Oil and gas companies involved in the water-intensive practice of hydraulic fracturing, or fracking, to extract natural gas may find little to celebrate in today’s rock-bottom energy prices. But advocates pushing for higher environmental standards in the fracking industry don’t have to look hard to find the downturn’s silver lining.
Just ask Richard Liroff, executive director of the Investor Environmental Health Network, a shareholder engagement group based in Falls Church, Virginia. Eager to cut costs to offset low prices for their products, natural-gas explorers have grown receptive to the suggested best practices published in IEHN’s 2011 report Extracting the Facts: An Investor Guide to Disclosing Risks from Hydraulic Fracturing Operations .
In one sign of that change, Liroff says, he’s seen several companies adopt toxicity scoring systems for chemicals used in fracking; one of the recommendations in the IEHN report, this process can help reduce chemical use and its accompanying expenses. “As for other money-saving operational changes that are good for the environment, in general, I think companies have been getting smarter about those over the past several years,” Liroff says. “The lower [commodity] prices certainly provide that much stronger an incentive.”
Steven Heim, director of environmental, social and governance research and shareholder engagement at Boston Common Asset Management, has been talking since 2005 to portfolio companies involved in fracking. He says he’s noticed the same encouraging trend.
“In the beginning the whole industry approach was, ‘More is better’: more chemicals, more water, more pressure, more fracturing stages,” recalls Heim, whose Boston-based firm manages $2.2 billion. “Now, with oil prices down, they really have to think, ‘Do we need to put in a new well every 250 feet? Do we have to use all these chemicals? And water is expensive!’”
Ceres, a Boston-based nonprofit sustainability advocacy group, is collecting fracking industry data for an update of its 2014 report Hydraulic Fracturing and Water Stress: Water Demand by the Numbers, which highlighted places where exposure to water scarcity might concern institutional investors and offered recommendations to mitigate water risk. The first report found that between January 2011 and May 2013, fracking operations in the U.S. used 97 billion gallons of water, and 55 percent of the wells they drew from were in areas suffering from drought.
Though not much time has passed since the 2014 report, Ceres’ water experts expect to find new patterns. “Where we’re probably going to see the most changes is in water use trends,” says Monika Freyman, senior manager of the group’s water program. “I think the drop in oil prices might be reflected in some of the newer data. There will probably be a slowdown in water use in some areas.”
But Freyman also urges investors to keep up the pressure on natural-gas companies as water sources keep shrinking and the public pays more attention to scarcity. As new environmental issues and their attendant financial problems emerge for the fracking industry, she says, investors need to update their questions for the businesses in their portfolios.
“Companies really have to communicate and proactively approach communities’ water managers and other users to say, ‘This is the water we’re going to need,’” Freyman contends. “Otherwise they’re going to get more pushback from communities on this quiet use of water.”
Freyman points to ongoing work by Jean-Philippe Nicot, a senior research scientist in the Bureau of Economic Geology at the University of Texas at Austin. Using Texas as a case study, Nicot has shown that although water use for fracking barely registers on the state level, it can have a significant impact locally, especially on groundwater. His conclusion: Given that the population of Texas is increasing even as droughts grow more frequent, fracking operations have no choice but to develop less-water-intensive processes.
Another troubling trend that the industry must address is the potential link between its activities and earthquakes, Ceres’ Freyman says. In Oklahoma, for example, the U.S. Geological Survey and the Oklahoma Geological Survey report that in the first four months of 2014 the state had already seen 145 earthquakes of magnitude 3.0 or greater — a 50 percent increase over the annual record of 109 such earthquakes, set the previous year. Both numbers are alarmingly high compared with Oklahoma’s long-term annual average between 1978 and 2008 of just two earthquakes on that scale. The two agencies say their analyses suggest that the fracking industry’s practice of injecting wastewater deep into geological formations is contributing to the spike.
Insurers in Oklahoma are taking notice. In 2014, State Insurance Commissioner John Doak issued an emergency rule requiring all property and casualty insurance agents to complete one hour of continuing education on earthquake insurance every two years. Earlier this year Doak announced that 15 percent of Oklahomans now have earthquake insurance, versus 2 percent in 2011. If future research establishes a clearer link between earthquakes and natural-gas operators’ disposal of wastewater, fracking operations will probably become more tightly regulated and face bans on how and where they can handle wastewater. This could hurt them financially, Freyman warns.
“The cost of fracking becomes a lot higher, because then you’ll have to treat some of the wastewater or drive it further away,” she says. “The big question for investors is will this wastewater issue shrink margins? Companies just can’t assume they can dispose of it at a relatively low cost, as they have in the past.”
