The U.S. Environmental Protection Agency has serious reservations about allowing shale gas drilling in New York City's watershed, warning of a threat to the drinking water for 9 million people.

An EPA report on the divisive issue is the latest potential roadblock for energy companies seeking to exploit the Marcellus Shale formation, which state officials say may contain enough natural gas to satisfy U.S. demand for more than a decade.

We have concerns regarding potential impacts to human health and the environment that we believe warrant further scientific and regulatory analysis, wrote John Filippelli, chief of the agency's Strategic Planning and Programs Branch.

EPA has serious reservations about whether gas drilling in the New York City watershed is consistent with the vision of high-quality unfiltered water supply, he wrote in the agency's report, dated Wednesday.

Last week, New York City asked the state to ban shale gas drilling in the city's watershed.

At issue is the controversial process of shale gas extraction known as hydraulic fracturing, or fracking, in which a combination of chemicals, sand and water are blasted through rock to free trapped gas. Fracking is exempted from regulation under the U.S. Clean Water Act.

The natural gas industry argues that drilling poses no risk to drinking water, saying the chemicals are injected through layers of steel and concrete thousands of feet below aquifers.

But opponents argue that toxic fracking chemicals are contaminating drinking water, citing numerous reports of private wells near gas installations having water that is discolored, foul tasting, or even flammable because of methane that has escaped from drilling operations.

Theo Colborn, a researcher with the Endocrine Disruption Exchange who has drawn links between fracturing chemicals and a range of illnesses including cancer, said the EPA report indicates the agency was taking a new look at fracturing in light of growing public concern and media coverage.

The natural gas industry can't keep saying it's clean, she said.

TO DRILL OR NOT TO DRILL

The EPA was reacting to an environmental impact statement by the New York state Department of Environmental Conservation that recommended in September that energy companies be permitted to drill in the Marcellus.

We're pleased to see that the EPA recognizes what the state so far has not, that gas drilling is entirely inappropriate with in the drinking supply for 9 million people, said James Simpson, a staff attorney for Riverkeeper, a New York environmental group.

Eric Goldstein, a senior lawyer for the Natural Resources Defense Council, said the state's proposal will require a dramatic rethinking and revamping if it is going to pass muster with federal guardians of water quality.

The EPA has allowed New York City to draw from an unfiltered watershed provided there are adequate protections, and officials have warned the city could be forced to build a $10 billion filtration system if drilling is allowed.

Last spring, the EPA conducted its first water tests in response to growing public concern over possible water contamination from gas drilling. The tests, in Wyoming, found some private water wells were tainted with chemicals that may have come from gas drilling, but the agency did not reach a conclusion about the source of the contamination.

(Additional reporting by Edith Honan in New York; Editing by Daniel Trotta and Steve Gutterman)

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