2nd UPDATE: EPA Studies Hydraulic-Fracturing Effect On Water

The Obama administration on Thursday indicated that it is moving on two fronts to gain information about a key oil and natural gas production technique that is viewed as essential for boosting gas supplies but that critics fear could contaminate drinking water.

The U.S. Environmental Protection Agency launched a study to determine whether "hydraulic fracturing" is contaminating water supplies. U.S. Interior Secretary Ken Salazar told a House panel that he is considering requiring oil and gas companies that drill on federal lands to disclose the chemicals used in the practice, which involves pumping water, sand and chemicals under pressure into deep underground wells. The technique breaks open underground rock, releasing the gas within.

"It is an issue that we are looking at," Salazar told a U.S. House appropriations subcommittee when asked whether the Obama administration would require such disclosures. While Salazar said he didn't have "a definitive response," he added that alerting communities about the chemicals used in hydraulic fracturing would be "a good way for oil and gas companies to go." He said that "if the public does not know what is being injected," then that "is ultimately going to hurt the natural gas industry."

The issue has been drawing the federal government's attention as new techniques allow access to vast gas supplies in underground rock formations known as shale. The shale regions--concentrated in states including Texas, Louisiana, Pennsylvania and New York--have become a focus in the energy world, with major companies snapping up shale-gas developers. Companies such as Chesapeake Energy Corp. (CHK) and XTO Energy Inc. (XTO) say the supplies could multiply the available domestic reserves of a resource that has a fraction of the greenhouse-gas emissions of its fossil-fuel cousins, coal and oil.

While environmentalists are concerned that the process for accessing the underground gas may be causing groundwater contamination and are calling for federal oversight, the industry says there is no proof and it is already adequately regulated. Companies also say that while the chemicals aren't publicly disclosed--because they are commercially sensitive--they are disclosed to local regulators.

"Our research will be designed to answer questions about the potential impact of hydraulic fracturing on human health and the environment," said Paul Anastas, assistant administrator for EPA's Office of Research and Development. "The study will be conducted through a transparent, peer-reviewed process, with significant stakeholder input," he said in a statement.

Reps. Diana DeGette (D., Co.) and Maurice Hinchey (D., N.Y.), cosponsors of legislation to bring hydraulic fracturing under EPA regulation, said the study would be a significant step in ensuring drinking water is protected. But Hinchey went further on Thursday, urging the Interior Department to require disclosures of drilling fluids used on federal lands.

"You could require operators on federal leases, federal lands, to publicly disclose all of the chemical compounds that are used in drilling," Hinchey told Salazar. "Such a requirement would help set a national standard for disclosure."

The American Petroleum Institute said in a statement, "We expect the study to confirm what 60 years of experience and investigation have already demonstrated: that hydraulic fracturing is a safe and well understood technology for producing oil and natural gas."

Lee Fuller, head of the petroleum-industry group EnergyInDepth, said that if the review "is based on objective, scientific analysis, it will serve as an opportunity to highlight the host of steps taken at every wellsite that make certain groundwater is properly protected."

Facing increasing pressure from some Democratic lawmakers and environmentalists, the EPA said in its proposed budget earlier this year it planned to conduct a study of the process.

Previous studies by the EPA--including one review of the process for coalbed methane extraction at much shallower levels--haven't found hydraulic fracturing carries a risk of water contamination.

Although the states regulate the actual process of hydraulic fracturing--known as fracking--the EPA already regulates the waste-water systems that either re-inject it into reservoirs or send it to waste-treatment facilities.

Last month, Steve Heare, director of the EPA's Drinking Water Protection Division, said at a conference he hadn't seen any documented cases that the fracking process was contaminating water supplies.

Bill Kappel, a U.S. Geological Survey official, said at the same conference that contamination of water supplies is more likely to happen as companies process the waste water from hydrofracking. In some instances, municipal water systems that treat the water have reported higher levels of heavy metals and radioactivity.

"Treatment of the [waste] water hasn't caught up with the hydrofracking technology," Kappel said.

Although legislation in the House and Senate to bring greater federal oversight of the hydrofracking process hasn't gained momentum, Heare said even if such proposals are approved, it wouldn't likely have a dramatic effect on regulation. States would still have the right under the Safe Drinking Water Act to use their own regulatory standards.

-By Ian Talley and Siobhan Hughes, Dow Jones Newswires; (202) 862 9285; ian.talley@dowjones.com;

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