush the process,” says Cahill of New York. “New information is disclosed and uncovered every day. That information should be investigated, considered and synthesized. Meeting a deadline to move forward just for the sake of doing so is simply not prudent.”

Jacquelyn Pless tracks natural gas issues for NCSL.