Engaging with oil and gas companies on fracking: an investor guide

The production of oil and gas via hydraulic fracturing (fracking) remains important and yet can be viewed as a contentious method in some regions, with community controversies, bans and moratoria in different areas.

The shale revolution saw production of oil and gas from fracked wells soar in the US in the past decade and natural gas is seen as a cleaner fuel compared to coal. However, the global operating context for oil and gas companies has changed rapidly in recent years, with fluctuating oil prices and a shifting regulatory context to transition towards a low-carbon economy.

Bearing in mind the changing market context and the operational-level risks associated with fracking, investors need to be prepared to engage on the issue today and understand the potential risks for future operations as the market and regulatory context evolves. Fracking risks that are of concern to investors are:

operational and physical risks;
methane and other greenhouse gas emissions leaks;
reputational risk and social license to operate;
policy and regulatory risks.

Taking the lessons learnt from the PRI-coordinated engagement, which saw 87% of the companies engaged with improve their disclosure of fracking-related policies, practices and management systems, this guide outlines why fracking is an important issue for engagement. It also provides investors with tried and tested questions to encourage oil and gas companies in their portfolio to minimise risks related to fracking.

This guide provides an overview to some key steps to consider before engaging with companies on the above risks. A different approach should be considered when engaging with service providers because of the different role they play to producers.

Engagement questions, accompanied by the basic expectation from investors and follow-up themes, are structured under four focus areas:

governance;
water use and quality;
greenhouse gases and other air emissions; and
community impact and consultation.

While companies significantly improved their disclosure during the course of the PRI-coordinated engagement, gaps were identified where companies could still improve, and these are recommended areas for future investor engagement:

Encourage companies to reduce and report on their methane emissions.
Encourage companies to continue to engage with stakeholders and implement grievance mechanisms.
Encourage companies to monitor and report on water quality and availability.
What is fracking?

$what is fracking$

From 2014-2016, a group of 41 PRI signatories, with assets under management of USD$5.1 trillion, engaged with 37 companies using a benchmark conducted in 2013 as a basis for the dialogues. The benchmark consisted of 56 indicators, developed by the PRI Fracking Steering Committee, reflecting fracking policies, commitments and performance metrics. In 2016, a repeat of the benchmark was conducted for 26 producing companies and four service providers. The results showed that:

26 out of the 30 companies (87%) that were benchmarked in 2016 improved their disclosure of fracking-related policies, practices and management systems.
The most improved company increased its disclosure score by 47%.
Specific indicators, including incorporating fracking into sustainability policies; reporting a commitment to well integrity standards; and reporting on metrics were disclosed by more than 80% of companies.

Despite the improvements, there is still significant scope for companies to improve their fracking practices in order to reduce risks and make the most of opportunities. Taking the lessons learnt from the PRI-coordinated engagement, this guide outlines why fracking is an important issue for engagement, even within the changing economic and regulatory context. It also provides investors with tested questions to encourage oil and gas companies in their portfolio to minimise risks related to fracking.