How Trump’s Fracking Rule Repeal Affects MLPs

08/08/17 | Karyl Patredis

I heard Trump is trying to repeal Obama’s fracking rule. What does this mean for MLPs?

Let’s start with an important fact: MLPs themselves aren’t directly involved in fracking. Companies like Emerge Energy Services (EMES) and Hi-Crush Partners (HCLP) provide support to fracking operations through their frac sand businesses, but MLPs aren’t the guys drilling the actual wells. That said, fracking also pulls more hydrocarbons out of the ground, which means there are more of them to transport and store. This means fracking is generally a good thing for MLPs because upstream production translates into the need for midstream services.

Because it’s such a hotly debated topic, you probably already have a good handle on exactly what it means for a company to engage in hydraulic fracturing (fracking), but just in case you need a refresher, this video does an excellent job of explaining the process and the narrator makes a few nerdy jokes which I applaud. If you don’t have the energy to click on the video, generally speaking, one vertical well is drilled and the drill bit makes a 90 degree turn (imagine the letter “L”). A mixture of water, sand, and a few chemicals is then pumped into the well to break up delicate rock. The water is removed, but the sand props open the cavities allowing more hydrocarbons to flow to the surface. The reason some people dislike fracking is because they are afraid the chemicals used in the process will seep into our water supply and cause contamination.

The US Environmental Protection Agency (EPA) released its final assessment of the impacts of fracking on drinking water in December 2016. For me, the conclusion is so heavily caveated citing “uncertainties and data gaps” that it’s hard to completely understand what the consequences of fracking really are. It does emphasize the need for the proper handling of frac fluids, which seems pretty universally agreed upon.

In any event, the Obama Administration released rules for fracking on public and tribal lands.

To be fair, these rules don’t seem too crazy. And, let’s not forget that these regulations don’t apply to private land or land owned by individual states. To better understand the impact, check out this map (on page 19) from the Bureau of Land Management (BLM). This shows where federal and tribal lands are located. Next, hop over to this map from the US Energy Information Administration (EIA) which shows our nation’s shale plays. You can see that drillers in states like Wyoming and Idaho could be most affected by these regulations. This is likely why a Federal District Court Judge in Wyoming ruled that the US Department of the Interior (DOI) didn’t have the authority to issue these regulations. Some states believe it should be up to them to decide how fracking will be handled.

These rules are likely viewed as a bunch of red tape for drilling companies. Higher storage and disposal standards for frac water translates into higher costs for drillers. As an undoubtedly pro-energy president, Trump believes that fracking will lead to American energy independence. The cost, along with the perception that many of these regulations are duplicative of state and tribal standards, is why Trump is seeking to repeal the Obama-era regulations.

The timeline of this roll-back is uncertain. Currently, the rules are caught up in court and aren’t being enforced. Most expect Trump will kill the regulations, so the case is on hold until there is more definitive direction from the Trump Administration.

All in all, the direct effect of the removal of these rules on MLPs is negligible to slightly positive, but the repeal would certainly be a win for drillers in the Northwest.