By KRISTEN HAYS Copyright 2009 Houston Chronicle
June 3, 2009, 10:18PM

The oil and gas industry’s trade group says increased federal regulation of a method to crack underground shale rock to release natural gas could increase costs and chill production.

“Drilling operations today are being effectively regulated by the different states,” said Richard Ranger, a senior policy adviser for the American Petroleum Institute.

The group explained its position Wednesday, on the eve of a House Natural Resources subcommittee fact-finding hearing today on U.S. shale gas production.

Environmental groups are pushing for more federal oversight of such operations, which boomed throughout 2008. Led by Rep. Diana DeGette, D-Colo., they want hydraulic fracturing to be subject to requirements of the Safe Water Drinking Act, which is under the auspices of the Environmental Protection Agency. Hydraulic fracturing involves injecting massive amounts of water, sand and chemicals underground at high pressures to break shale rock and release natural gas.

The environmental concern lies with whether hydraulic fracturing fluids can permeate ground water. In April, 16 cattle died in a northwestern Louisiana pasture near a drilling rig.

State environmental officials are investigating whether they died after drinking what may have been drilling fluid on the ground near the rig.

A January study by the Energy Department’s Office of Fossil Energy said new or increased activity in emerging shale gas basins, from the Marcellus in Pennsylvania and surrounding states to the Haynesville in East Texas and northern Louisiana, has “caused some anxiety and concern among local residents about the potential environmental implications associated with such development.”

Improvements in shale gas technology, such as hydraulic fracturing as well as the ability to drill multiple horizontal wells from a single location, fueled last year’s boom as natural gas prices shot to $13 per thousand cubic feet.

Prices have since plummeted to less than $4 as industrial demand sharply decreased amid the recession and inventories remain high.

Producers have pulled up stakes during the trough, bringing the U.S. rig count to 899 rigs — most of those natural gas — from a high of 2,031 in October, according to Baker Hughes.

Ranger acknowledged Wednesday that he was unaware of any studies confirming that ground water is safe from hydraulic fracturing fluids.

But he cited the Energy Department’s study, which said more regulation will add cost, prompt operators to drill fewer wells and eventually shrink U.S. natural gas supply.

The study said the added cost could reduce production by 12 percent to 18 percent, or up to 53 trillion cubic feet, the study said.

Shale gas wells cost $3 million to $10 million to drill. At an additional $150,000 per well, that’s $90  million for 600 wells, which Devon Energy drilled in the Barnett last year.

“We have a set of fixed costs, and there aren’t revenues coming in from that well despite your plans and estimates until you have production,” Ranger said. “So, if you know your costs are increasing, different companies in different positions may elect to drill fewer wells.”

kristen.hays@chron.com