Evolving risks and opportunities in fracking

This volatility has seen the cost of a barrel plunge from US$100 to below US$50. Low prices have become the deciding factor on whether a company will continue fracking operations. As a result, some companies are sitting on drilled but uncompleted wells, waiting for higher oil prices, raising the prospect of stranded assets, and concerns over debt obligations or bankruptcy.

In addition, the regulatory context is also shifting. COP21 in 2015 resulted in a legally-binding global deal to limit global warming to well below 2°C, with efforts to restrict it to 1.5°C. The role the oil and gas industry will play in a low carbon economy is under question, as is how countries will secure their energy requirements. As countries consider their emission reductions and Nationally Determined Contributions, high-cost resources are likely to be the most affected.

While natural gas is recognised as a replacement for carbon-intensive fuels, its primary component – methane – is, in the short term, 84 times more potent than carbon dioxide. Fracking can therefore significantly contribute to greenhouse gas emissions if leakages happen during production, transportation or use. Methane leakages on the scale of those documented in a recent study could offset the benefits of switching from coal to natural gas and potentially limit its potential as a transition fuel in a lowcarbon economy.

Policy, operational risks and community concerns have also, and will continue to, affect the development of fracking operations globally. Countries like the UK plan to develop their shale reserves via fracking, but development has been slow and is in the early stages. This is in part because of questions related to the UK’s carbon budget, as well as how to manage community opposition to fracking.

China’s large shale reserves provide potential for the next fracking boom, but progress has been slow – their annual shale gas target of 6.5 billion cubic meters was not met; they also cut their 2020 production goal. Despite the environmental risks involved, China’s shale potential is seen as conducive to transitioning the economy away from coal with the help of national regulation and policy. The IEA projects China’s gas production to exceed 250 billion cubic meters by 2040 but cites challenges with geology, water availability and access rights in addition to regulatory pricing and developing supply chains. China will need to tightly manage the local environmental and community impacts of fracking in order to maximise the benefits of transitioning away from coal.

Why engage on fracking?

With existing fracking operations globally and a potential surge in regions such as China, fracking remains important to investors that hold global oil and gas companies with market exposure. Investors need to be prepared to engage on the issue today and understand the potential future risks as the market and regulatory context evolves. Fracking risks that concern investors include:

• Operational and physical risks. They can increase costs and impact the value of an investment. For example, fracking requires significant and continuous quantities of water, and it is harder to secure this at the right quality in areas that are experiencing water stress. Water discharge and pollution risks also occur through wellbore and surface leaks during the transportation, storage and disposal of contaminated water.
• The leakage of methane and other greenhouse gas emissions, both within and outside the company’s direct operations, contributes to climate change and undermines natural gas’s relatively cleaner reputation when compared to coal. It can also be a loss of revenue for the company, as in some cases methane can be captured and sold rather than vented or flared. Companies may also face increasing regulations to reduce their methane emissions, potentially raising costs.
• Reputational risk and social license to operate. Community concerns about fracking operations often receive media attention. A company’s ability to adequately respond to and manage local community concerns, including contaminated drinking water and increased noise, can affect reputational risks and the social license to operate.
• Policy and regulation. Companies need to be able to adapt to meet changing regulatory requirements. In 2016, the US, Canada and Mexico committed to cut methane emissions from the oil and gas sector by 40-45% compared to 2012 levels by 2025. Other regulations may include water withdrawal limits, green completions, and disposal guidelines. Bans and moratoriums in different countries have also limited fracking.
  
  For example:
  
  
• Scotland has imposed a moratorium on fracking while a full public consultation and research is conducted into the impacts on public health.
• The Victorian government in Australia announced a permanent ban on the exploration and development of onshore unconventional gas, including fracking and coal seam gas, in the state.

Taking these risks into account, and through consultation with fracking experts, the PRI Fracking Steering Committee identified four areas to engage companies operating in different jurisdictions:

• governance;
• water use and quality;
• air emissions;
• community impact and consent.

These focus areas reflect the most material risks and where companies could make a significant improvement in their performance and disclosure.