The Fuse

Emerging Shale Plays in Oklahoma Threatened By Earthquakes

by Nick Cunningham | September 08, 2016

A 5.8-magnitude earthquake hit Oklahoma on September 3, the state’s most powerful quake on record. Oklahoma has become somewhat accustomed to an increased frequency in tremors over the last few years. Seismic activity has spiked in the Sooner State, and much of the blame has been pinned on the oil and gas industry. While this past weekend’s tremor will not likely bring drilling to a halt, it could usher in a new era of heightened oversight on fracking in a state that has seen increasing investment from shale companies in recent years.

While this past weekend’s earthquake will not likely bring drilling to a halt, it could usher in a new era of heightened oversight on fracking in a state that has seen increasing investment in recent years.

More drilling, more earthquakes

Hydraulic fracturing itself is not the cause of a sudden uptick in the frequency of earthquakes. Instead, the injection wells have been singled out for blame. When an oil or gas well is fractured, operators take the leftover wastewater and reinject it into a disposal well. Research has shown that thousands of barrels of water injected at high pressure in disposal wells can trigger earthquakes. Bloomberg Intelligence estimates that there are 35,000 active disposal wells in Oklahoma, and a few dozen of them have been directly linked to earthquakes.

According to the U.S. Geological Survey (USGS), Oklahoma experienced only three earthquakes of a magnitude 2.5 or greater back in 2005. By last year, however, that number had exploded to about 2,500. Oklahoma has recorded three times as many earthquakes as California, making it the most seismically active state in the Lower 48.

The exact cause of the earthquake during this past weekend has not yet been determined.

“Without studying the specifics of the wastewater injection and oil and gas production in this area, the USGS cannot currently conclude whether or not this particular earthquake was caused by industrial-related, human activities,” the USGS said in a statement regarding the quake that struck northwest of Tulsa. “However, we do know that many earthquakes in Oklahoma have been triggered by wastewater fluid injection. The USGS will continue to process seismic data in the following days and weeks that will help answer this question.”

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Light touch regulation

For several years, the Oklahoma government approached the issue with caution, not imposing any significant restrictions on drillers for fear of killing off the state’s golden goose. The dramatic rise in seismic activity has been met with voluntary guidelines put forward by the state. Regulators have issued directives requesting disposal wells to be shut down when data showed that a certain disposal well in a certain area could increase the risk of an earthquake. Although operators of hundreds of wells have received requests for shutdowns, drilling has, for the most part, proceeded unabated in Oklahoma.

Although operators of hundreds of wells have received requests for shutdowns, drilling has, for the most part, proceeded unabated in Oklahoma.

As earthquakes have grown in strength and frequency, however, regulators have started to take action. In January 2016, struggling oil and gas driller Sandridge Energy defied one particular request from state regulators to shut down six disposal wells, arguing there was not sufficient evidence to do so. The cash-strapped company could ill-afford to curtail activity. The Wall Street Journal reported in January that Sandridge disclosed in its filings with the Securities Exchange Commission in 2015 that restrictions on its use of disposal wells could negatively impact production.

The Oklahoma Corporation Commission (OCC), the state body with oversight of oil and gas production, initiated legal action to compel Sandridge to shut its wells. Ultimately, the issue was resolved out of court, with Sandridge agreeing to comply with the shutdown request. Although the disposal wells were in all likelihood a problem for Sandridge, the Oklahoma City-based driller filed for bankruptcy protection in May due to its inability to survive low oil prices.

The conflict ended up spurring legislation to affirm the OCC’s authority to act to compel drillers to comply with shutdown orders. In April, Oklahoma Governor Mary Fallin, a Republican, signed a bill that clarified the OCC’s authority to take whatever action necessary in an emergency, a move that grants the regulator more power to shut down disposal wells.

The latest earthquake has prompted regulators to use their newly affirmed powers to order the shutdown of 37 wastewater disposal wells, the state’s first mandatory restriction on wastewater wells.

The latest earthquake has further emboldened the OCC, prompting the agency to use its newly affirmed powers to order the shutdown of 37 wastewater disposal wells, the state’s first mandatory restriction on wastewater wells. The federal government has also been forced off the sidelines. On September 6, the U.S. Environmental Protection Agency shut down 17 disposal wells in northeastern Oklahoma.
Although the closures are relatively minor events that are isolated and localized, they portend tighter oversight of the use of disposal wells, potentially putting oil and gas production in the state at risk.

No major restrictions…yet

Oklahoma is no stranger to oil and gas drilling, but as the shale frenzy has died down in most of the country, the state’s overlooked oil and gas resources are getting renewed consideration. The SCOOP and STACK, two shale plays in southern and central Oklahoma, have seen increased attention over the past year. They have emerged as two of just a handful of regions in the U.S. that can turn a profit at today’s oil price. The prolific shale plays in the Permian Basin in West Texas are arguably the most sought after with oil prices currently trading below $50 per barrel, but the SCOOP and STACK are not far behind.

Some drillers hope that with attention and capital shifting away from places like the Bakken and the Eagle Ford, the SCOOP and STACK could become the industry’s next big thing.

An April 2016 assessment from IHS Energy found that the STACK is profitable with oil prices at $45 per barrel. Crucially, the report noted, drilling is still in its early days. “The limited drilling to date has not yet revealed a sweet spot for the Oklahoma STACK,” Reed Olmstead, manager of the North America Supply Analytics Service at IHS Energy, said in a press release for the report. Some drillers hope that with attention and capital shifting away from places like the Bakken and the Eagle Ford, the SCOOP and STACK could become the industry’s next big thing.

A regulatory crackdown, however, could threaten those hopes. The state is feeling increased pressure to crackdown on disposal wells as more and more earthquakes put people in harm’s way. Oil and gas producers in Oklahoma are acutely aware of the regulatory risk, but so far they have not been substantially affected by state restrictions. The latest mandatory shutdowns only impacted areas near the earthquake, which was located north of Oklahoma City, far from the productive and well-known SCOOP and STACK shale plays.

A more draconian crackdown has not arrived just yet, but the frequency of earthquakes is not declining, meaning the industry could see tighter regulations ahead.

A more draconian crackdown has not arrived just yet, but the frequency of earthquakes is not declining, meaning the industry could see tighter regulations ahead. Three days after the record-breaking 5.8-magnitude earthquake, and on the same day that the EPA shut down disposal wells, the state was hit with two more earthquakes.

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