* EPA to propose shale gas wastewater rules in 2014
* "Elevated" levels of pollutants in surface water -EPA
* Planned rules would not apply to shale oil development (Recasts, updates with comment from EPA official, natgas trade group)
By Ayesha Rascoe
WASHINGTON, Oct 20 (Reuters) - The U.S. Environmental Protection Agency said on Thursday it will develop rules for the booming shale gas industry to dispose of its wastewater, which has been linked to polluted surface water.
The move is one of several that signal the Obama administration plans to push ahead with regulating whatever aspects of shale gas production fall under its authority.
"Where we know problems exist, the EPA will not hesitate to protect Americans whose health may be at risk," said Cynthia Dougherty, a water regulator with the EPA, at a congressional hearing on water resources and shale gas production.
The EPA said it would propose rules for shale gas wastewater in 2014, while regulations for the disposal of coal-bed methane wastewater would come a year earlier in 2013.
Hydraulic fracturing -- a technique that involves injecting a mix of water, sand and chemicals into the ground to extract hydrocarbons -- has unlocked vast U.S. shale oil and gas reserves.
The practice has been mostly exempt from U.S. EPA oversight, but the agency does have authority over wastewater from oil and gas production when it is sent to public treatment plants or released into surface water.
But the rapid expansion of shale drilling has prompted a public backlash, with landowners near shale gas wells and green groups complaining of its environmental impact.
At the same time, shale producers have maintained that the drilling was safe and have warned that onerous federal regulations could limit development.
Kevin Book, an analyst with Clearview Energy Partners, said that while the EPA's decision to develop standards for waste water was important, preemptive regulations from states ultimately posed more of a risk to shale production.
"The EPA isn't the thing operators should worry about," Book said. "The headline risk from federal water regulations is likely to be a footnote to state rules likely to already be in place."
Still, the American Natural Gas Alliance said in a statement it still believes states are best qualified to assess appropriate water disposal requirements for their shale plays.
"As EPA officials move forward we encourage them to partner with the states and take into serious consideration state regulators' existing on-the-ground expertise and ongoing oversight activities," Daniel Whitten, a spokesman for the group.
Some water used in the drilling is recycled, but the EPA said a significant amount requires disposal and some ends up in treatment plants not equipped to deal with such waste.
The EPA said it has reviewed data that found "elevated levels" of pollutants as a result of improper water disposal.
In light of these findings, the EPA said it will begin gathering data and public input to develop standards that shale gas wastewater would have to meet before going to a treatment facility.
The planned rules announced Thursday will not apply to shale oil development, an EPA spokeswoman said.
PROTECTING PUBLIC, ENSURING ACCESS
The Obama administration has walked a fine line on shale production, supporting increased natural gas output for energy security benefits and lower carbon emissions, but stressing the need to protect the environment and public health.
"We can protect the health of American families and communities at the same time we ensure access to all of the important resources that make up our energy economy," EPA administrator Lisa Jackson said in a statement. "The American people expect and deserve nothing less."
Green groups and fracking critics applauded the EPA's decision to develop standards.
"Proper treatment of this polluted water is vital to ensure clean drinking water for the millions of Americans that share water with the natural gas industry," said Deb Nardone, the Sierra Club's Natural Gas Reform Campaign Director. (Additional reporting by Roberta Rampton; Editing by Dale Hudson, Andrea Evans and David Gregorio)