Why Does the SEC Care About Fracking?

Article: Wall Street Journal, SEC Drills Down on Fracking, Deborah Solomon

Interesting article today on page one of the WSJ's Marketplace section.  "Fracking" is short for hydraulic fracturing, the somewhat controversial practice by which shale-based natural gas is extracted by pumping water, chemicals and sand into deep underground wells (see earlier post Natural Gas: Fracking in Europe).

Many environmentalists, and groups living in areas where fracking is being carried out, have raised concerns that the practice pollutes groundwater, and that the chemicals used are not fully disclosed.  Now the U.S. Securities and Exchange Commission (SEC) is stepping in, asking for "detailed information about oil and gas companies' hydraulic fracturing operations, including environmental impacts."

Which raises the question: why the SEC?  The SEC's mission is to: "...protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."  Wouldn't this be better left to the Environmental Protection Agency (EPA), whose mission is "..to protect human health and the environment"?

SEC Head Mary Schapiro

Perhaps so, but after reading the article I came to a better understanding of the SEC's concern here.  "Government officials said the SEC's interest in fracking is in ensuring investors are being told about risks a company may face related to its operations, such as lawsuits, compliance costs or other uncertainties."  I always wondered how much faith I should put in the part of the annual report where management discusses risks--how can an investor be sure that this discussion is honest and complete?  After all, if management wants the stock price to go up, they might feel a temptation to downplay risks and put a happy face on future prospects.

To the extent that the SEC causes management to be honest about risks, it's good for investors.  On the other hand, to the extent that they require companies to disclose similar information to multiple agencies, it is an inefficient regulatory compliance burden which costs money both for the company being regulated and for the taxpayers who fund the agencies doing the redundant work.

EPA Head Lisa Jackson

It's a tough call.  Oil and gas companies use toxic chemicals in their operations which are to a certain extent undisclosed, because they say the exact formula represents a "trade secret", like the top secret formula for Coca Cola syrup.  I would say the public has a pressing interest in knowing this information.  Ideally, information on practices with potential environmental effects should be disclosed to the EPA, these disclosures should be publicly available, and the SEC should make sure that management is not distorting or downplaying this information on their disclosures to the market.  But if the EPA --which is often accused of being a jobs killer and is funded from the vulnerable "discretionary" budget-- can't get the job done, then I applaud the SEC for stepping up and doing something that protects both investors and the general public.

Many people believe that shale-based oil and especially natural gas will be a resource of major importance to the United States in coming years.  The size of these unconventional reserves is compelling, and will be examined in future posts.  It is already a provider of jobs in some regions (see CNBC report Unemployed? Go to North Dakota).  But the risks to public health and the environment must be addressed.