Socially responsible investors must balance pragmatism with uncertainties surrounding natural gas sustainability.
Editor's Note: It's that time of the year again and we're ready to wrap up 2012. Like last year, we've assembled an impressive lineup of thought leaders and experts who will examine the year that was, guide us on what might be ahead and offer their advice on how our business, social and environmental consciousness continues to converge. They will spotlight achievements, highlight trends and activate the change makers among us in our end of the year CSR & Sustainability 2012 series. Consider this series a call to action.
Today's editorial is by Sanford Lewis, Counsel to the Investor Environmental Health Network.
2012 has been a challenging year for socially responsible investors who track risks and policy related to natural gas and hydraulic fracturing. SRI investors will need to think holistically about natural gas, in a context in which the question of sustainability is shrouded in more than the usual uncertainties.
Many SRI investors entered 2012 with a pragmatic approach, seeing natural gas as a relatively clean and plentiful transitional fuel, with potential to pose less environmental damage in extraction and consumption than fossil competitors, coal and oil. Despite the controversies and community concerns regarding hydraulic fracturing, many investors focused their efforts on pressuring oil and gas companies to eliminate the worst environmental risks of hydraulic fracturing, in the hope that it could serve as an imperfect but necessary response to interim energy needs and demands until a renewable energy future is achieved.
But growing climate and financial concerns about shale gas are challenging investors to take account of multiple layers and uncertainties about its sustainability.
Pragmatism: A Prevalent Approach
The technology of hydraulic fracturing, used for extracting natural gas from shale, involves injecting water and chemicals deep under the ground in order to cause shale to fracture and release methane to the surface. Although the ultimate environmental impacts of widespread use of this technology deep below the surface may not be evident for decades, above ground the related operations have already caused spills, violations and heated community conflicts.
Many of the pragmatic dialogues between SRI shareholders and natural gas companies over the last year, for example, have focused on improving the weakest environmental management practices in hydraulic fracturing. The Investor Environmental Health Network and Interfaith Center on Corporate Responsibility guide, Extracting the Facts: An Investor Guide to Disclosing Risks from Hydraulic Fracturing, received widespread investor support in its calls for quantitative indicators on environmental management, including key performance indicators.
Dialogues focused companies on addressing environmental weaknesses such as waste management methods and hazardous air emissions. Fracking waste injection wells, very widely relied on to dispose of wastewater generated by fracking, are under scrutiny with evidence that waste injection may be causing earthquakes in some areas. In addition, investors are emphasizing the need to systematically lower the toxicity of fracturing fluids injected into the ground.
Yet, the pragmatic approach is necessarily complicated by issues surfacing regarding the role of natural gas in climate change and additional concerns regarding financial prospects.
Climate-Challenged Natural Gas?
The International Energy Agency has stated that a significant portion of fossil fuels known to exist must stay in the ground to ensure the needed level of controls on climate change. IEA wrote that, “No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2 °C goal” – the internationally recognized limit to average global warming in order to prevent catastrophic climate change.
Which fossil fuels should stay in the ground?
Coal? Oil? Natural gas? Some of the pragmatists say that the emphasis should be placed on utilizing natural gas, while leaving other, dirtier fuels, in the ground. Natural gas’ suitability as a bridging fuel from the perspective of climate depends principally on how much of that natural gas (methane) one anticipates reaching the environment unburned.
Pound for pound, methane is far more climate damaging than carbon dioxide. According to EPA:
Pound for pound, the comparative impact of [methane] CH4 on climate change is over 20 times greater than CO2 over a 100-year period.
Some authors assert that when you take this pound-for-pound impact and consider the leakage of gas during the natural gas extraction and consumption life cycle the longer-term climate footprint of natural gas extracted from shale is comparable to coal:
Compared to coal, the [climate] footprint of shale gas is at least 20 percent greater and perhaps more than twice as great on the 20-year horizon and is comparable when compared over 100 years.
However, such an analysis is based on an assumption that quite a bit of methane will find its way into the atmosphere. In contrast, others believe that substantially less methane will reach the atmosphere, maintaining natural gas as the fossil fuel of choice. For instance, see this NYTimes article.
Regardless, socially responsible investors are being increasingly challenged to rethink their investments in fossil fuel companies. SRI always involves a tension between investing in (and working to reform) marginally dirty/problematic industries, and choosing to divest from the worst. Fossil fuels have been targeted by an emerging divestment movement.
Even if the economy were built around solar and wind power meeting our generation needs, there might remain a need for an energy source to address dips in electricity production (e.g., in a windless night) and spikes in demand (hot summer days). Natural gas-fired turbine powerplants are appealing because they are quick start-ups and cleaner generators relative to coal plants.
Bottom Line Challenges
Although the natural gas industry itself claims that shale gas reserves may last the next 100 years, some observers armed with expertise and data see a different picture. Although initial volumes of gas drawn from fracked wells are often substantial, skeptics assert a much steeper decline in shale gas well output after the first few years than the industry commonly asserts.
The skeptics say the longevity of shale gas supplies is less than 10 years, not 100 years. The extraction industry bitterly disputes assertions that shale gas is the latest bubble, soon to burst. And other analysts see a downward trend in reserve estimates, but less severe than the pessimists. And there is also optimism from some that productivity and cost per barrel for extracting gas in the Northeast’s Marcellus shale may continue to improve.
Nevertheless, there may already be enough evidence for the SEC to revise its reserve reporting regulations to require disclosures that better reflect the range of reserve estimates rather than letting industry optimism drive disclosures.
On top of the reserves debate, the recent campaign to frack for shale gas resulted in too much natural gas output – the price of natural gas was driven down. Committed to produce by contracts and lending, many companies could not scale back, even though overproduction was driving down prices. Several companies (e.g., Encana, Chesapeake, BG Group) have taken an impairment this year, citing depressed natural gas prices.
All of these issues are likely to remain in play in 2013. Investors must balance pragmatism with considerations of evolving uncertainties regarding sustainability of natural gas.