Sustainable Investments Institute Issues Report on Fracking

The Sustainable Investments Institute (Si2) and the IRRC Institute yesterday released a new report titled “Discovering Shale Gas: An Investor Guide to Hydraulic Fracturing” (a copy of the 74-page report is embedded below). The report provides an in-depth look at the environmental and social impacts of shale gas development, identifies key questions for investors and includes 10 drilling company profiles. An expert panel representing industry, environmental groups and investor activists provided input to the report.

Si2 and IRRC (Investor Responsibility Research Center) Institute, the organization that created Si2, provide research on shareholder initiatives to nudge or force corporations to adopt more environmentally friendly policies. Usually those are code words for environmental activism. But in a quick review of this research report on hydraulic fracturing, it does seem that Si2 makes a good attempt at being impartial and does not take a position pro- or anti-drilling.

The report is worth reading. It’s well laid out with good information and it does a good job of summarizing the issues with hydraulic fracturing—both good and bad. At a high level, MDN would summarize the report’s findings this way: Hydraulic fracturing technology is solid and drilling can be done in an environmentally safe way, but drillers need to do a better job at public relations, getting the facts out there and being more transparent, or they risk continuing to have pubic opposition and moratoria. MDN concurs.

The Si2 press release does a good job of distilling down the essentials of the report:

The natural gas industry is technologically capable of tapping vast shale gas resources in the United States, but it is unclear if all companies can successfully manage the complex array of environmental and social risks that could impede profitable extraction.  Companies also vary in the quality, quantity and timeliness of their disclosure regarding shale gas activities, and generally need to replace anecdotal descriptions of some innovations with consistent and comprehensive data across their operations.

These findings are contained in a new report, Discovering Shale Gas: An Investor Guide to Hydraulic Fracturing, commissioned and funded by the Investor Responsibility Research Center (IRRC) Institute and conducted by the Sustainable Investments Institute (Si2).

The study, with input from a panel of advisers from industry, environmental organizations and investment managers, identifies the full range of issues for investors and others to consider.  It also profiles 10 publicly traded shale gas developers including Anadarko Petroleum, Cabot Oil & Gas, Carrizo Oil & Gas, Chesapeake Energy, Chevron, ExxonMobil, Hess, Range Resources, Southwestern Energy and WPX Energy (formerly Williams Cos.).

The report notes that three critical issues challenge the industry:

  • Technical—Fracking a horizontal shale well requires one to eight million gallons of water and thousands more gallons of chemicals than a conventional vertical gas well. These volumes create a host of issues companies must address.
  • Scale—Thousands of shale gas wells may be drilled within a few years in some states.  If contamination problems occur at only a small percentage, numerous communities could be negatively affected.
  • Location—Development is spreading to new areas.  Regulators and communities new to natural gas development are proving less tolerant of associated impacts than communities where gas production has occurred historically.  Even if environmental concerns can be addressed, some communities may oppose industrialization of their surroundings.

Key findings are as follows:

  • As a result of the three key issues, shale gas development presents unique management challenges—but not unique technological challenges—to mitigate adverse environmental impacts.  The basic techniques to prevent pollution are similar to those in place for conventional onshore natural gas development.
  • It is unclear if the industry has the will, short-term economic incentives or regulatory oversight to avoid environmental and social impacts that could lead to continued controversy and additional restrictions on drilling.  An industry-wide commitment to transparency and best practices rather than mere regulatory compliance is essential.
  • Rapid technological innovation to reduce environmental impacts is occurring, and industry has shown a willingness to respond quickly to issues. Commercial and investment opportunities to reduce environmental impacts also are evident, as seen by the growth of recycling technologies and new “green” fracturing fluid products.
  • Shale gas development has been an economic victim of its own success, resulting in lower natural gas prices.  This presents challenges for companies to absorb new costs associated with reducing environmental impacts.

“Shale gas extraction is high stakes and high risk for companies, investors and the environment,” said Jon Lukomnik, IRRC Institute executive director.  “Perhaps because of that, most analyses have been one-sided.  The reality is a bit more complex.  The good news is that significant technological advancements have enabled companies to access a plentiful domestic energy source.  The bad news is that shale gas is found in communities unfamiliar with petrochemical development where a regulatory patchwork does not always fully protect community interests.  This places the onus on corporations to manage and negotiate through environmental and social issues on a community by community basis.”

Lukomnik continued, “That means that some areas, such as the New York City watershed, may be simply off-limits, while others require more stringent methodologies than currently mandated by law. Everything, from selection of drill pad sites to choice of chemicals to when trucks are scheduled, needs to be considered. That is a huge managerial challenge, so regulators, investors, community groups and environmentalists are correct to distinguish amongst the companies engaging in hydraulic fracturing so as to judge managerial quality.”

Report author Susan Williams of Si2 predicts, “The companies most adept at navigating these complex management, social, and environmental risks are best positioned to capitalize.  Those that
don’t, or those who use one-size-fits-all solutions to different geologic formations, population patters and watersheds, will find their operations criticized, and possibly prompt restrictions on the entire industry. This new research guide will help investors get their arms around the driving issues, formulate key questions to pose to companies, and make informed investment decisions.”

Si2 executive director Heidi Welsh commented, “Fracking is a quintessential 21st century energy issue about hard choices.  It forces us to look at how we are meeting growing demand with unconventional energy sources, and who will pay the costs for how this affects communities.”*

*Sustainable Investments Institute (Mar 8, 2012) – Hydraulic Fracturing: Management Challenges – Not Technology – Biggest Hurdles for Companies (PDF)

  • Anonymous

    Thanks much for the story covering our report. As you point out, we did try to be informative and impartial, not merely repeat sound bites from one side or the other.

    However, I do want to correct the record on two items. First, the IRRC Institute did not “create” SI2. SI2 is an independent entity with which we contracted for the research, analysis and report. Second, our purpose is decidedly non-advocacy.  We seek to provide thought leadership at the intersection of corporate responsibility and the informational needs of investors. We find that by providing objective research we can do that. Indeed, we seek to better inform all participants who debate and advocate about the various issues we research, so that their arguments can begin from a factual basis, rather than received “wisdom” that may or may not be factual.  We belive that benefits all.


    Jon Lukomnik, Executive Director, IRRC Institute

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