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The U.S. Environmental Protection Agency Thursday launched a study to determine whether a key oil and natural gas production technique called hydraulic fracturing is contaminating water supplies.

While environmentalists are concerned that the process may be causing groundwater contamination and are calling for federal oversight, the industry says there is no proof and it is already adequately regulated.

At issue are new natural-gas reservoirs deep below the earth's surface that companies such as Chesapeake Energy Corp. (CHK) and XTO Energy Inc. (XTO) say 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.

"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.

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, Dow Jones Newswires; (202) 862 9285; ian.talley@dowjones.com;

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