NEW YORK (Reuters) - Pennsylvania regulators levied a record fine for contaminating drinking water against major natural gas producer Chesapeake Energy, a move that threatens to intensify a fierce debate over drilling for natural gas in the state.

The Pennsylvania Department of Environmental Protection fined Chesapeake $900,000 for contaminating water supplies inBradford County, a busy drilling area in the prolific Marcellus shale gas formation, the agency said on Tuesday. It was fined another $188,000 for a fire that injured three workers in February.

The fine will again cast a spotlight on hydraulic fracturing, or fracking, a controversial process used to extract natural gas from shale formations, which involves blasting a mix of water, chemicals and sand into the rock.

While public criticism has recently been focused on the possible contamination from fracking waste products, Tuesday's action stems from complaints that gas near drilling wells had seeped into the drinking water.

The agency began an investigation in February 2010 after receiving complaints from residents about drinking water near Chesapeake shale gas drilling sites. The agency concluded that contamination was caused by improper well casing and cementing, allowing seepage from non-shale shallow gas formations.

"The water well contamination fine is the largest single penalty DEP has ever assessed against an oil and gas operator," said Mike Krancer, secretary for the Department of Environmental Protection (DEP).

"Our message to drillers and to the public is clear."


Chesapeake Energy, one of Pennsylvania's biggest shale gas producers, said in a statement that it will pay the fines and has improved its cementing and casing practices since the investigation.

Its shares fell 1.8 percent to close at $29.09.

The incidents occurred in the Marcellus shale gas formation, which is estimated to hold enough natural gas to meet U.S. demand for a decade or more. Attention is being drawn to the region by groups concerned about possible health risks from fracking, especially in relation to drinking water.

"It looks very likely much like there will be a political backlash," said Jeremy Boak, director of the Center for Oil Shale Technology and Research at the Colorado School of Mines. "But the real problem is the well casing and cement rather than fracking," he added.

Neighboring New York state, home to a smaller stretch of the Marcellus shale formation, has halted permissions for shale drilling while it mulls the affect on drinking water.

Chesapeake suspended completion of natural gas wells in Pennsylvania for three weeks after a well blowout on April 19 sent thousands of gallons of drilling fluid spewing into the surrounding area and into local waterways.

Well completion is work to prepare a site for production after drilling has been completed and involves fracking.

(Reporting by Edward McAllister; Editing by Lisa Shumaker)

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