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ShaleGasandHydraulic
Fracturingin
the
US:
OpportunityorUnderestimatedRisk?
ByDanaSasarean,SamuelBlock,andLindaElingLee
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Summary
Shalegaspresentsahugenewpotential investmentopportunityandcouldpossiblytransformtheUSenergymarket.However,financialreturnsfromshalegasfacepressureduetoemerging
environmental liabilities, community opposition that limits access to resources, recoverable
reservesuncertainties,andnaturalgaspricevolatility.
Significant rampup inproductionwill likelyunveil twomajordriversof increasedoperationalcostand liabilities: lackofwater availabilityand contamination fromhigh volumeofwaste
water.Differentenvironmentalandsocialprofilesof thevariousbasinsmeans thatdrilling in
somebasinsentailspotentiallyhigheroperationalcostsandliabilities.
Someofthe largestshalegasproducers,suchasExxonandAnadarko,donotfacethehighestvaluationriskfromtheirshale involvementduetodiversificationofoilandgasresources.The
more pure play companies such as Chesapeake Energy, Encana, Ultra Petroleum, Range
Resources,andCabotOilandGasfacehigherrisks.
BasedonMSCIESGResearchsassessmentofcompaniesperformanceonenvironmentalissues,webelievethatcompanieswithpoorhistoricalperformancesuchasCabotOilandGas,BP,and
Chesapeake Energy are more likely to face community opposition and permitting issues,
possiblyhinderinglongtermgrowthpotentials.
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Introduction
Shale gas, hailed by some as a game changer and even a silent revolution in theUS, is drastically
alteringthedomesticenergylandscapewithinternationalmarketimplications.Thesubstantialreserves
baseand
steep
domestic
production
increase
are
already
changing
the
international
natural
gas
market,
freeingup liquefiednaturalgas (LNG)capacityand loweringcontractprices inregionssuchasEurope
andRussia.Whilenaturalgasisalreadythebackboneofawiderangeofindustries,frompetrochemicals
andplastics to fertilizers, theprospects forgreateruse inpowergenerationand transportationmay
ensureitslongtermexpansion.Theproliferationofactivityintonewshaleplayshasincreasedshalegas
productionintheUSfrom0.39trillioncubicfeet(tcf)in2000to4.87tcfin2010,or23%ofUSdrygas
production. EstimatesofprovedUS shale gas reservesby theUS Energy InformationAdministration
(EIA)haveshotup from34 tcf in2008 to84 tcf in2011witha totalof862 tcfprovedandunproved
resources.Productionisforecasttoreach12.6tcfby20201.
For investors, however, the potential economic returns from shale gas production are still highly
uncertain.Inadditiontocompetingclaimsabouttheactualsizeandvalueoftherecoverablereserves,
communityresistance,negativemediaattentiontopotentialenvironmentalhazards,grassrootsactivist
opposition,andincreasedregulatoryscrutinyhavecalledintoquestionthecompaniesabilitytooperate
inanenvironmentallysafemannerandstillmeethighexpectationsof financialreturns.Nevertheless,
givencontinuedhighpricesforoil,andtheprospectofcheapnaturalgasintheshorttomediumterm,
webelievethattheoilandgassectorwillcontinuetopursueshalegasasamajorpartoftheirgrowth
strategyinunconventionalenergyextraction.Butwequestionthelongtermvaluationofcompanies
thatareunpreparedtohandlethecomplexinterplayofenvironmentalandsocialrisksinthisspace.
Whilemostoilandgasplayersarepresent inmultiple shalebasins, thedifferentenvironmentaland
social profiles of the various basins means that drilling in some basins entails potentially higher
operationalcostsandfutureliabilities.(Forasummaryofthekeyprocessesinshalegasrecovery,pleaseseeAppendixI:WhatisShaleGasandHydraulicFracturing?). Specifically,wherecompaniesaredrilling
determines the exposure to some of the most high profile and controversial elements of hydraulic
fracturing,includingtheissuesofwaterstress,wastewatermanagement,andcommunityoppositionto
landusechanges.
RelianceonShaleGasReserves
AmongcompaniesintheMSCIWorldIndex,weestimatethat54playersarecurrentlyinvolvedinshale
gasexplorationandproductionglobally.
Whilemajorshale reservesare located inmanycountriesasestimatedby theUSEIA (suchasChina,
Argentina,Mexico,andCanada)wefocusontheUS,whichaccountsfor13%ofresources(technically
recoverable,unproven reserves) andwhere explorationandproduction is currentlymost aggressive.
(For a breakdown of the countries with major shale gas reserves, please see Appendix II: Global
1AccordingtoSBIEnergyestimateshttp://www.sbireports.com/about/release.asp?id=2354
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DistributionofUnprovenShaleGasReserves).Wehaveanalyzedthetop25companiesintheUS,asthis
marketiscurrentlyseeingthequickestinvestmentgrowth.Allofthesecompaniesfacedevaluationrisks
ifenvironmentalorsafety failurescauseadditionaloperationalcosts,reputationaldamage,or limited
accesstoresources.Whilethegreatertheproductionofshalegasthegreatertheriskexposuretothe
environmentalandsocialrisks, thecompanieswiththelargestshalegasproductionarenotnecessarily
mostexposedtovaluationrisk.Thelessdiversifiedcompanieswhoseoilandgasresourcebaseishighly
dependent on hydraulic fracturing such as Chesapeake Energy, Encana, Ultra Petroleum, Range
Resources,andSouthwesternEnergy (figure2), face thehighestriskexposure.Nonetheless,wenote
thatmultinational integratedoilcompaniesExxonMobil,BP,ConocoPhillips,Chevron,andShell,with
significant US natural gas reserves totaling about 57 tcf, largely made up of shale gas, are more
diversifiedandthuslessdependentonshalegas,butstillfacesomevaluationrisksandpotentiallosses
oninvestments.
FIGURE 1 Top25ShaleGasPlayersinUS**EstimatesofShaleGasReservesandProduction
Bcf=billioncubicfeet;mmcf/d=millioncubicfeetperday
*DailyShaleGasProductionvaluesrepresentstatisticsinfirsthalf2011,source:NaturalGasSupplyAssociation(NGSA)
**WilliamsEnergy,ElPasoEnergy,andMarathonarealsomajorplayersinUSshalegasbutareexcludedfromthisanalysis
QuoteSymbol Company
Name
EstimatedUSNatural
Gas
Reserves(Bcf)
NaturalGasProduction
(mmcf/d)*
EstimatedShaleGasShareinOverallO&GProduction
XOM Exxon(XTO) 26,100 3,873 0to20%
CHKN ChesapeakeEnergyCorporati on 15,455 2,639 75to100%APCN AnadarkoPetroleumCorporati on 8,100 2,369 0to20%
DVNN DevonEnergyCorporati on 9,000 1,997 50to75%
BP_GB BritishPetroleum(BP) 13,700 1,869 0to20%
ECAN EnCanaCorporati on 7,500 1,833 75to100%COP ConocoPhi l l i ps 10,500 1,621 0to20%
SWNN SouthwesternEnergyCompany 4,345 1,312 75to100%CVX Chevron(Atl as) 2,500 1,284 0to20%
EOG
N EOG
Resources,
Inc. 6,861
1,124
50
to
75%RDSA_GB Royal DutchShell (Eas t) 4,502 953 0to20%
APAN ApacheCorporati on 4,340 869 0to20%
HKN PetrohawkEnergy(BHPBi l l i ton) 3,392 792 75to100%OXY Occi dental NotReported 748 0to20%
QEPN QEPResourcesInc. 2,612 641 50to75%
UPLN UltraPetroleumCorp. 4,200 614 75to100%NFXN NewfieldExplorationCompany 2,490 510 20to50%
EQTN EQTCorporati on 5,200 464 50to75%
COGN CabotOi l &Gas Corporati on 2,644 439 75to100%RRCN RangeResourcesCorporati on 4,442 346 75to100%PXDN PioneerNatural ResourcesCompany 2,594 331 75to100%XEC
N Cimarex
Energy
Company 1,254
326
20
to
50%TLMT TalismanEnergyInc 5,240 315 20to50%
PXPN Plains Exploration&ProductionCompany 1,157 285 20to50%
HES Hess Corporati on 568 103 0to20%
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MajorEnvironmentalandSocialChallenges
Themostcontroversialaspectsofhydraulicfracturing(fracking)revolvearoundtheissueofwater.Large
quantitiesofwaterareneededforthefrackingjob,whichcanincreaseregionalwaterstressandcreates
challengeswith themanagementofpostfrackingwastewater. Thehigh riskofwater contamination
andregionalwaterstressduringfrackingandproductionarepromptingstrongcommunityoppositiontoshalegasdevelopments.Methane,whichmakesup7090%ofthenaturalgas,canleakandcontaminate
drinkingwatersupplies.Thereleaseoftheleakednaturalgasintheatmospherealsohasclimatechange
implicationssincemethaneisahighlypotentgreenhousegas.
FIGURE 2 MajorRisksAssociatedwithHydraulicFracturing(fracking)Risk SpecifictoHydraulicFracturing
Operational Wastewaterorflowbackwaterpresentssignificantoperaonalchallenges
(wastewaterconsistsoffrackingfluids+substancespickedupundergroundsuch
ashydrocarbonsandheavymetals)
Morewellsneededforproduconthanequivalentoilproducon morechances
ofmishapsandhigherlanddisturbanceFrackingoccursatabout9,000poundspersquareinchpressureorgreater
Poorcasingprovidesapathforgasmigraonundergroundandthenaquifer
contamination
Tracesofradiaoninshalerockandfoundinwastewater(lowlevels)
MarcellusandlikelyUcabasinsarenotwellequippedforreinjectionof
wastewaterorwatertreatment(localwatertreatmentplantsnotequippedto
handlethesevolumesorsubstances)
Regulatory Increasingstateandfederalregulaonsarelikelyinthenexttwoyearsdueto
pendingstudybyUSEnvironmentalProtectionAgency(EPA)
Reputational Publicopposiontohydraulicfracturing(temporarymoratoriuminNYstate)due
tofearsofwatercontamination
Environmental Highlevelsofwastewaterandchemicalsraisesrisksofsurfacespills
Highlevelsofinefficienciesinproduconandtransport(methanelosses
estimatedtobeashighas8%ofpotentialproduction,industryadmitslossesof1
to3%)leadingtohighemissionsofpowerfulgreenhousegas
35,000gallonsoffrackingfluidaddives(oentoxic)injectedundergroundper
well
LandUseandAccessto
Resources
Averageof7milliongallonsofwaterneededperwellperdrillingjobpotenally
stressingwatersuppliesinaregion(drillingjoblastsaboutaweek,additional
frackingmaybeneededtorestimulateawell)
Largelanddisturbancesfromaccessroads,trucking,storageponds,andother
surfaceoperationssuchaspiping,storageandwellpadconstruction,resultingin
lossesofnaturalvalue(trees,vegetation,biodiversity)adverselyaffectingthe
ecosystemaswellasallowingforhighermigrationofemissions,contaminants,and
sediments
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High
Low
WaterStress
FIGURE 3 MajorShaleBasinsandRecentDroughtConditions
Source:USDADroughtMonitor.Droughtmonitor.unl.edu/.ShalebasinoverlayfromMSCIESGResearch.
FIGURE 4 MajorShalePlaysandWaterStressShaleplays States Water
Stress MajorPlayers
EagleFord TX Exxon,Petrohawk,Chesapeake,Aurora,Pioneer
WestTexasPermian TX Cabot,Chesapeake,Devon,EOG,Pioneer
Woodford OK,TX Cabot,BP,Devon,EOG,Exxon
Barnett TX RangeResources,Exxon,Chesapeake,Devon,Encana,EOG,Pioneer
Haynesville/Bossier LA,TX Petrohawk,Exxon,Cabot,Chesapeake,Plains,Encana,EOG
Fayetteville AR Southwestern,Petrohawk,Chesapeake
Marcellus PA,NY,OH,WV Cabot,Chesapeake,Ultra,EQT,Talisman,Range,Anadarko,Shell,EOG,Exxon(XTO)
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0
5000
10000
15000
20000
MillionGallons
CumulativeShaleGasEstimatesofWaterUseandWasteWaterGenerationwateruse
wastewater
USwateruse100,000persons
(assumed575 litersperday/person)
FIGURE 5 Estimatedyearlywateruseandwastewater
*20072010representestimatesbasedonactualshalegasproductionlevels.20112020areestimatesbasedonaprojected12.6tcfproduction
by 2020 (source: SBI Energy). We assumed a 10% annual production increase over the period. Water use estimates are based on a 1.3
gallon/millionBritishThermalUnits(MMBtu)waterneedsaverage3.Wastewatergenerationestimatesassumethat70%ofwaterusedreturns
asflowbackandignoresanyotheradditionalproducedwater,whichmaydrasticallyincreasetheestimatedlevels.
MethaneLeaks
Anadditionalconcernaboutshalegasextractionisthatitmayreleaselargeamountsofmethane,which
couldcontaminatedrinkingwateraswellascontribute toclimatechange.Naturalgasconsistsof70
90%ofmethane,anontoxic,highlyflammableandasphyxiantgaswithhighclimatechangepotency.
AcademicstudiesfromDukeUniversity4haveconfirmedsystematicevidenceofmethanecontamination
ofdrinkingwaterassociatedwithfrackinginPennsylvaniaandNewYork.Thehealthimpactofmethane
contaminatedwaterisunknown.Theoil&gasindustryarguesthatmethaneleaksareassociatedmore
generallywithnaturalgasdrilling,notwithhydraulicfracturingperse.
3WaterConsumptionofEnergyresourceExtraction,Processing,andConversion,ErikMielke,LauraDiazAnadon,andVenkatesh
Narayanamurti,Harward Kenedy School, Belfer Centre for Science and Interantional Affairs, Energy Technology Innovation
PolicyResearchGroup,October2010
4Methanecontaminationofdrinkingwateraccompanyinggaswelldrillingandhydraulicfracturing,StephenG.Osborn,Avner
Vengosh,NathanielR.Warner,RobertB.Jackson,centeronGlobalChange,NicholasSchooloftheEnvironment,andthe
BiologyDepartment,DukeUniversity,Durham,NC27708,January2011
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Methane fugitive gases and leaks in the atmosphere, throughout the lifetime of a well, are also
significantlyincreasingtheshalegasoverallcarbonfootprint.AccordingtoCornellscientists5,methane
leakagefromfracturingisworsethanwithconventionaldrilling;asmuchas8%ofmethaneinshalegas
leaksintotheairduringthelifetimeofshalegasproduction.Thefactthatunburnedmethanereleased
in the atmosphere has 20 times the warming effect of carbon dioxide (pound for pound) calls into
questionwhetheranyfutureconstraintsaroundgreenhousegasemissionscouldimpactthe longterm
growthoftheshalegasindustry.Onaverage,naturalgasemits30%lesscarbonwhenburnedcompared
tooilsenergycontent,whichmakesnaturalgasasacleanerenergyalternative.However,therelatively
high rateofmethane lossduring fracking (through leakage) coulddilute thebenefitofnaturalgas in
mitigatingclimatechangecomparedtooilandcoal.
CommunityOppositionMarcellusinfocus
Environmentalandhealthconcernsarethekeyreasonsthatenvironmentalistsandlocallandownersor
communityresidentsareopposedtohydraulicfracturing.Theseconcernsinclude:
potentialundergroundwatercontaminationfromtoxicchemicalsinthefrackingfluidsandnaturalgasseepingfromfaultywells
increasingstrainonwaterresourcesduetolargewaterrequirementsfordrilling potential soil, surface, and underground water contamination from inadequate
managementoraccidentalspills
increased landdisturbancedue to roadconstruction,waterstorage (pondsandlagoons),andlargenumbersofwellsdrilled
trafficandnoise from increasedactivity: tracks,compressorsandotherenginesusedduringdrilling
potential increased radioactivity from radioactive substances brought to thesurfacebytheflowbackandproducedwater
Landdisturbanceandtheintensityoflanduseforshaleproductionarealsoquitehigh.Fourteenshale
gaswellsareneededtoproducethesameamountofnaturalgasasproducedinconventionaloilfields
onanequivalentenergybasis.Eachwellrequiresroughly4to5acresperpad, includingwastewater
storage,andothersupportingequipment.
Comparedtootherbasins,communityopposition issignificantlystrongerintheMarcellusshalebasin,
whichcoverslargeareasofvaryingpopulationdensities.WhilepublicopinioninPennsylvaniaisdivided
on shale gas drilling, intense community opposition in some townships has delayed production and
could ultimately impose higher operational costs through more stringent regulations on fracking
activities.
5Methaneandthegreenhousegasfootprintofnaturalgasfromshaleformations,RobertW.Howarth,reneeSantoro,Anthony
Ingraffea,DepartmentofEcologyandEvolutionaryBiology,CornellUniversity,March2011
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FIGURE 6 TheMarcellusShaleandMajorWaterBasinsMap
Source:WaterResourcesandUseforHydraulicFracturingintheMarcellusShaleRegion. J.DanielArthur,P.E.,SPEC;MikeUretsky,PhD.;
PrestonWilsonALLConsulting,LLC
In thestateofNewYork,whichhasjurisdictionoverasmallportionof theMarcellusShale, the local
governmentimposedatemporarymoratoriumonnewdrillingpermitsinDecember2010.Asoftheend
ofJune2011,thestateadministrationindicatedthatithasbeencontemplatingpoliciesthatwouldonly
allowfrackingonprivatelands,andexcludeareasthatcontainaquifersusedforcitydrinkingwater(theNew York City and Syracuse watersheds) as well as parks and wildlife reserves; the issue has been
undergoingapubliccommentperiodandnewrulingisexpectedimminently.
ThecommunityoppositioninpartsoftheMarcellusshalebasin,whilemotivatedbyenvironmentaland
healthconcerns, isalso largelyabyproductofprevailingsocialsentimentandpoliticalopinion in that
region.Notunexpectedly,theexpansionofoil&gasactivities intoareaspreviouslyuntouchedbythe
industry will continue to face fierce opposition from the community, unless companies adequately
manageenvironmentalimpactandcommunityhealthconcernsthroughcommunicationandadoptionof
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bestenvironmentalpractices.Thepopulationdependenton thewater resources in theNortheast is
quite high (see figure 7), which means that any potential issues with water contamination would
arguablyhavealarger impact inpartsoftheMarcellusshalebasinascontaminationofdrinkingwater
therecouldultimatelyimpactmorepeople.6
FIGURE 7 OverlayofUSPopulationandShaleBasins
Source:USNationalAtlas.http://nationalatlas.gov/.ShalebasinoverlayfromMSCIESGResearch.
CompanieswithsignificantinterestsintheMarcellusbasin,asopposedtoallothershaleplays,facethehighest community opposition and regulatory risks. Despite the heightened risks from wastewater
managementand intensecommunityopposition,15outofthe25majorshalegasplayersareactively
pursuingproductionopportunitiesintheMarcellusbasin(seefigure8).
Companies capabilities in stakeholder engagement can help reassure communities, facilitate the
permitting process, and ultimately head off costly litigation. In evaluating companies relative
capabilities,MSCIESGResearchtakesinaccountofcompaniesprogramstargetingrelationshipbuilding
withNGOsandparticularly landowners;strategies tobuild localeconomiesthroughsupport for local
businesses and suppliers, employment, training andprofessionaldevelopment; and support for local
communityservicessuchaseducationandhealth.WenotethatUltra,CabotOil&Gas,andEOGlack
strong records or clear programs to manage community impact. Lack of community engagement
strategyatEOG,forexample,hasexposedthecompanytoongoingcommunityresistance,impedingitsabilitytocarryoutplannedhydraulicfracturingjobsinnewcommunities. Thecompanynamecontinues
to appear in the news in negative association to hydraulic fracturing after a shale well blowout
promptedregulatorstoissueaworkstoporderin2010.
6WenotethattheBarnettshalebasinintheDallasFortWortharea,wheremorethantwomillionpeoplereside,isalsohighlypopulated.Arguably,spillsandwater
contamination inthisbasinwouldalsoaffectalargenumberofpeople.
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Strong Weak
CommunityEngagementPrograms
FIGURE 8 MarcellusOperationsandCommunityPrograms
50%ormore
10to50%
Under10%
Loworunderdevelopment
Nopresence
ShaleOperationsinMarcellus
CompanyNameShale
DependencyonMarcellus
ActiveWellsinFirstHalf2011inPA
MSCIEvaluationofCommunityPrograms
ChesapeakeEnergyCorporation 1326
TalismanEnergyInc 673
RangeResourcesCorporation 609
AnadarkoPetroleumCorporation 421
EQTCorporation 367
CabotOil &GasCorporation 254
EOGResources,Inc. 242
UltraPetroleumCorp. 226
Chevron(Atlas) 182
Exxon
(XTO)
106
EnCanaCorporation 14
Hess 8
SouthwesternEnergyCompany
Shell(East)
NewfieldExplorationCompany
DevonEnergyCorporation
BP
ConocoPhillips
ApacheCorporation
Petrohawk(BHPBilliton)
Occidental
QEPResourcesInc.
PioneerNaturalResourcesCompany
CimarexEnergyCompany
PlainsExploration&ProductionCompan
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ProxiesforMeasuringRiskManagement
Inour2011Environmental,SocialandGovernance(ESG)ratingsresearch,wefoundthatthecompanies
with the highest concentration of assets in shale gas plays are also the ones with the poorest
disclosure of key metrics such as fresh water withdrawal, incidence of spills, waste generation andtreatment.Thesecompanies include:UltraPetroleum,ChesapeakeEnergy,Range,andCabotOiland
Gas.
While companies overall track records can be indicative of their ability to manage the social and
environmentalrisksaroundshalegasdrilling,wenotethatcurrentlymostplayersinthe industryhave
notdisclosedsufficientdatatoallowinvestorstomakeindepthanalysisonthespecificrisksinvolvedor
the companies risk management capability. Given the different levels and types of exposure to
environmentalrisksinthedifferentshalebasins,moredetaileddataonthelocationofcompaniesshale
reserves is necessary to gain a fuller picture of the operational and reputational risks facing each
company. Additionally, disclosure specifically around the use and treatment of water in shale gas
operations is imperative for investors tounderstand theextent towhichcompanieshavebuilt in the
costs of maintaining operational integrity and potential exposure to future liability associated withaccidentsandcontamination.
Investors are activelypursuing specificdisclosure of fracking operations. For instance, theNew York
State Common Retirement Fund has successfully included fracking shareholder proposals at 16
companies.Furthermore,theU.S.SecuritiesandExchangeCommissionhasaskedoilandgascompanies
fordetailed informationon fracking, including fracking fluid chemicals compositionandmanagement
initiativesfordealingwiththeenvironmentalimpact.LegislationatthestatelevelincludingDelaware,
New York, Pennsylvania, and Wyoming has been proposed or adopted regarding disclosure and
standardsofoperationsandenvironmentalmanagementpractices.
2011
Proxy
VotingOilandgas companieshavecomeunderpressure toprovidemore information regarding
their exposure to risks associated with shale gas drilling. During the 2011 proxy season,
Institutional Shareholder Services Inc. (a subsidiary of MSCI) reported that shareholder
resolutions related to theenvironmental risksofshalegasdrillinggarneredanaverageof
40.7% support, a rise of 10 percentage points from 2010. The table below shows the
resolutions filed in 2011 seeking greater transparency on the environmental impacts of
hydraulicfracturingandtheimplementationofpoliciestoreducehazardsfromtheprocess.
*Theproposalswerewithdrawnaftervariousagreementswiththeshareholders.
Companieswithfrackingrelatedproposals
filedin2011Voting
percentage
Energen 49.5%Carrizo Oil & Gas 43.7%
Ultra Petrleum 41.7%
Chevron (Atlas) 40.5%
Exxon (XTO) 28.2%
Cabot Oil & Gas Corporation withdrawn*
El Paso withdrawn*
Anadarko Petroleum Corporation withdrawn*
Southwestern Energy Company withdrawn*
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Ourassessmentofacompanysabilitytomanageenvironmentalimpacttolandresourcesisbasedon
thefollowingfactors:
Performancetrackrecordonfrackingoperations Performanceonwateruseandspills(benchmarkedagainstpeersbasedonavailabledata)
Evidenceofoverall
policy
implementation:
environmental
and
social
impact
assessment
prior
to
operations, initiatives forminimizing environmental disturbance and impact, and community
andstakeholderengagement
ClearpoliciestoprotectbiodiversityandrespecttraditionallandusepracticesWehave identifiedCabotOil&GasandChesapeakeEnergyashavingthepoorestperformance track
record, due to significant fines and pending lawsuits stemming from contamination and community
impact from fracking. Other companies with evidence of spills and blowups from fracking, or with
pendingorsettlednaturalgascontaminationlawsuitsincludeDevon,Talisman,EnCana,Southwestern,
EOG,andRangeResources. Supermajoroilandgascompanies,suchasShell,Chevron,ExxonandBP,
whilehaving comprehensiveenvironmentalandbiodiversitymanagement structures inplace,havea
history of controversies and poor performance including spills and contamination of sensitive
environments.Attheotherendofthespectrum,smallerplayers,suchasHess,PioneerorEQT
donot
seem to have the same level of involvement in poor performance while also having adequate
biodiversitypoliciesandpracticesinplace.
FIGURE 9 ProxyforCompaniesCapacitytoMitigateRisksAssessmentofEnvironmentalManagementinFrackingOperations
*DataanalyzedisincludedintheassessmentofcompaniesperformanceonBiodiversityandLandUse,oneoftheindustrykeyissuesonwhich
weevaluateoilandgascompaniesinMSCIsannualESGratingsresearch.Onthiskeyissue,weevaluatecompaniesonboththeirexposureto
andtheirabilitytomanagerisksoflosingaccesstoresourcesandofincurringlitigationandliabilitycostsduetooperationsthatdamagefragile
ecosystems.OtherindustrykeyissuesthatdetermineoverallESGratingsforcompaniesintheseindustriesincludeHealth&Safety,Corruption
&Instability,CarbonEmissions,andToxicEmissions. PleaserefertoIVAIndustryReportsonIntegratedOil&GasandonOil&GasExploration
andProduction,aswellascompanyprofilesfordetails.
EnvironmentalManagementofFrackingOperationsStrong
Weak
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Webelievethat inthemediumterm,companieswithapoortrackrecordofmanagingenvironmental
impactwateruse,waste,spills,aswellasoperationalintegrityandsafetyorwithpoorpracticesof
community engagement, will be less prepared tomeetmore stringent regulations around shale gas
drilling. For companies unprepared to meet higher environmental and community standards,
unanticipatedfuturecostscould include requirements tobuildwaste treatmentfacilities,prolonged
permitting processes, legal costs associated with lawsuits or other environmental liabilities, lost
permits,andcleanupcosts.
Morespecifically,ourrecentanalysisofCabotshowsthat,unlikethemajorityofitspeersintheoil&gas
exploration and production industry, the company lacks a standard environmental policy, makes no
commitmentsrelatedtobiodiversityorlanduseprotection,andlackskeyprocessessuchaseffectiveor
adequateassessmentsofenvironmental impactbeforedevelopinganareaandprograms tominimize
environmental disturbances caused by its operations. Consequently, the company has faced fines,
numerous lawsuits,andtemporarybansfromusinghydraulicfracturingafterrepeated leaksandspills
intolocalwaterways.InonesettlementinNovember2009,thecompanywasorderedtohaveallfuture
casing and cementing plans approved by thePennsylvaniaDepartment of EnvironmentalProtection.
(ForcomprehensivedetailsoninvestigationsandcontroversiesimplicatingCabot,pleaserefertoMSCIs
ESG ImpactMonitor profile). These repeated offenses are indicative that the company is not well
equippedfromamanagementperspectivetoeffectivelymitigateitspropensityforwatercontamination
initshighriskoperations.
CabotisalsoonthePennsylvaniaLandTrustslistof25drillerswiththemostviolations,alongwithEOG
Resources,SouthwesternEnergy,Anadarko,andTalismanEnergy.The LandTrust issueda report in
August2010thatidentifiednearly1,500violationssinceJanuary2008committedby43MarcellusShale
drillingcompanies.ThePennsylvaniaDepartmentofEnvironmentalProtectionhasalso indicated large
numbersofviolationsinconnectionwithwastewaterhauling.Inone3dayperiod,theDEPreported669
traffic citations and 818 written warnings issued to trucks hauling waste water from drilling in the
Marcellus.
Thehigh
profile
nature
ofshale
gas
drilling
inthe
US
means
that
alltop
players
are
effectively
being
put
on watch for how they manage the substantial environmental and social risks involved in these
activities,whichinturnmayinfluenceshalegasdevelopmentglobally,inregionssuchasEurope,South
America, or Asia. For the super oil majors, any poor environmental performance that will generate
healthscaresor impact localwater resourceswill compromise the theirability togainaccess tonew
marketsinotherregions.
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CONCLUSIONS
Companiesintheshalegasmarketmayfacetremendousopportunitiesbutafailuretoproperlyaddressthechallengesmayputthecompanyvaluationsathighrisk
Wateravailabilitymaybecomeaprobleminspecificbasins Waste water generation will increase with growth in production, further raising operational
costsandenvironmentalliabilitiesfromcontamination
Residential and environmental community opposition will likely remain high until adequateenvironmental management practices address water sourcing, waste contamination, and
methaneleaksattheoperationallevel
Themostdiversifiedcompaniesfacelowerrisktotheirvaluationandareinabetterpositiontoadoptbestpractices
Smaller players that are highly reliant on shale interests face the highest risk of longtermcompanydevaluation,especiallyforthosewithpoorrecordsofenvironmentalandsocialissues
andnoclearplanstoimprovethem
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AppendixI:WhatisShaleGasandHydraulicFracturing?
Shaleisgenerallydefinedasfinecompactgrainsofsedimentaryrockthatcontainoilornaturalgas(typicallymethane).
Whileshalebasinsholdlargeamountsoffossilfuelsthatrivalwhatisfoundinconventionalfields,theyhavelow
permeability,makingconventionalextractionmethodsuneconomical. AprocessknownasHydraulicFracturing
(commonlyreferredtoasfracking)isbeingemployedincreasinglybyoilandgascompaniestostimulateproductionof
oilandnaturalgasfromshalebasinsandotherreservoirssuchascoalbeds. Newdrillingtechniquesthatallowfor
horizontalanddirectionaldrillingatthedepthofthetargetedrockformationareopeningupvastnewquantitiesofoil
andgasresourcesthatpreviouslywereconsideredunrecoverable.
Keytotheprocessisafluidmixpumpedathighpressurethroughsteelandconcretewellboresintoshaleformations,
creatingfracturesandfreeingthefossilfuelstoallowfordesirableproductionflowrates.
Thefrackingfluidgenerallyconsistsofabout95%waterandsand,supplementedbychemicaladditivesthattypicallyare
nomorethan1to2%ofthemixbyweight. Whilethechemicaladditivesareproprietaryblendsthatvarybycompany,
theycommonlycontaintoxicsubstancessuchasbenzene,toluene,hydrochloricacidandsodiumhydroxide. These
substancesarelinkedwithcancer,endocrinedisruptionandothermajorhealthhazards.
Hydrocarbonreservesinshalerocktypicallyaredeepundergroundatdepthsof2,000to3,000meters(~6,500to10,000
feet),thoughsomereservoirsaremuchshallowerordeeper. Mostformationsarewellbelowdrinkingwaterresources
andseparatedbyimpermeablelayersofrock. However,productionwellsmaygothroughdrinkingwaterresourcesto
accesstheseresources,andpoorwellcasingscanleadtowatercontamination. Reservoirsatshallowdepths,whicharecommonforothernaturalgassourcessuchascoalbedmethane,presentamuchhigherrisktoshallowwaterresources.
Surfacewatercontaminationisanotherpotentialhazard. Whilealargeamountofthefrackingfluidremains
underground(creatingpotentiallongtermliabilities),alargeproportionalsoreturnstothesurface,dependingonthe
welllocationandunderlyinggeologicalcharacteristics. Thishighvolumeoffluidwastemustbemanagedcorrectlyto
avoidcontaminationofsurfacewatersupplies. Becauselocalwastewatertreatmentusuallyisnotavailable,mostfluid
wastemustbetransportedoffsite. Thiscreatesasubstantiallandfootprintconsistingofwastewaterpits,storagetanks,
transportationlines,trucksandotherequipment. Communitiesnotaccustomedtothislevelofindustrialactivityand
exposuretotoxicwastemayseektoblockdevelopmentactivityandincreaseregulatorycontrols.
Source:ProPublicahttp://www.propublica.org/special/hydraulicfracturingnational
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France
Germany
Netherlands
Norway
U.K.
Denmark
Sweden
Poland
Turkey Ukraine
LithuaniaOthers
UnitedStates
Canada
Mexico
China
India
Pakistan
Australia
SouthAfrica
Libya
TunisiaAlgeria
Morocco
WesternSahara
Mauritania
Venezuela
Colombia
Argentina
Brazil
Chile
Uruguay
ParaguayBolivia
TechnicallyRecoverableShaleGasResources(trillioncubicfeet)
Source:EIA,2009
AppendixII:GlobalDistributionofUnprovenShaleGasReserves
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AppendixIII:CompositionofFrackingFluid
Source:ModernShaleGasDevelopmentintheUnitedStates:APrimer,April2009WorkPerformedUnderDEFG2604NT15455Preparedfor
U.S.DepartmentofEnergyOfficeofFossilEnergyandNationalEnergyTechnologyLaboratoryPreparedbyGroundWaterProtectionCouncil
OklahomaCity,OK.ALLConsultingTulsa,OK.
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