Sarasin engage with shale gas industry

                                                                                           Technology

The commercial viability of shale gas has only recently become profitable as a result of two new technologies: Horizontal Drilling and Hydraulic Fracturing. Directional drilling makes the process more productive and less costly. While Hydraulic Fracturing or ‘fracking’ is the high pressure injection of fluid, typically water and chemicals, into the shale in order to release gas to the surface. It is fracking which has been the source of contention as a result of uncertainty over environmental and health risks.

Engagement

Engagement with gas companies involved in fracking has produced some positive results but not provided enough information to assuage public concern. Of the 20 companies approached by Thomas DiNapoli’s shareholder movement to provide clarity on the chemicals they use, only 2 responded. DiNapoli urged the firms to disclose the chemicals, processes and strategies used as “the risks associated with unconventional shale gas extraction have the potential to negatively impact shareholder value.” Since widespread support for shareholder resolutions and increasing global media attention more firms have responded with improved disclosure. ExxonMobil said in a recent statement that it “supports the disclosure of the identity of the ingredients being used in fracturing fluids at each site” but remains reluctant to release “formulations in their exact amounts”.

 

Environmental Risks

Shale gas was originally considered to be a greener alternative to oil, coal and conventional gas. However, there is now considerable concern that shale gas could be as bad to the environment as burning coal and thus not be an environmental solution to the world’s climate problems – indeed  could compound them.

Recent independent studies have shown that although the burning of shale gas remains less carbon-intensive, it is the extraction process and the release of methane which leaves shale gas a less attractive energy source. In a letter by Howarth, Santoro and Ingraffea it is estimated that 3.6-7.9% of total well production is lost to the atmosphere as methane. This is 30% greater than, and perhaps twice as much over a well’s lifetime, as a conventional gas well. It is also important to note that methane is far more damaging to the environment than CO₂. In comparison to the carbon-intensity of coal and oil, shale gas is more carbon-intensive over a 20 year period and equal over a 100 year horizon.

 

Health Risks

Other than the environmental impact of shale gas, the health impact is another source of public concern. Concerns focus on the contamination of ground and drinking water by chemicals from fracking and the contamination of water supplies with methane. It is the citing of these health issues that led to demands for improved engagement from firms conducting shale gas operations and also the disclosure of chemicals used in hydraulic fracturing. A recent study by a number of scientists at Duke University concluded that methane could enter water supplies where shale gas operations were nearby, also illustrated in the documentary Gaslands.

In their report Sarasin note that up to 40% of the fluid injected in the mining process returns to the surface. Due to the chemical content of the fluid it needs to be treated to prevent environmental and health implications. The EPA is set to release preliminary findings on the effects of fracking on water supplies in 2012. Currently the procedures are not regulated by the EPA under the US Safe Drinking Water Act.

 

Energy and Financial Impact of Shale Gas

The International Energy Association (IEA) estimate that shale gas could make up 11% of global gas production by 2035. The number and extent of Shale gas deposits has risen dramatically across the globe, but methods of calculation levels of deposits have been called into question.

In the US the IEA has estimated in 2011 that there is around 750Tcf (trillion cubic feet) of recoverable shale gas, with over half of this attributable to the Marcellus region (between New York and Virginia). However, since then estimates for the Marcellus region have been slashed by 80% leading to a clampdown by the SEC on how estimates are calculated.

From an economic perspective discovery of this new resource of gas has significantly impacted on the price of Natural Gas and shifted the development of energy infrastructure, which will have in the future and has had wide implications for investors.

 

Conclusion

In their report Sarasin conclude that engagement has had a positive impact in helping to change the information which is reported by companies involved in fracking. They also highlight the key points which investors should consider when reviewing investments such as:

• local regulation;
• community involvement;
• water intensity;
• depletion rates;
• disclosure of chemicals used on the FracFocus registry; and
• the monitoring of health and environmental issues.

The Sarasin report adds greatly to an investor’s ability to assess this industry. However, while shale gas reserves have a positive impact on energy security for many nations, the environmental impact of this source of gas in meeting global carbon targets is concerning. At the recent Climate Change Awards Dr David Kennedy, Chief Executive of the UK government’s committee on Climate change, made the point that shale gas was “a major threat to de-carbonising society”. So while Shale gas might be a short term solution for energy companies, it still does not look like a long term solution for society.