* Builds on Jan. pledge to promote gas development
* Creates interagency group to regulate fracking
* Business group says directive is solid first step
By Timothy Gardner
WASHINGTON, April 13 (Reuters) - President Barack Obama streamlined oversight of the natural gas drilling boom on Friday as his administration faced increasing pressure to allow exports of the fuel as supplies swell.
Obama issued an executive order creating an interagency group to oversee development of natural gas, building on a pledge he made in his State of the Union address in January to support the industry while increasing safety.
A government source said the panel, to be led largely by Obama's deputy assistant for energy and climate Heather Zichal, would not increase regulation.
The order seeks to coordinate regulation among agencies and their efforts to boost use of natural gas in cars and trucks.
Several energy industry groups, including the American Petroleum Institute and America's Natural Gas Alliance, praised the directive for its acknowledgement that states, not the federal government, are the primary regulators of natural gas.
But not everyone welcomed it.
"We don't need another working group, or any more bureaucracy," said Kevin Smith, spokesman for House Speaker John Boehner. "We need a president who will work in a bipartisan way on expanding American energy production to lower gas prices and create more jobs."
Vast new sources of shale gas, which drillers access with techniques including hydraulic fracturing, or fracking, have flooded the United States with the fuel, decreasing costs for industrial and residential users. Natural gas prices have fallen to 10-year lows, leading some producers to ask for permission to export it just years after the country was expected to become a major importer.
The boom has also alarmed environmentalists and health groups which say that fracking operations near homes and schools can pollute air and water.
"It is vital that we take full advantage of our natural gas resources, while giving American families and communities confidence that natural and cultural resources, air and water quality, and public health and safety will not be compromised," Obama's directive said.
Most drilling for natural gas occurs on private land, which has limited the administration's authority over the practice, and state governments provide most of the regulation for the industry.
As natural gas drilling has expanded, several federal government agencies and departments have pledged to step up oversight, leading to cries from industry to back off.
The working group will include representatives from at least 13 federal agencies including the Departments of Defense, Interior and Energy, plus the Environmental Protection Agency.
Kevin Book, an energy policy analyst at ClearView Energy Partners, said the working group could provide transparency that would expand natural gas output in the future.
"But it could also standardize environmental policy in a way that uniformly increases wellhead costs," he said. Pending federal agency actions could add millions of dollars per well for some wells by the end of 2014, he added.
The Interior Department crafted draft rules that would require natural gas drillers to disclose which chemicals they use while fracking on public lands.
Next week, the EPA is expected to finalize rules to slash smog-forming emissions from fracking.
The EPA also is conducting a study about whether the process of fracking, in which companies blast large amounts of sand and water laced with chemicals deep underground to free natural gas and bring it to the surface, is polluting water supplies.
Also pending is a decision from the Energy Department, which is considering seven applications to export natural gas, from companies including Southern, BG and Sempra . Its study on exporting the fuel is expected later this summer.