Thursday, September 15, 2011

Fracking Under Pressure

This new report by Dayna Linley, global energy sector lead for Sustainalytics, clearly outlines what’s going on in the world of fracking today, and what responsible investors should be aware of. Fracking is the colloquial term for hydraulic fracturing, that is, pumping fluids (usually water and chemicals) into a geologic formation at high pressure to release the natural gas (shale gas).

The report begins with some background on global energy demand, which is constantly increasing and driving the shift to unconventional oil and gas. ‘Due to restricted access to known reserves, many public companies are shifting their operations into higher risk areas and into unconventional oil and gas deposits. High-risk regions are generally characterized by social volatility or environmental sensitivity, while unconventional deposits are those that either contain heavier or more contaminated oil or gas, or that occur in less accessible reservoirs or rocks.’ This is followed by an explanation of the potential impacts of shale gas extraction on air emissions, land and water.

What should the socially responsible investor do? Investors should be aware of the risks, primarily reputational risk, regulatory risk and litigation risk, and should engage with companies to encourage the adoption and ongoing development of best practices. ‘Oil and gas companies, working with their energy service providers, should evaluate local conditions and regulatory frameworks to determine locally appropriate best practices to limit impacts to the environment, local populations and the bottom line.’

The section on best practices details some best practices: transparency, baseline water testing, use of green products, process changes regarding fluid management and minimization, GHG and air emission reduction and well integrity testing, contractor management and community engagement. Included are examples of corporate initiatives in each of these areas.

A final caveat - ‘…responsible investors should view shale gas development in the context of the broader need to shift our economy away from dependence on fossil fuels. Shale gas development, even with best practices in place, does nothing to contribute to this shift. Therefore, while pushing for best practices, responsible investors should push even harder for investment in renewable, sustainable forms of energy and for regulatory environments that incentivize such investment.’

See the sidebar for more stories on fracking.
Read the full Sustainalytics report here.

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