Halliburton's Interests Assisted by White House

The administration has lent support to a lucrative drilling technique. Some in the EPA consider it an environmental concern.

By Tom Hamburger and Alan C. Miller

Los Angeles Times

October 14, 2004

WASHINGTON — Over the last four years, the Bush administration and Vice President Dick Cheney's office have backed a series of measures favoring a drilling technique developed by Halliburton Co., Cheney's former employer.

The technology, known as hydraulic fracturing, boosts gas and oil production and generates $1.5 billion a year for the company, about one-fifth of its energy-related revenue. In recent years, Halliburton and other oil and gas firms have been fighting efforts to regulate the procedure under a statute that protects drinking water supplies.

The 2001 national energy policy report, written under the direction of the vice president's office, cited the value of hydraulic fracturing but didn't mention concerns raised by staff members at the Environmental Protection Agency.

Since then, the administration has taken steps to keep the practice from being regulated under the Safe Drinking Water Act, which Halliburton has said would hurt its business and add needless costs an d bureaucratic delays.

An EPA study concluded in June that there was no evidence that hydraulic fracturing posed a threat to drinking water. However, some EPA employees complained about the study internally before its completion, and others have strongly criticized it publicly since its release.

One of them, an environmental engineer and 30-year EPA veteran in Denver, last week sought whistle-blower protection in an 18-page statement sent to the agency's inspector general and members of Congress. The statement alleges that the study's findings were premature, may endanger public health and were approved by an industry-dominated review panel that included a current Halliburton employee.

"EPA produced a final report … that I believe is scientifically unsound and contrary to the purposes of the law," Weston Wilson wrote to lawmakers.

EPA spokeswoman Cynthia Bergman said Wednesday that the agency was reviewing Wilson's statement but did not "believe that any of the concerns raised by his analysis would lead us to a different conclusion."

Cheney declined to be interviewed or to answer specific questions for this story. His spokesman, Kevin Kellems, cited the vice president's commitment to keeping the 2001 energy policy deliberations confidential, a principle Cheney is defending in federal court.

"There is an important principle at stake in protecting the ability of the office of the president and vice president to receive the most candid and direct advice and counsel during the policymaking process," Kellems said.

Halliburton, where Cheney was chief executive from 1995 to 2000, is the leader among three large companies providing most fracturing services to oil and gas drilling operations around the world. Fracturing affords access to hard-to-reach energy deposits by forcing pressurized fluids deep into the earth, creating underground fissures that permit oil and gas to flow toward surface wells.

Halliburton and other energy compan ies have applauded the administration's support of fracturing, which they say has proved safe for decades.

Efforts to regulate hydraulic fracturing became a concern for the industry during Cheney's tenure at Halliburton. A group of Alabama residents went to court in 1995 seeking to force regulation of the practice under the federal drinking water law. Halliburton filed a brief in the case, arguing that environmental regulation of the practice "could have significant adverse effects" on its business.

The company subsequently played a leading role in lobbying against efforts to regulate fracturing under federal drinking water laws.

Cheney, who left Halliburton in August 2000 to run for vice president, has said he has severed all ties to the company.

Since he took office in January 2001, Cheney has received $398,548 in deferred compensation, and he will continue to receive annual payments through 2005. He also has 433,333 options to purchase Halliburton stock, according to financ ial disclosure records filed in May 2004.

But his staff has pointed to an insurance policy that guarantees that the vice president will receive the deferred compensation no matter how Halliburton does — and to his commitment to donate any profits from the stock options to charity.

The administration's ties to Halliburton have become an issue in the presidential campaign. Democrats criticize the administration for awarding the company billions of dollars in contracts in Iraq. Cheney has said he played no role in the Iraq contracts.

Less attention has been paid to Halliburton's domestic operations. The company, like many in the oil and gas business, has benefited from an administration led by two former oil executives, both of whom have made clear their belief that too many regulatory hurdles hamper efforts to increase domestic energy production.

Energy Breakthrough

In 1949, engineers from Halliburton Oil Well Cementing Co. gathered in an Oklahoma field to experiment with a new drilling technique: They pumped gasoline, napalm, crude oil and sand into the ground under enormous pressure in hopes of stimulating oil from a 4,882-foot-deep well.

This successful test of hydraulic fracturing would "forever change the workings — and fortunes — of the energy business," said a Halliburton news release commemorating the experiment's 50th anniversary.

The company estimates that the technique has increased recoverable oil and gas reserves in North America by as much as a third. About 28,000 wells a year are fractured. Halliburton services at least one-third of the market, analysts say.

The ingredients used in fracturing vary with the job and the terrain. Most of them are as benign as food additives, but they can include toxic chemicals. In every case, the fluid includes water and a "propping agent" — usually fine sand or ceramics mixed with a chemical gel — that is pumped into the cracks to keep them open. A second chemical m ixture liquefies the gel so that much of the injected water and chemicals can be removed before the gas is extracted.

But some of the fluid remains in the ground, a cause for concern in heavily drilled areas.

Energy companies say there is not a single proven case that fracturing fluids caused contamination.

But in Alabama, a group of residents petitioned the EPA in 1994, saying that their drinking water had been fouled by fracturing fluid used to extract methane from coal beds.

They asked the agency to force the state to regulate fracturing under the federal Safe Drinking Water Act. They argued that wells subjected to fracturing should be held to the same pollution standards as wells used to dispose of waste from energy production.

The EPA denied the request. Residents asked the U.S. 11th Circuit Court of Appeals to overturn the decision, and in 1997, the court ruled that fracturing should be regulated under the federal drinking water law.

The Alabama case set off a scramble in the industry, which feared it would lead to wider regulation of fracturing — imposing costly requirements for permits, inspections and testing.

While the court case was unfolding, lobbyists for Halliburton and other energy companies began pressing the Clinton administration to exempt fracturing from regulations under the drinking water law.

They made limited progress. Former EPA Administrator Carol Browner was called to Capitol Hill to meet with members of Congress from gas-producing states. She said more study was needed, and the agency launched the drinking water study that ended this year.

Cheney-Led Task Force

Nine days after his inauguration in 2001, President Bush asked Cheney to head a Cabinet-level task force to draw up a national energy strategy.

The task force consisted of the vice president, nine Cabinet members and five senior administration appointees. Research and writing was directed by two aides to Cheney supported by a working group of representatives from participating Cabinet agencies. The working group met through February and March, often in the vice president's ceremonial office, to develop recommendations for the principals — Cheney and Cabinet members.

The Cheney-led task force would tackle some of the highest-priority issues on the new administration's energy agenda: expanding oil and gas production, improving pipeline and power line transmission systems and developing a new approach to regulating air and water pollution.

To the surprise of some of those involved in the effort, the Cabinet-level panel also would consider a narrower topic of importance to Cheney when he headed Halliburton: hydraulic fracturing.

Cheney has cited executive privilege to keep task force deliberations secret. But interviews and records obtained by The Times show that Cheney's office was involved in discussions about how fracturing should be portrayed in the report, and that it resisted EPA attempts to inclu de concerns about its effects on the environment.

The Energy Department drafted language for the task force that described hydraulic fracturing as essential to increasing domestic gas production and that asserted that production would be hurt by regulation under the Safe Drinking Water Act.

Documents obtained by The Times show that in the spring of 2001, EPA officials corresponded with the vice president's office at least three times requesting modifications in the proposed language. The EPA specifically asked that the report note that the EPA was studying potential environmental consequences of the technique.

A May 1, 2001, e-mail from the EPA to Karen Knutson, a Cheney aide serving as deputy director of the task force, proposed the addition of the following paragraph:

"As a result of the … lawsuit on hydraulic fracturing of coalbed methane wells, the EPA recognizes this issue raises concerns and is conducting an investigation to evaluate the potential risks to ... drin king water." The proposed language described the ongoing EPA study of fracturing and water quality, and noted that it could culminate in "a regulatory determination."

On May 3, EPA employees said, they received a final pre-publication draft of the report. Agency staff members met into the evening to discuss the lack of responsiveness from Cheney's office on fracturing and several other issues. They decided to ask then-EPA Administrator Christie Whitman to write to the vice president personally to request modifications.

The following day, Whitman initialed a memo to Cheney asking him to reconsider parts of the final draft, including the section on fracturing. Her note pressed Cheney to scale back the recommendation exempting hydraulic fracturing from regulation.

Whitman warned that the administration could be "walking into a trap" by taking a public position against any regulation before the EPA completed its study of drinking-water pollution.

Whitman, who resigned last year, d eclined to be interviewed. Through a spokesman, she said, "EPA offered its expertise and input on relevant issues whenever possible," but she said she didn't recall details concerning the task force's handling of hydraulic fracturing.

"From my perspective, the vice president's office was driving the issue of hydraulic fracturing," said Jeremy Symons, a former EPA staffer assigned to the task force, who now works for a wildlife conservation organization.

When the task force report was released on May 16, 2001, the reference to an exemption from regulation was gone. But the report described the benefits of fracturing in detail without any mention of the EPA study.

"In certain formations, it has been demonstrated that the gas flow rate may be increased by as much as twenty-fold by hydraulic fracturing," the report said, noting that "most new gas wells drilled in the United States will require hydraulic fracturing."

Although Cheney declined to answer questions about his office's role in the fracturing discussions, his spokesman, Kellems, said the task force encouraged "environmentally sound production" of energy.

During the next three years, the administration supported a regulatory exemption for the practice on Capitol Hill and at the EPA.

Cheney participated in House-Senate conference committee negotiations last year that produced a sweeping national energy bill with a provision that would exempt fracturing from EPA drinking water regulation. Bush and Cheney immediately endorsed the energy bill. Some of those involved in the meetings said they could not recall or did not know whether Cheney intervened on behalf of fracturing.

Halliburton spokeswoman Wendy Hall said the company "did not contact Vice President Cheney or his office about hydraulic fracturing or the [provision in] the energy bill."

The bill has passed the House, but has languished in the Senate under the threat of a filibuster.

EPA Study Attacked

Although stymied in Congress, the gas and oil industry won an important victory within the administration.

In June, the EPA released its long-awaited study initiated in response to the Alabama lawsuit. The report focused on the use of fracturing to recover methane gas from coal beds, which often lie close to the surface and near groundwater used for drinking.

The report concluded that "injection of hydraulic fracturing fluids into coal bed methane wells poses little or no threat" to drinking water supplies and "does not justify additional study at this time."

Hall said the study confirmed Halliburton's "long-standing belief that hydraulic fracturing poses little or no threat to drinking water sources."

But the EPA study has come under sharp attack within the agency. An EPA water expert, who reviewed drafts of the report before its release, said he complained internally about several flaws. The water expert, who did not want his name used because he was speaking without authorization, said his concerns were largely ignored.

Wilson, the EPA environmental engineer, and two other specialists from the EPA Denver regional headquarters told The Times they were not consulted, even though their territory included the country's richest coal bed methane fields and some of the nation's most vulnerable water supplies.

In his statement to the EPA inspector general and members of Congress, Wilson said the study did not follow approved methodology, relied on a panel of experts with conflicts of interest and failed to include any field investigation.

The report was based largely on a review of fracturing studies, reports of water contamination and consultations with state regulatory officials. The EPA decided against proceeding with a second phase of independent fieldwork.

"This study was hijacked," Wilson said in an interview. The EPA's multiple failures "may result in danger to public health and safety," he said.

Wilson's statement said the study found that frac turing fluids often contained hazardous chemicals. But because their patented formulas are proprietary, all the potential compounds are not publicly identified, he said.

"EPA cannot objectively nor scientifically defend its claim that this practice does not risk endangering sources of underground drinking water," Wilson said in an interview. Agency officials said the chemicals were diluted and dispersed enough to minimize the risk. And they said their analysis of incident reports found no firm proof that fracturing had directly caused drinking water contamination.

"Unless we actually see threats to drinking water supplies, the Safe Drinking Water Act admonishes EPA not to regulate injection for oil and gas production unnecessarily," said EPA spokeswoman Bergman.

The report did find that diesel fuel in fracturing fluid posed a risk to drinking water. But EPA officials said no regulatory action was necessary, because the three major fracturing companies voluntarily agreed to stop using the fuel in coal bed methane operations. Wilson's statement says the arrangement is inadequate, because the EPA has no way of enforcing it and any of the parties can drop out at will.

The EPA report was reviewed by a seven-person panel: a senior technical advisor at Halliburton, a manager from an industry-funded research institute who previously worked for Halliburton, a senior engineer with BP Amoco and two academics who had worked for the energy industry. A sixth member, a state regulator with an engineering background, also had worked for Amoco. The final member was an expert on hydraulic fracturing from Sandia National Laboratories in New Mexico.

"EPA selected panel members who we believed would be unbiased and fair in reviewing this study, and selected a representative group," the EPA's Bergman said.

One reviewer, Peter E. Clark, a professor at the University of Alabama who specializes in hydraulic fracturing fluids and previously worked for the industry, said the panel was fair. "Nobody tried to grind any axes."

He said the original draft of the report reviewed by the panel overstated the risks of fracturing and needed to be toned down. He said he requested changes and that, in the end, "EPA made the right decision."

The EPA's Bergman said the final report incorporated only changes suggested by the panel "to make the study as scientifically accurate as possible."

In addition to the peer review panel, the agency sought broad input through public meetings and notices and consultation within the EPA, including the Denver regional office, officials said.

Cynthia C. Dougherty, director of the agency's groundwater and drinking water office, said there was no political influence on the selection of the peer review panel or preparation of the report. Halliburton's Hall said the company did not recommend its employee for the panel and "had no expectation of specific benefit" from his participation.

The EPA report was a victory for Halliburton. Alth ough only 1% of the company's fracturing business is in coal bed methane fields, it is one of the fastest-growing sources of gas production in the U.S. The study is seen as a boost to industry's efforts to win a blanket exemption for fracturing.

Rep. Henry A. Waxman (D-Los Angeles), a member of the House Energy and Commerce Committee who has followed the fracturing study's progress, said the EPA review "made a faith-based leap to conclude that injecting toxic materials" underground posed little or no threat, he said. "The unanswered questions in EPA's report cry out for further study."

Geoffrey D. Thyne, a professor at the Colorado School of Mines who has done consulting work for energy companies and local governments, said fracturing is generally safe but needs to be monitored, particularly in areas where oil and gas deposits are close to water supplies. Exempting fracturing from EPA regulation "is premature, unwise and goes against the public interest," he said.

*


Times staff researchers Robin Cochran in Washington and Janet Lundblad in Los Angeles contributed to this report.

(BEGIN TEXT OF INFOBOX)

The fight over a drilling technique

*

When Dick Cheney led Halliburton Co. in the late 1990s, the firm opposed Environmental Protection Agency regulation of hydraulic fracturing, a technique that pumps pressurized fluid into the ground to boost oil and gas production. Halliburton and two other companies dominate worldwide use of the method. The administration of President Bush and Vice President Cheney has taken steps to keep the practice of hydraulic fracturing from being regulated by the EPA under federal drinking water

laws.

1995: Dick Cheney becomes chief executive of Halliburton Co., a leader in fracturing.

1997: Alabama residents win a ruling in U.S. appeals court that fracturing should be regulated under the Safe Drinking Water Act.

1999: Following up on its ruling, the U.S. appeals cour t orders the EPA to oversee fracturing in Alabama.

2000: Halliburton lobbies in Washington to exempt fracturing from regulation under drinking water law.

2001: Vice President Cheney convenes task force to devise a national energy policy.

2001: The EPA chief presses Cheney to scale back language recommending the exemption of fracturing from a task force report. The exemption recommendation is removed, but the report notes the benefits of fracturing.

2003: Bush and Cheney back a sweeping energy bill that includes a provision to exempt fracturing from EPA drinking water regulation.

2004: An EPA study concludes that fracturing does not threaten drinking water.

2004: An EPA environmental engineer seeks whistle-blower protection after telling the agency inspector general and lawmakers that the EPA fracturing study is scientifically unsound.

*

Sources: Federal court records, national energy policy report, EPA records, interviews and news accounts