By Barbara Hadley, Tom Rennell and Derek Austin

Fracking: Risks and Rewards

4

Contents

INTRODUCTION 6 The Great Unknowns

WHAT IS FRACKING? 8 What are we talking about? What is shale gas? What is unconventional gas? Hydraulic fracking in theory

What is new about fracking?

REWARDS20 So how much is there? Profitability

Employment Energy security and independence Gas prices

Climate change

RISKS50 Intensive industry Water usage

Impact of water usage Leaks, spills and accidents Flow-back and produced water Methane Contamination pathways

Earthquakes

RESPONSIBILITIES82 US UK EU

France Germany Poland

Spain

MANAGING THE RISKS112 Litigation Insurance

PLAYERS130

FrackingRisks and Rewards

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Fracking: Risks and Rewards Introduction

By its many proponents it has been called a ‘game-changer’, a ‘golden age’ of the ‘fracking revolution’ and a potential ‘bridge fuel’ to a brighter, more renewable future. To its equally numerous opponents it is a foolhardy ‘dash for gas’, ‘a long, slow road to nowhere’, a folly laid bare by the myriad risks it represents and, economically at least, a ‘bubble’ waiting to burst.

Shale gas, and the accompanying technique of hydraulic fracturing or ‘fracking’, has become one of the most divisive and controversial battle grounds in a global debate over the future energy needs of the modern world. With conventional oil and gas resources fading,

global energy consumption predicted to rise by over 40 per cent by 20351 and concerns over climate change growing ever more acute, the stakes are huge and the stakeholders wide ranging.

The revelation that not only do shale beds hold huge quantities of gas and oil but that they are now commercially recoverable has been hailed by some as a blessing. That shale beds are so abundantly placed around the world promises to alleviate the pressures of energy security and dependence felt by many countries who have in recent decades become net importers of their energy needs. Cheap domestic gas production promises to lower energy prices, create jobs and kick-start western economies still reeling from the world financial collapse.

Moreover, proponents say, shale gas is a 1 BP Energy Outlook 2035, 2014

far cleaner source of energy than oil or coal, touting it as ‘a bridge’ that can bide humanity over until such a day that renewable technology and its infrastructure is prepared to bear the weight of global energy demands.

Opponents on the other hand say that fracking is a new and poorly regulated technique responsible for a variety of serious environmental and health risks, from water contamination to earthquakes. Far from being a saviour in the fight over climate change, they say, it is yet another fossil fuel to be burnt at the expense of badly needed investment in the renewable energy sector.

Elsewhere, economist critics have questioned the purported financial rewards from the shale gas industry, raising concerns over the commercial sustainability of the industry in its American homeland. For them the shale gas revolution is in reality a glass-bottomed boat heading precariously towards shallow rocky waters.

The world is divided, and aggressively so. Yet for all this division shale gas remains a relatively adolescent industry full of uncertainties and unknowns. As a report from Deutsche Bank puts it: ‘A measure of caution is in order in drawing conclusions about the future of international shale gas development given the limited state of current knowledge.’2 For instance, it is still highly uncertain how much there actually is and, crucially, how much of it can be extracted, on both technical and economic grounds. Within the US data is limited and not easy to translate into accurate long term forecasts. Outside the US data is virtually non-existent.

While hopeful governments, particularly those in Europe, have looked towards shale gas to bring a much needed economic boost,

2 Deutsche Bank AG January 2013 – European Gas - The changing landscape for shale gas.

The great unknownsvery little evidence exists to either confirm or deny the benefits that a domestic shale gas revolution might bring. Although a boost to employment figures seems more than likely, given the extent of the supply chain needed to make shale gas production work, it is now becoming apparent than an impact on gas prices is far less realistic – especially as the US model indicates that energy companies are struggling to break even on gas production and many are borrowing heavily to cover their increasing expenses.

At the same time a climate benefit is also disputable. Whilst it is widely acknowledged that, all things being equal, gas is preferable to coal and oil as regards global warming and climate change, there continue to be doubts about the overall carbon footprint of such a highly intensive industry with its record of fugitive emissions of methane, a greenhouse gas far more potent than carbon dioxide.

In the US, a myriad of documented cases continue to highlight the risks associated with the industry, though there is a lack of data as to just how much risk it poses to public health and the environment. Immediate health impacts aside, even less certainty exists over the long term health impacts of exposures to the chemicals used by the industry and the toxic waste elements it produces.

The impact on local resources is also uncertain. There is general disagreement over the quantities of water required by the industry and this is compounded by uncertainties over the treatment or disposal of the vast amounts of wastewater it produces.

As more countries look to start a shale revolution at home, it is uncertain whether existing regulatory frameworks are sufficiently robust or if new regulations are required. Moreover, if incidents were to occur, it is increasingly unclear where responsibility

will lie. The United States, the country at the forefront of the technology, is seeing an increasing number of incidents, regulation violations and ensuing litigation, with companies often finding their insurance cover inadequate and inappropriate.

So big questions remain over the future of shale gas and fracking. This is not to suggest however that these questions are unanswerable. As Professor John Loughhead, executive director of the UK Energy Research Centre said recently: ‘Not knowing is not necessarily a negative but a pointer to where our priorities should be.’3

In part then, this book aims to shed some light on these uncertainties, to clarify the issues surrounding fracking and present the various positions being taken by its diverse range of stakeholders. Although we do not claim to offer a definitive account of an industry that is, by its nature, evolving rapidly, we nonetheless hope to provide the framework for an informed and sensible debate over what is a crucial issue with potential global repercussions.

3 Said during ‘Fracking: The debate on hydraulic fracturing for gas’ held 19 May 2014 London.

A measure of caution is in order in drawing conclusions about the future of international shale gas developmentgiven the limited state of current knowledge’

6 7

8 9

Fracking: Risks and Rewards What is fracking?

What is fracking?Technically speaking ‘fracking’ to refer to the specific technique of hydraulic fracturing, is just one specific stage in the overall operation to extract shale gas (or indeed any other substance for which the technique might be and has been used).

Despite this, ‘fracking’ has become synonymous with shale gas extraction as a whole – from drilling a well through to the pumping of water to propagate fractures, to the subsequent extraction of gas and all the risks associated with the entire operation.

This is both an unfortunate and dangerous ambiguity. It can attribute risks to ‘fracking’ that are in fact risks associated with other processes. Equally it can also marginalise other factors associated with the whole process that are not directly related to the ‘fracking’ stage.

It has also been the cause of several misunderstandings between the energy industry and opposition groups. For example the claim that ‘fracking’ has contaminated surface water sources has been vigorously denied. For the energy industry the specific technique of hydraulically fracturing a rock formation has never, in itself, contaminated water sources. However this does not mean that contamination has never occurred during the entire operation of extracting shale gas. It has and cases in the US have been well documented (see page 118). Nonetheless contamination has generally occurred during some other stage of the whole operation, for example due to faulty well bores during the drilling.

To be clear, this book is not only about the narrow definition of the technique of hydraulic fracturing but the larger context of ‘fracking’: the entire operation required to extract hydrocarbons from rock formations with a very low permeability, such as shale; what in industry parlance are called ‘unconventional’ sources.

What are we talking about?A few words on terminology. Fracking, or fracing1 – or more accurately, hydraulic fracturing – is aprocess by which fluid is pumped at extremely high pressure in order to propagate cracks or fractures in rock formations. Today ‘fracking’ has become a popular but controversial technique to remove oil and gas from deep and widely dispersed, largely impermeable rock formations – most notably to extract gas from shaleformations.

One difficulty in approaching this subject is the large disparity between the terms and definitions used by the media, environmental activists, government departments and the energy industry.

1 There is general disagreement over spelling, either ‘fracking’ or ‘fracing’. For the most part ‘Fracking’ is acceptable although some people prefer ‘Frac’ when in its infinitive form or when used as an adjective as in ‘frac fluid’ or ‘frac job’. For the purposes of some much needed clarity, not to mention consistency, we’ve kept to the former spelling as this seems to be the most commonly used version and, to our eyes at least, is more in keeping with how the word is pronounced.

What is shale gas?Shale is the most common sedimentary rock to be found on the planet, the remains of vast prehistoric oceans and lakes that populated the globe between approximately 66 and 540 million years ago. This period spans the Paleozoic and Mesozoic eras2 which saw the relatively rapid appearance of multi-celled organisms, beginning with what is known as the Cambrian explosion and ending with the Cretaceous–Paleogene extinction event that wiped out almost 75 per cent of the world’s life forms including the dinosaurs. In fact many modern theories of the evolution of life on the planet, including that of the Cambrian explosion, are supported by evidence found from the study of shale formations around the world and the fossilised records of life they hold. Today these same prehistoric fossilised structures of the planet’s shale beds have become of enormous importance as a source of what we call hydrocarbons.

Hydrocarbons are a family of organic compounds consisting entirely of hydrogen and carbon atoms. When combusted, in the presence of oxygen, hydrocarbons produce water, carbon dioxide (or carbon monoxide) and, most importantly, energy in the form of heat. Thus hydrocarbons, from gases such as methane (CH4) to liquids like octane (C8H18), have become one of the predominant sources of energy on the planet used to produce electricity, heat

2 The Paleozoic and Mesozoic eras preceded the era we are currently in, the Cenozoic era.

homes and fuel cars among many other uses.

Hydrocarbons such as those found in shale are formed from organic matter with the addition of heat, pressure and time. As organic matter decomposes, as was the case in the prehistoric oceans that formed today’s shale beds, the basic chemical compounds of proteins and carbohydrates, biopolymers, break down to form new compounds, geopolymers (the process is in effect the reverse of photosynthesis). Subjected to varying levels of geothermal pressures over sufficiently long periods of time, geopolymers undergo

further changes to produce a mixture of chemical compounds known as kerogen. When kerogen becomes heated beneath the earth’s crust it can breakdown further to release hydrocarbons.

There are different types of hydrocarbons: aromatic hydrocarbons, alkenes, cycloalkanes and alkyne based compounds; however those we are concerned with here are alkanes. In the simplest terms, alkane hydrocarbons are part of the same family differing only in the size, and therefore weight, of each molecule (see

Shale is the most common sedimentary rock to be found onthe planet, the remains of vast prehistoric oceans and lakes’

Methane molecule (CH4)

A piece of shale rock

10 11

Fracking: Risks and Rewards What is fracking?

Table 1). Alkanes follow the formula CnH2n+2 which simply means that for each carbon atom there are two hydrogen atoms plus another two. Methane is the lightest of the hydrocarbon family with just one carbon atom and therefore four (1 x 2 + 2) hydrogen atoms: CH4. One step up, ethane consists of two carbon atoms and six hydrogen atoms: C2H6. Propane contains three carbon atoms with a chemical structure C3H8 – and so on and on up the alkane3 hydrocarbons ladder. Everyday gasoline/petrol averages around eight carbon atoms, diesel fuel about 12, and with crude oils the number of carbon atoms exceeds 20. Though we tend to differentiate between gas and oil it is important to understand that they are both part of the same continuum and come from the same sources.

Natural gas is a naturally occurring mixture of a number of hydrocarbon gases, however it is predominantly methane which accounts

3 From here on in, simply hydrocarbons

for roughly 70-90 per cent (see Table 2).4 Shale gas is the name given to the natural gas found within shale formations. Because gas and oil are essentially just different members of the same family they are often found together. Gas discovered alongside oil is known as associated gas, gas discovered on its own is called non-associated gas. It is not uncommon to find oil within shale formations and this is unsurprisingly known as shale oil.5 For the most part in this report we are talking about gas production; however, as is certainly apparent in the ‘rewards’ section of this book, shale oil is also an important part of the future of the energy industry. Moreover, using hydraulic fracturing to access shale oil is effectively the same process as used for extracting shale gas and carries similar if not identical risks.

What is unconventional gas?As noted, gas and oil are formed from organic material in rock formations that have been subjected to varying amounts of heat and pressure over extended periods of time. These are known as source rocks for what should be obvious reasons and shale beds are understood to be the source rock for many of the conventional sources of gas and oil discovered to date.

Since the density of hydrocarbons found in source rocks is lighter than the water-saturated rocks around them, given enough time they will migrate, effectively float, 4 It’s worth noting that this type of methane is called thermogenic

methane, that is to say it is methane that has been produced by heat and pressure. This should be distinguished from biogenic methane which is methane formed by methanogens, tiny organisms that produce methane by breaking down organic matter. They can be found in the intestines of most animals as well as just below the surface of the earth as well as producing methane from landfills .This latter source of methane is already in use by the energy industry as a source of fuel.

5 Just to confuse things, shale oil should be distinguished from oil shale which is a type of immature kerogen that requires extensive processing before it can be made usable. Though it is well known that there are significant amounts of oil shale around the world, so far it has remained largely uneconomic to extract and produce.

upwards towards a more porous body above (not unlike the oily film that rises to the surface of your coffee). With nothing to stop it, a hydrocarbon molecule will continue to migrate until it reaches the surface – and in naturally occurring seeps, such as tar pits,6 they do exactly that.

However, beneath the surface of the earth there are strata of rock formations of varying depth, density and, crucially, permeability. Layers of rock with sufficiently low permeability will act as a seal to the steadily rising hydrocarbon molecules. Thus these are sometimes called cap rocks (and to aid confusion they can be, and often are, another layer of shale). Cap rocks are not by nature flat, rather they form layers with waves and troughs and sudden edges due to the movement of fault lines and so forth, and any gas or oil migrating upward tends to collect into reservoirs beneath particular parts of the cap rock formation, just as steam from a pan of boiling water will collect at the centre of the lid.

What this means is that at any given moment in geological time, certain amounts of hydrocarbons attempting to migrate to the surface will have collected in a single area trapped beneath a cap rock to form a reservoir. This is called a conventional source, as this is conventionally where humans have extracted hydrocarbons. Because they are in one place and the rock in which they are found, the reservoir rock, tends to be relatively permeable, they are relatively easy to extract, requiring a single hole by which to release the contents to the surface.

In contrast, unconventional drilling for gas and oil is characterised by going directly to the source rock for extraction, rather than waiting for the hydrocarbons to rise and collect naturally.

Unconventional sources of hydrocarbons are characterised by being located in formations of 6 Features such as tar pits are very obvious indicators of extensive

hydrocarbon resources beneath the surface.

very low permeability. Permeability is measured in darcys (D) or millidarcys (mD). To provide some perspective, the permeability of your average beach sand is roughly two darcys or 2000 mD. The permeability of sandstone or other reservoir rocks where oil or gas collect in conventional sources is in the range of 0.5 to 20 mD. Shale by contrast has a permeability in the range of 0.000001 to 0.0001 mD, or 1 to 100 nano-darcys.7

In this context, unconventional sources have

been defined as any rock with permeability lower than 0.1 mD. Unconventional sources then include not just shale gas but also coal bed methane, that is gas trapped in coal seams, and tight gas which is simply gas trapped in any type of rock formation, sandstone or limestone which is sufficiently impermeable.8

7 Identifying risk

8 Though the techniques for extracting coal bed methane and other tight gases are similar and so are the risks, for the purposes of this report we concentrate solely on shale.

Though we tend to differentiate between gas and oil it is important to understand that they are both part of the same continuum and come from thesame sources’

Table 1. Alkane hyrdocarbons

Name Formula State at roomtemperature

Methane CH4 Gas

Ethane C2H6 Gas

Propane C3H8 Gas

Butane C4H10 GasPentane C5H12 LiquidHexane C6H14 Liquid

Heptane C7H16 Liquid

Octane C8H18 Liquid

Nonane C9H20 Liquid

Decane C10H22 Liquid

Undecane C11H24 Liquid

Dodecane C12H26 Liquid

Icosane C20H42 Solid

Triacontane C30H62 Solid

Tetracontane C40H82 Solid

Table 2. Typical composition of natural gasTypical Composition of Natural GasMethane CH4 70-90%

Ethane C2H6 0-20%

Propane C3H8 0-20%

Butane C4H10 0-20%

Carbon Dioxide CO2 0-8%

Oxygen O2 0-0.2%

Nitrogen N2 0-5%

Hydrogen sulphide H2S 0-5%

Rare gases A, He, Ne, Xe TraceNaturalGas.org. http://www.naturalgas.org/overview/background.asp

20 21

Rewards

Rewardstiny subset of resources that can be produced commercially. Both are always wrong but resource estimates can be hugely misleading because they are guesses and have nothing to do with economics.’3

Thus before asking how much shale gas there is, it is necessary to look at the different types of estimates there are and what they mean. As the UK Energy Research Centre puts it, ‘the controversy and confusion about shale gas resources could be significantly reduced through more careful and consistent use of terms and definitions.’4

Put simply, a resource estimate (sometimes called a ‘gas/oil-in-place estimate’ or a ‘total resource estimate’) is the amount of gas or oil thought to physically be in the ground in a given area. Most estimates are usually given as a range to reflect geological uncertainty. Thus, in the example above, the BGS estimated the Bowland Shale as having a lower limit of 822 tcf, a central estimate of 1,329 tcf and an upper limit of 2,281 tcf.

A reserve estimate on the other hand gives the amount of gas or oil that is believed to be actually recoverable from a given area, taking into account various factors including available technology and current economic conditions. This is a speculative measure that is often significantly smaller than the resource estimate and can be broken down into two primary categories: proved and unproved.

Proved reserves (sometimes called recoverable estimates) are considered almost certain to be recoverable, as opposed to unproved reserves which are a more tentative estimate. Unproved reserves can be subsequently broken down into probable

3 http://oilprice.com/Interviews/Shale-the-Last-Oil-and-Gas-Train-Interview-with-Arthur-Berman.html

4 UK Energy Research Centre, A review of regional and global estimates of unconventional gas resources, September 2012

So how much is there?The potential shale gas revolution arrived with much fanfare from governments and media outlets, exclaiming startling figures for the vast resources of shale gas buried across the globe. Yet many of the upper figures quoted can be highly misleading, failing to take into account what these estimates actually mean in practice.

For example, in 2013 the British Geological Survey estimated there was some 1,329 trillion cubic feet (tcf) of shale gas within the Bowland Shale formation in Northern England. This prompted an array of optimistic media reports and Prime Minister David Cameron’s exclamation that just 10 per cent of that figure was equivalent to over 50 years of the UK’s natural gas supply.1

Nonetheless, as the report notes, the figure of 1,329 tcf is a resource estimate – that is, an estimate of the amount of gas actually in the ground. However for the most part, how much gas is in the ground is less important than how much can actually be extracted, a reserve estimate, and the BGS report makes clear that, at the time of writing, ‘not enough is yet known to estimate potential reserves’. Instead, it alludes to an earlier report which estimates just 4.7 tcf of Bowland Shale gas might be recoverable, and then only if production rates turn out to be similar to those in the US.

The authors note with dismay that this distinction between resources and reserves has ‘often been confused by the media.’2 Likewise, geological consultant Art Berman observes: ‘The public and politicians do not understand the difference between resources and reserves. The only thing that they have in common is that they both begin with “res.” Reserves are a

1 http://www.telegraph.co.uk/news/politics/10236664/We-cannot-afford-to-miss-out-on-shale-gas.html

2 The Carboniferous Bowland Shale gas study: geology and resource estimation – DECC BGS 2013

reserves (sometimes called potential reserves) and possible reserves, the latter of which has a lower probability of being recoverable. Reserve estimates can also be expressed as a percentage. This is called the recovery factor and is an estimate of the proportion of the total resource that might be extracted. Resources can also be undiscovered, an estimate of the oil or gas which is thought to be in a given area but nonetheless hasn’t been explored yet.

A common and important estimate used is the technically recoverable resource (TRR) estimate (sometimes called the potentially recoverable resource) which is an estimate of the amount of gas or oil recoverable given current technology but excluding economic considerations. All else being equal, this figure can be expected to rise as new techniques and innovations are developed. Of course not all of the TRR will actually be extracted if the cost to do so is prohibitive. Thus a subset of the technically recoverable resources is the economically recoverable resources (ERR) which is an estimate of gas that is both technically and economically recoverable.

The Ultimately Recoverable Resource (sometimes called the Estimated Ultimate Recovery especially when referring to individual wells rather than whole regions or countries) is the amount of gas or oil

estimated to be extracted from a given area across all time. This figure includes any gas or oil estimated to be undiscovered, that is not recoverable with current technology and is not currently economic but which is expected to become so. Naturally the URR makes a number of assumptions regarding future technological developments and changes in the economic climate so is an extremely uncertain estimate, especially during early stages of exploration or development in a region.

With these definitions in mind, a 2013 study by the US Energy Information Administration (EIA) estimates there are 7,201 trillion cubic feet of unproven technically recoverable resource (TRR) across 42 countries around the world.5 The results of this study are given in Table 1.

Again however the definitions used lack clarity as the UK Energy Research Centre (UKERC) notes: ‘Complete and clear definitions of TRR are rarely provided... ambiguity remains over whether sources include undiscovered volumes of gas from their definitions, and what they mean by the term “undiscovered”. The US Energy Information Administration for example, first introduces a figure suggesting that TRR excludes undiscovered volumes of gas, but later in the main body of text suggests that it includes undiscovered volumes.’6

Nonetheless the UKERC’s own review of around 50 different global estimates for the global TRR of shale gas finds it ‘may be in the region of 200 trillion cubic metres’ which is roughly 7,060 trillion cubic feet and thus closely coincides with the EIA.7 These figures can be compared to an estimated 425 Tcm (15,009 tcf)

5 Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States, US Energy Information Administration (EIA), 2013

6 UK Energy Research Centre, A review of regional and global estimates of unconventional gas resources, September 2012

7 Ibid

Cubic feet vs Cubic metresAs will become apparent different organisations from different countries often use different forms of measurements for the same things. Where appropriate we try to show the conversion rates. In this instance one cubic metre of gas is equivalent to roughly 35.3 cubic feet. US reports tend to use the latter whilst in Europe cubic metres are preferred. Incidentally the Barrel of Oil Equivalent (BOE) of gas, that is the amount of gas required to produce the same amount of energy as burning a barrel of crude oil, is between 5,800 and 6,000 cubic feet or around 170 cubic metres.

Fracking: Risks and Rewards

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Fracking: Risks and Rewards Rewards

at regional and global level’ adding: ‘Whilst estimates of unconventional gas resources in the United States remain very uncertain, this is eclipsed by the much greater uncertainty surrounding unconventional gas resources in the rest of the world.’8

8 UKERC

of conventional gas resources, some 190 Tcm (6,710 tcf) of which are currently classified as proved reserves.

The UKERC however warns that these estimates should be treated with caution given ‘multiple and substantial uncertainties in assessing the recoverable volumes of shale gas both

Many complex issues surround the estimation of natural gas and oil resources and great uncertainty exists over current estimates of shale gas. This is further complicated by the range of methodologies employed by different institutions which then reach wildly different conclusions.

One study concludes ‘there are substantial difficulties in assessing the recoverable volumes of shale gas’ and that ‘current resource estimates should be treated with considerable caution. Most existing studies lack transparency or a rigorous approach to assessing uncertainty and provide estimates that are highly sensitive to key variables that are poorly defined.’9

One of the key challenges preventing adequate estimates is the relative adolescence of the shale gas industry which means that, even in the US, there is a significant lack of extended data. Outside North America, data on production levels is virtually non-existent.

The British Geological Survey notes: ‘To some extent our ability to obtain reserve or resource figures in any hydrocarbon province is determined by the stage of exploration and the degree of production uncertainty.’ It adds that early figures ‘are normally derived early in an exploration phase, perhaps even before drilling takes place, for the benefit of shareholders and investors. These speculative values often find their way into the media. When substantive data from drilling and production rates become available, more reliable figures for reserves and resources can be estimated.’

Even in areas where production is currently taking place, notably North America, there remains significant uncertainty over the size of the resource and considerable variation in the available estimates.

9 McGlade, Speirs & Sorrell Methods of estimating shale gas resources - Comparison, evaluation and implications.

For the most part, estimates around the world to date have relied heavily upon assumptions of productivity similar to that in the US. This is mainly because it is the only country (apart from Canada) where there is any significant data – however such an approach may prove misguided. Differing economic and geological situations in other countries could impact sharply on the production levels of specific wells and regions, resulting in a very different shale gas experience than the US has so far witnessed.

For instance, the 2013 report from the EIA significantly reduced resource estimates for a range of countries as compared to estimates in 2011. Most significantly, Norway’s shale

gas assessment dropped from 83 trillion cubic feet in 2011 to zero, following disappointing results obtained from three wells drilled by Shell.

Similarly in Poland, the 2011 EIA report estimated that the country had approximately 187 trillion cubic feet (or 5.3 trillion cubic metres) of technically recoverable shale gas reserves. This figure was then reduced by 20 per cent in the EIA’s 2013 update figure of just 146 trillion cubic feet. These estimates continue to be hampered by the fact that by the end of 2013 only 50 exploratory wells had been drilled in Poland compared to the minimum of 200 necessary, according to research institutions, to assess reserves more accurately.10

This is not to say that shale gas is necessarily economically unrecoverable in Norway or 10 http://www.neweasterneurope.eu

Table 1. EIA estimated global TRR (tcf)Europe 470 South Asia 201

Bulgaria 17 India 96

Denmark 32 Pakistan 105

France 137 Middle East and North Africa 1,003

Germany 17 Algeria 707

Netherlands 26 Egypt 100

Norway 0 Jordan 7

Poland 146 Libya 122

Romania 51 Morocco 12

Spain 8 Tunisia 23

Sweden 10 Turkey 24

United Kingdom 26 Western Sahara 8

Former Soviet Union 415 Sub - Saharan Africa 390

Lithuania 0 Mauritania 0

Russia 287 South Africa 390

Ukraine 128 South America & Caribbean 1,430

North America 1,685 Argentina 802

Canada 573 Bolivia 36

Mexico 545 Brazil 245

United States 567 Chile 48

Asia and Pacific 1,607 Colombia 55

Australia 437 Paraguay 75

China 1,115 Uruguay 2

Indonesia 46 Venezuela 167

Mongolia 4

Thailand 5 Total World 7,201

As will become apparent different organisations from different countries often use different forms of measurements for the same things. Where appropriate we try to show the conversion rates. In this instance one cubic metre of gas is equivalent to roughly 35.3 cubic feet.

To some extent our ability to obtainreserve or resource figures in any hydrocarbon province is determined bythe stage of exploration and the degree of production uncertainty’

Fracking: Risks and Rewards

50 51

Risks

RisksIntensive industryAccording to Environment America, between 2005 and 2012 it is estimated that some 82,000 shale gas or oil wells were drilled in the USA affecting 360,000 acres of land, using at least 250 billion gallons of water, roughly 2 billion gallons of chemical additives, and contributing some 450,000 tons of air pollution each year and 100 million metric tons of CO2 equivalent to the atmosphere.1

Whilst in principle it is the same technique as is used for a variety of other purposes, including conventional oil or gas extraction, in order to be technically and economically viable hydraulic fracturing to release shale gas is a much more intensive business than its conventional counterparts. This is in terms of not only the volume of fluids, chemicals, wastewaters and other materials involved, but also the number of wells and well sites required to recover the gas profitably (see page 25).

On the one hand, multiple horizontally drilled wells from a single pad take up less land overall than if these wells were vertically drilled. The New York State Department of Environmental Conservation (NYDEC) notes that a single well pad with six to eight horizontal shale gas wells could access 640 acres with only seven to eight acres of total land disturbance.2 On the other hand, in order to access as much of the shale as possible, the nature of the shale gas industry requires a much larger number of wells in total than conventional sources, and multi-well pads by necessity take up more room than single well pads – 7.4 acres on average as compared to 4.8 acres for a single well.1 Fracking by the Numbers: Key Impacts of Dirty Drilling at the

State and National Level (2013) Environment America

2 NYDEC ‘Well Permit Issuance for Horizontal Drilling And High-Volume Hydraulic Fracturing to Develop the Marcellus Shale and Other Low-Permeability Gas Reservoirs - Supplemental Generic Environmental Impact Statement On The Oil, Gas and Solution Mining Regulatory Program, 2011.

Both conventional drilling and the technique of hydraulic fracturing have been components of the energy industry for some time and, by and large, the risks associated with these operations are well known and regulated. That said, the modern variant required to extract shale gas – slickwater multi-stage hydraulic fracturing of multi-lateral horizontal wells from multiple well pads – both exacerbates old risks and raises new questions over the safety of the industry.

In this section we examine some of the purported risks associated with fracking. Specific cases and examples of incidents that have occurred are, by and large, provided later.

Of overriding concern is that shale gas extraction is a vastly more intensive operation than conventional sources, both in terms of each individual well or well pad and in terms of the total number of wells that are required to maintain levels of production. This

translates into a range of issues, including the risks of on-site and off-site accidents, increased water usage and the safe disposal of an increased amount of toxic wastewaters, as well as the potential for seismic activity. Although many of the risks already associated with the extraction of hydrocarbons are well known, this enormous increase in activity increases the overall number of incidents likely to occur.

The use of, often unidentified, chemicals in slickwater frack fluids, and in much larger volumes than in conventional drilling, introduces new unknown variables in regards to the potential impact on public and worker health, both in the short and long term. In general, frack fluids and wastewaters present risks from various potential avenues through which they might contaminate surrounding water, air or land, which again are exacerbated by the increased volumes required.

The International Energy Agency notes that a striking feature of the shale gas industry is the need for more wells: ‘Whereas onshore conventional fields might require less than one well per ten square kilometres, unconventional fields might need more than one well per square kilometre (km2), significantly intensifying the impact of drilling and completion activities on the environment and local residents.’ The IEA adds: ‘Once drilling starts, it is generally a 24-hour-per-day operation, creating noise and fumes from diesel generators, requiring lights at night and creating a regular stream of truck movements during mobilisation/demobilisation periods. Drilling operations can take anything from just a few days to several months, depending

Impact of unconventional gas extraction on the landscape

These two satellite images from 1984 and 2011 show the high density of wells where over 1000 UG well pads (small, white dots) were cut into the Louisiana landscape (USA), most of them in recent years, as use of hydraulic fracturing tech-nology became widespread. Source: UNEP/GRID-Geneva, 2012

52 53

Fracking: Risks and Rewards Risks

it is likely that this risk will be amplified.6

NYDEC has also highlighted risks to local wildlife resulting from the substantial development of shale gas resources, warning of the ‘unavoidable impacts to habitats (fragmentation, loss of connectivity, degradation, etc.), species distributions and populations, and overall natural resource biodiversity...from land grading and clearing, and the construction of well pads, roads, pipelines, and other infrastructure associated with gas drilling.7

Extracting shale gas is also an extremely water-intensive practice which translates into significant adverse impacts relating to water supplies. A single horizontal shale gas well might use between 11 and 34 million litres of water which according to UNEP represents some 360 – 1100 truckloads alone. 8

Water usageThere are two important features of the shale gas industry’s water usage. First, it uses a huge amount of water, much more than conventional sources of gas; second, not all the water used is returned to the surface and the water that is retrieved is contaminated and must then be treated or, as is more common, disposed of by injection into disposal wells – effectively removing it from the hydrological (water) cycle. This latter point raises additional issues around both the treatment and safe disposal of waste water.

The US Geological Survey separates water use into water withdrawal, ‘water removed from the

6 http://rt.com/usa/158040-fracking-spike-trafic-fatalities/

7 New York State Department of Environmental Conservation ‘Well Permit Issuance for Horizontal Drilling And High-Volume Hydraulic Fracturing to Develop the Marcellus Shale and Other Low-Permeability Gas Reservoirs - Supplemental Generic Environmental Impact Statement On The Oil, Gas and Solution Mining Regulatory Program, 2011

8 Gas Fracking: can we safely squeeze rocks? (November 2012) UNEP Global Environmental Alert Services.

on the depth of the well and type of rock encountered.’3

The most immediate impact is the number of truck visits each site requires. According to a report from the Tyndall Centre for Climate Change, a six well pad requires a total number of truck visits between 4,300 and 6,600, of which a high proportion – 3,870 to 5,750 – are associated with the hydraulic fracturing process, a major increase over conventional drilling sites. Tyndall adds that the local traffic impacts are ‘clearly, likely to be significant, particularly in a densely populated nation.’4 In the US, the intense level of traffic has seen damage to local road use. So much so that the West Virginia Department of Transportation has increased the bonds that industrial gas drillers must pay from $6,000 to $100,000 per mile. Pennsylvania is also considering a similar rule where the increased funds are needed to repair roads not designed for the level of traffic associated with shale gas extraction.5

Additionally, analysis from the Associated Press found a significant increase in traffic related fatalities in regions with high levels of drilling. In West Virginia, while overall state traffic death dropped by 8 per cent, the counties with the highest levels of drilling saw an increase of 42 per cent. Similarly, in Texas overall traffic fatalities were down 20 per cent, however in 21 counties with high levels of drilling the figure was up by 18 per cent. Deadly crashes, according to Marvin Odum of Royal Dutch Shell, are ‘recognised as one of the key risk areas of the business.’ With the increase in the number of truck visits needed to individual sites, and in the number of sites needed to maintain production,

3 Golden Rules Report EIA 2012 www.worldenergyoutlook.org/goldenrules

4 Shale gas: a provisional assessment of climate change and environmental impacts, Tyndall Centre for climate change research, 2011

5 ‘Gas drillers: W.Va. road-repair regs may be costly’, Business Week, 12 August 2010

ground or diverted from a surface-water source for use,’ and water consumption, ‘the part of water withdrawn that is evaporated, transpired, incorporated into products or crops, consumed by humans or livestock, or otherwise removed from the immediate water environment.’ 9

It is worth pointing out that whilst fracking certainly consumes water, as defined by the US geological survey, it is not simply removed from the immediate water environment. Rather, as Philadelphia based campaign group Protecting Our Waters argues, the water consumption of the fracking industry ‘is fundamentally different than evaporative losses for agriculture, electricity generation, and recreational uses like golf courses, which essentially recycle the water used into the atmosphere where it returns as precipitation. Water injected for fracking is locked away from the earth’s natural hydrologic cycle, a total loss that doesn’t return to its source.’

According to the University of San Jose, on average just 8 per cent of the water used in hydraulic fracturing operations in West Virginia and 6 per cent of that in Pennsylvania is recaptured. The remaining fluid remains trapped deep underground, permanently removing it from the hydrological cycle. More importantly, unless treated or recycled, the fluid that is recaptured is disposed of via underground injection control wells, again permanently removing it from the hydrological cycle (see page 74): ‘The ecological and socio-economic implications of this true consumptive loss’ according to the San Jose study, ‘have not been studied or quantified.’10

According to researchers at the Pacific 9 US geological survey 2009: Water Resources and Natural Gas

Production from the Marcellus Shale

10 Evan Hansen, Dustin Mulvaney, Meghan Betcher (2013) Water Resource Reporting and Water Footprint from Marcellus Shale Development in West Virginia and Pennsylvania. Downstream Strategies

Institute: ‘The true scale of water impacts can still only be estimated, and considerable improvements in industry reporting, data collection and sharing, and regulatory enforcement are needed.’11 Generally speaking, slickwater fracturing of horizontal wells in shale uses several million gallons of water, as compared to about 5,000 to 50,000 gallons when fracturing a typical sandstone formation12 as the need for long horizontal wells necessarily increases the industry’s water requirements. A study by Noble Energy and Colorado State University found that water use averaged 387,000 thousand gallons for vertically fracked wells, compared to an average of 2.83 million gallons required for horizontal wells13 drilled in the state. A separate study of wells in the Barnett Shale concluded similar figures of 1.2 million gallons and 3-3.5 million gallons respectively.14 In addition, because of its depth, hydraulically fracturing shale is also much more water intensive than other, shallower, non-conventional sources. For example, the United States Environmental Protection Agency (EPA) estimates the water requirements for fracking coal bed methane as between 50,000 to 350,000 gallons (190,000 – 1.3 million litres) per well.15

With the added use of multi-well pads, multi lateral wells and multi-stage fracking techniques, the single well pad’s water requirements can become huge. The ability to re-fracture wells will also increase the total 11 Hydraulic Fracturing and Water Resources: Separating the Frack

from the Fiction, Pacific Institute, 2012

12 J Harper (2008) ‘The Marcellus shale—An old “new” gas reservoir in Pennsylvania’ Pennsylvania Geology, VOL. 38, NO. 1,

13 Lifecycle Analysis of Water Use and Intensity of Noble Energy Oil and Gas Recovery in the Wattenberg Field of Northern Colorado, Noble Energy, Inc. and Colorado State University, 2012

14 Assessment of Industry Water-Use in the Barnett Shale Gas Play, Nicot, 2009

15 Draft Plan to Study the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources, United States Environmental Protection Agency Office of Research and Development, February 2011

82 83

Fracking: Risks and Rewards Responsibilities

inadequate and need to be more stringent, there is an equally strident group arguing that the myriad of laws and red tape make it hard to attract companies into the market, delay exploration and put back the timescale of production needlessly. The bigger question may be whether the current regulations are actually ‘fit for purpose’ having in so many cases merely been ‘tagged on’ to existing, not necessarily relevant, environmental regulations.

Meanwhile the US, the country at the forefront of shale gas development, is seeing an increasing number of incidents, regulation violations and ensuing litigation (many being settled out of court in sealed agreements) and, given the number of potential claimants, the spectre of big ticket settlements and class actions looms large.

So far there has been minimal impact on insurance companies but it is clear that the increase in claims against companies – and the growing awareness of the risks – is prompting insurers to examine their policy wordings, particularly in relation to pollution exclusions. Which could result in policyholders discovering that their insurance cover is both inadequate and inappropriate.

In this section we start by looking in more detail at the individual countries involved, or aiming to be involved, in shale gas production – including some which have chosen, oftendue to public pressure, to hold back on shale gas development for the time being. These individual country profiles look at how much shale gas they actually have, or hope to be able to recover, the regulations, if any, in place to control the industry’s development, and the, in many cases more stringent, controls being proposed by NGOs, investors and the operating companies themselves.

Who is responsible for the controlled development of the shale gas industry and who will pay the price when – what many see as the inevitable – incidents or accidents occur? Governments? Taxpayers? The companies themselves? Their insurers?

While some countries remain unconvinced by the benefits of fracking for shale gas, and in some cases have banned it until more facts about the risks emerge, many are keen to exploit its potential and emulate the perceived success of shale gas development in the US.

For those keen to proceed, the issue of how to develop the industry – and provide the right level of controls and regulations – is crucial. As things stand, fracking regulations vary dramatically worldwide; in the US, which is currently experiencing a boom in shale gas production, individual states handle fracking regulations and their level of robustness varies widely. In the UK, yet to see any actual

production, there is a plethora of national regulatory bodies overseeing fracking but no fracking-specific legislation. There is no EU fracking-specific legislation either.

Consequently a number of NGOs, professional bodies, scientific institutes and risk management firms, etc. regularly conduct studies into fracking risks and make recommendations to governments, energy companies and other stakeholders – such as insurance companies and investors – on improvements to regulations and procedures in order to mitigate risks.

For all those who argue that regulation and monitoring of fracking developments are

USAccording to the Energy Information Administration (EIA), in 2012 the US produced approximately 24,000 billion cubic feet of natural gas – with shale gas accounting for between 30 and 40 per cent of that figure and expected to grow to over 50 per cent by 2035. US natural gas production is currently at its highest level for 30 years with technically recoverable reserves put at 750 trillion cubic feet. The largest portions are in the Northeast (63 per cent), Gulf Coast (13 per cent), and Southwest regions (10 per cent) respectively.

The US is at the forefront of the commercial fracking industry – with many years of experience dating back to 1947 – and is one of the few countries producing fracked shale gas commercially (the others being Canada, Argentina and China). There are 16 states which are producing, or are expected to produce, shale gas commercially: Arkansas, Colorado, Kentucky, Louisiana, Maryland, Michigan, Montana, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, Texas, West Virginia, and Wyoming.

The most extensive areas currently being fracked for shale gas are in the Northeast of the country, in particular the huge Marcellus Shale formation which extends across parts of a number of states – New York, Ohio, Pennsylvania, Maryland and West Virginia – and is part of the Devonian Black ShaleSuccession. The largest shale gas plays are the Marcellus (410.3 trillion cubic feet), Haynesville (74.7 trillion cubic feet) and Barnett (43.4 trillion cubic feet).

Claiming that shale gas is proving to be quick to produce in large volumes at a relatively low cost, US energy companies are hailing the shale

gas revolution as a chance for the US to become totally self sufficient in energy resources in a relatively short time.

But despite this apparently positive picture, the US is increasingly divided. On one side, environmentalists and members of the general public wish to control the development of fracking on risk grounds; on the other side, the energy industry and the US government are keen to promote it, seeing it as placing the US in an enviable position in terms of energy resources with minimal risk.

President Obama in his State of the Union address in January 2014 said: ‘Today, America is closer to energy independence than we’ve been in decades,’ and that ‘if extracted safely’ natural gas is ‘the bridge fuel that can power our economy with less of the carbon pollution that causes climate change.’ He also stressed that his administration ‘will keep working with

Responsibilities

Source: United States basins from US Energy Information Administration and United States Geological Survey; other basins from ARI based on data from various pub-lished studies

Figure 1 Map of basins with assessed shale oil and shale gas formations, as of May 2013

If extracted safely natural gas is the bridge fuel that can power our economywith less of the carbon pollution that causes climate change’

There is a plethora of national regulatory bodies overseeing frackingbut no fracking-specific legislation’

84 85

Most [US] companies are refusingto reveal their chemicals list, insisting their chemical formulas areproprietary’

Fracking: Risks and Rewards Responsibilities

Clean Water Act (CWA)One of the purposes of the CWA is to minimise erosion and sedimentation during construction projects (including construction of oil and gas sites), and the CWA prohibits the dumping of any pollutant into US waters without a permit. Industrial facilities that generate stormwater run off (a pollutant under the Act) must obtain a CWA stormwater permit; in fact they are required to have a permit both for constructing the facility (at which point soil sediment may run off the site) and operating it (at which point polluted substances may continue to run off the site). CWA regulations call for preparation and implementation of Storm Water Management Plans (SWMPs) to mitigate impacts of well pad sites greater than one acre in size. However within the Energy Policy Act of 2005 (EP Act 2005) Congress expanded the definition of oil and gas exploration and production under CWA which meant that oil and gas operators were not required to obtain a permit for uncontaminated ‘discharges of stormwater run off from . . . oil and gas exploration, production, processing, or treatment operations.

‘In sum, oil and gas operators must obtain a stormwater permit under the CWA for the construction of a well pad and access road that is one acre or greater, but they need not obtain such a permit for any uncontaminated stormwater from the drilling and fracturing operation. Some states and regional entities such as New York and the Delaware River Basin Commission, however, have proposed to require stormwater permitting that addresses both the construction and operation of gas wells that are fracked.’2

Meanwhile the US Environmental Protection Agency (EPA) says it will propose CWA standards for the treatment of wastewater from shale gas wells in 2014.

Safe Drinking Water Act (SDWA)In 1996 the EPA decided that the Underground 2 Ibid

the industry to sustain production and job growth while strengthening protection of our air, our water, and our communities’ and called on Congress to help create ‘sustainable shale gas growth zones.’ The White House said this would help ‘regions come together to make sure shale gas is developed in a safe, responsible way that helps build diverse and resilient regional economies that can withstand boom-and-bust cycles and can be leaders in building and deploying clean energy technologies.’

Detractors of the US shale gas boom dispute the validity of safe extraction and argue that there have already been a number of incidents including water and air contamination and earthquakes. Many also dispute the rosy production and profits figures relayed by the energy companies, claiming that the costs of extraction are far higher than reported. Meanwhile potential investors are being urged to take advantage of the market now or risk being left out – with exciting investment opportunities being cited, not just within the energy companies themselves but in fracking proppant providers, gas storage container producers and gas transportation companies, for example.

RegulationIn line with these developments there has been a steady movement in the number and range of fracking related regulations in the US – as well as subsequent claims and litigation (see page 137). Shale gas regulation in the US has largely evolved out of existing regulations developed for conventional oil and gas producers, going back many decades. Shale gas development is regulated at almost all levels of government, but in general the principal regulatory authority lies with individual states.1

A number of federal laws and regulations apply to various phases of shale gas development, with the key ones as follows:1 Fact-Based Regulation for Environmental Protection in Shale Gas

Development http://energy.utexas.edu/

Injection Controls (UIC) ‘prohibiting subsurface emplacement of fluids by injection that endangers underground drinking water’ (established under the SDWA in 1973) did not apply to fracking. This policy was subsequently overturned by the United States Court of Appeals for the Eleventh Circuit in 1997. Then in 2005 Congress exempted hydraulic fracturing from the SDWA under the 2005 EP Act, courtesy of the ‘Halliburton Loophole’ which amended the SDWA’s definition of ‘underground injection’ to exclude underground injection of fluids or propping agents, other than diesel fuels, in hydraulic fracturing activities related to oil, gas, or geothermal production activities. So the SDWA applies only to waste from fracking and drilling that is disposed of in UIC wells; operators don’t need a UIC permit for the fracking operation itself unless they are using diesel fuel. The EPA is currently developing UIC standards for fracturing with diesel fuel.

For clarification, The Clean Water Act is concerned with limiting and controlling what is put into the US water bodies and the Safe Drinking Water Act concerns the US Public Water Systems, which treat and provide drinking water. Both laws are implemented by the EPA.

Clean Air Act (CAA)Under proposed CAA regulations, shale gas operators will have to control volatile organic compound (VOC) emissions from flowback during fracking by using VOC capture techniques called ‘green completion’.

Comprehensive Environmental Responsibility, Compensation, and Liability Act (CERCLA)Under CERCLA, operators must report any releases of hazardous chemicals over a certain level and owners and operators of facilities, those who arrange for disposal of waste, and those who accept hazardous substances for disposal will be held liable for the costs of hazardous substance clean-up. CERCLA

exempts oil and natural gas from the list of hazardous substances that trigger these liability and reporting requirements, however. Oil and gas operators still have to report spills of other hazardous wastes over certain levels, and face being found liable for the subsequent clean-up.

Emergency Planning and Community Right-to-Know Act (EPCRA) and Occupational Safety and Health Act (OSHA)Under EPCRA and OSHA, operators must maintain material safety data sheets (MSDSs) for certain hazardous chemicals that are stored on site over a certain amount.

Fracking chemicalsThe non-disclosure of the chemicals used in fracking is a key area of debate in the US. There are increasingly robust calls from environmentalists, individual state government officials, insurance companies and investors for energy companies to reveal this information, on the grounds that otherwise there is no way of judging the risks.3 In 2003 the EPA entered into a Memorandum of Agreement with the three largest providers of hydraulic fracturing fluids who each agreed to eliminate diesel fluid from fracking fluids for coal bed methane wells.

In 2011 the Securities and Exchange Commission began ‘asking’ oil and gas companies to provide detailed fracking information, including chemicals used, for the purposes of evaluating the range of potential risks on behalf of investors. And in 2013 the EPA issued ‘significant 3 http://www.propublica.org/article/alec-and-exxonmobil-push-

loopholes-in-fracking-chemical-disclosure-rules

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Fracking: Risks and Rewards Managing the risks

that shale gas wells are cased properly to avoid contamination of underground water supplies with methane; that the content of the fracturing solutions should be disclosed; and that the large quantities of wastewater produced are disposed of properly. A number of states have taken action on these issues; Arkansas, for example, requires (for fractured wells) that surface casing ‘have sufficient internal yield pressure to withstand the anticipated maximum pressure to which the casing will be subjected in the well’ and applies specific cementing requirements to fractured wells.

Pennsylvania also has updated its casing and cementing requirements and its requirements for the treatment of flowback water prior to disposal. Montana, North Dakota and Wyoming have also updated their casing requirements to require pressure tests or the use of a pressure relief valve ‘on the treating lines between pumps and wellhead’. Some states are taking a close look at all aspects of potential fracking impacts, for example New York has conducted a comprehensive environmental review of the impacts of high-volume hydraulic fracturing in shales and has proposed aggressive environmental controls, such as requirements for setbacks of wellpads from natural resources, air emission controls on drilling and fracturing equipment, and the use of steel tanks to hold drilling and fracturing waste.

The research paper concludes that, despite the regulatory updates in several states and existing protective regulations in others, significant gaps remain. Yet beyond the introduction and implementation of effective regulations, other stakeholders can bring pressure to bear to increase the control and management of the risks. Investors and insurers can demand higher standards of risk control, for example, while the general public and pressure groups can pressure operators

All stakeholders in fracking – including the operators, suppliers, third party contractors, local communities, general public, investors, insurers, etc. – benefit from insisting on the highest level of risk management when it comes to any potential risks from fracking.

Although regulations and recommendations covering fracking operations are on the increase, there have been a large number of violations and incidents reported so far in the US, with some ensuing litigation. As a result, many stakeholders are calling for far more robust monitoring and supervision of existing regulations; in many cases for the introduction of more stringent regulations; and assurances that there is adequate financial cover to pay for liabilities and damages when the inevitable – albeit reduced as much as possible – incidents occur.

In the US, national regulations governing the environment can be supplemented by each state adding its own regulations – these vary from state to state, with some states introducing far more stringent laws. But of course all regulations need to be enforced and violations addressed and, again in the US, one of the few countries to experience actual shale gas production activity to date, the level of enforcement varies considerably.

As a specialist research paper entitled ‘Fact-Based Regulation for Environmental Protection in Shale Gas Development’18 points out, the majority of state regulations that apply to shale gas development were written before it became common, although some states have revised regulations to address shale gas development and hydraulic fracturing specifically.

Most of the recent regulatory revisions tend to focus on three prominent concerns: 18 Charles G Groat, PhD Principal Investigator and Thomas W

Grimshaw, PhD Co-Principal Investigator

and regulation monitors to adhere to best practice – often with the threat of fines or litigation.

According to Thomas Swartz, of risk management consultants Marsh Environmental Practice,19 the greatest risks from fracking relate to the transportation, storage, and use of significant quantities of water. ‘The frack water is typically stored in purpose-built ponds or “frack tanks” at the drilling location. A percentage of the frack water is returned from the formation after it is pumped into the well, resulting in large quantities of flowback water, which must be handled at the drilling site. This means that the pond or frack tank is potentially storing water containing the fracking additives. These ponds can represent both short and long term risks of environmental damage.

‘Depending on the concentration of additives in the water, a storm event that results in surface runoff can cause environmental impacts to nearby land and water resources. Likewise, slow releases from the pond to soils and shallow groundwater could potentially impact useable shallow aquifers.’ However, Swartz believes these types of risks can be managed; for example, by lining the ponds with geosynthetic liners to reduce the potential for slow releases from the bottoms of the ponds. In addition to the storage of water at the site, operators may also construct pits, which are used to store drill cuttings, drilling muds and even cement.

Another area of risk is the potential for releases from the vertical casings of these wells to impact shallow aquifers with either fracking fluid or recovered methane. Most jurisdictions require that the surface casing be cemented all the way to the surface.

19 ‘Hydraulic Fracturing: Risks and Risk Management’ by Thomas Swartz, senior vice president, Marsh Environmental Practice, October 2011

(Cementing is the process of injecting a cement slurry between the borehole and the casing.) The next casing is either the production casing or an intermediate casing (depending on the depth of drilling). An intermediate casing is typically cemented to the bottom of the surface casing.

Some operators will cement the intermediate casing to the surface as well. The production casing is typically cemented through the production area, but due to difficulties in cementing and potential damage to the casings, it may not be cemented to the bottom of the surface or intermediate casing. The purpose of multiple casings is to seal off shallow zones (including aquifers) from the borehole and/or to stabilise the borehole. A well-cased borehole reduces the risk that formation liquids or production fluids will impact the shallow aquifers.

‘Once the well is constructed, the formation (either vertical or horizontal) is perforated in stages. With horizontal wells, the well is perforated and fractured progressively from the point farthest away toward the vertical riser in steps. … The risk to shallow aquifers during the completion of these wells is that the fracking process will open up new fractures that will communicate with existing fractures in the overburden, which in turn allows for communication between the deep gas-bearing zone and the shallow drinking-water aquifers,’ explains Swartz.

The primary risk management tool associated with this risk is the monitoring of nearby existing groundwater wells for exposure to fracking fluid constituents or natural gas. ‘If the baseline sampling indicates that there are no prior impacts, then arguments or allegations as to what caused the impact (ie. is it naturally occurring methane or an impact from fracking) are minimised and the regulatory authorities can require a much quicker response from the

Managing the risks

114 115

Fracking: Risks and Rewards Managing the risks

are generally responsible for their workers and their equipment regardless of fault. This form of contract is generally referred to as “knock for knock.” Under a “knock for knock” contract, each party indemnifies the other for damage to their personnel and their property. This enables each party to insure the risks associated with only their personnel and equipment. … In addition, contractors will also generally not be responsible for downhole or “resource” damages. So, for instance, the owner/operator cannot hold the driller responsible for failure to recover gas by alleging that the fracturing or drilling resulted in damage to the formation, making recovery impossible.

‘There are several different contracting methodologies used by the onshore industry for drillers including day rates, footage rates, or turnkey. Turnkey contracts are the only contracts where the drillers accept liabilities from the operations. However, the majority of the drilling contracts are written as day rate or footage contracts. Under these contracts, the operator essentially assumes control of the drilling rig (ie. they are instructing the driller) and, as such, the operator assumes the risk and provides the liability and “control of well” insurances for the site,’ says Swartz.21

Companies also would reduce their risk of environmental impact by insisting that both onsite and offsite contractors used only properly trained and licensed workers and equipment that meets all state and federal safety requirements.

Investment impactInvestors in the US energy sector are increasingly pressing companies to disclose more details about the risks they face with fracking – and the level of risk management applied to mitigate those risks – in order to assess the potential impact on shareholder value.21 Ibid

operator. Likewise, if the baseline assessment demonstrates a naturally occurring condition in the well (such as methane), then the operator has a better defence in the case of spurious claims,’ he says.

A significant risk of any oil and gas operation is the potential for a blowout or loss of well during the drilling phases. With shale gas drilling this can also include the loss of flowback water from the production site, which is treated with the fracking chemicals. The primary risk associated with this is the impact to surrounding areas, as well as the risks associated with the handling and storage of fracking additives at the drill pad location. Prudent operators, says Swartz, ‘can minimise these risks by controlling runoff from their site using collection ditches surrounding the drilling pad and by properly handling the chemicals while on site. If a release does occur, the operator should be prepared, via proper contingency and spill planning, to quickly recover the chemicals.’20

Third party risksShale gas well operators have a large number of different contractors working on the site, such as building contractors working on the infrastructure, eg. roads, pads and ponds; drilling contractors, wireline operators, equipment suppliers and fracking operators who provide the chemicals, blend the fluid and supply the pumps to perform the fracking of the wells. There may also be non-operating owners involved in the sites through a joint operating agreement.

‘Operating agreements will generally allocate the risk to the operator and the “non-operating” ownership in accordance with the ownership interest. The agreements may even specify that the non-operating owner purchase their own insurance programs for casualty risks,’ notes Swartz.

‘With regard to the contractors on the site, they 20 Ibid

In November 2013 a study by a consortium of activist investor organisations and asset management firms22 evaluated 24 major fracking companies based on 32 separate indicators of disclosure practices and found that none of the companies disclosed information on even half of the indicators (see Table 1).

According to the researchers, from an investor’s perspective this pattern of lax disclosure increasingly will be interpreted as an increased risk factor: ‘This is material information, both in terms of how a company manages risk and how competitive the company is, but the industry has grown so quickly there is a lack of awareness that investors need this information… This is an incredibly competitive industry and this kind of information gives us information on whether one company is managing its business better than others.’

The study looked at five main risk issues: toxic chemicals; water management (sourcing, well integrity, waste management, and monitoring); air emissions, community impacts and management and accountability. The key findings of the report were: ‘Quantitative, play-by-play disclosure is inadequate across the industry. Company disclosures remain mostly qualitative and narrative in form, making it difficult for investors to rigorously assess and compare company performance. Too often, companies provide aggregate reporting (eg. on a companywide or countrywide basis) and rely on anecdotes or narrative statements as a substitute for systematic, quantitative reporting on critical regional and local practices and impacts. Further, we believe that narrative reporting does not give investors and other stakeholders the information necessary

22 Green Century Capital Management, Boston Common Asset Management, Investor Environmental Health Network, and shareholder activist foundation As You Sow.

to determine if individual companies are sufficiently managing the risks inherent to their operations across their multiple plays.’

Toxic chemicalsWhile several companies state that they are seeking lower toxicity additives, only one company, Chevron, quantitatively reports on toxicity reduction, providing the specific number of MSDS-listed chemicals it has eliminated from use in the Marcellus Shale. When it came to eliminating diesel & BTEX chemicals, only four of the 24 companies reported that they eliminated BTEX and nine out of 24 companies reported that they eliminated diesel from their fracturing fluids.

Table 1 Disclosure practicesTHE SCORECARDEncana Corp (Encana) 14Apache Corp (Apache) 10Ultra Petroleum Corp (Ultra) 10Hess Corp (Hess) 8Noble Energy, Inc (Noble) 7Royal Dutch Shell plc (Shell) 7EOG Resources, Inc (EOG) 6Cabot Oil & Gas Corp (Cabot) 5Chesapeake Energy Corp (Chesapeake) 5ConocoPhillips Corp (ConocoPhillips) 5CONSOL Energy, Inc (Consol) 5EQT Corp (EQT) 5Anadarko Petroleum Corp (Anadarko) 4Devon Energy Corp (Devon) 4Chevron Corp (Chevron) 3Range Resources Corp (Range) 3Talisman Energy, Inc (Talisman) 3WPX Energy, Inc (WPX) 3BHP Billiton Ltd (BHP) 2BP plc (BP) 2Exxon Mobil Corp (Exxon) 2Occidental Petroleum Corp (Occidental) 2Southwestern Energy Co (Southwestern) 2QEP Resources, Inc (QEP) 1

(Out of a possible 32 points)

Fracking: Risks and Rewards

130 131

Players

PlayersBlackpool, Lancashire in 2011.

Cuadrilla has since ceased operations at two of its sites near Blackpool. In October 2013 it announced it would not progress with operations at the Anna’s Road site near Westby, St Annes, as other sites showed greater potential. Initially this decision was said to have been prompted by concerns over wintering birds in the nearby Ribble Estuary, but the company later admitted there had been a problem with a tool getting stuck.

In December 2013 Cuadrilla stopped work on the site at Preese Hall, Weeton that had previously been linked to two earth tremors. With the existing planning consent about to expire, the company said no further work would take place as it was ‘prioritising new horizontal wells that will provide better data about the amount of gas that can be recovered from the shale rock’ though it would apply for an extension to the current planning permission to seal the well and return the site to its former condition.

However Cuadrilla stressed it was not pulling out of Lancashire and was investigating new sites for exploration in the area. The company withdrew applications for permits to frack in order to revise its proposals for safe disposal of waste water, following a change in regulations reclassifying flowback water as radioactive waste, but said it

A guide to some of the major companies that hold production, exploration, and development licences (PEDLs) in the UK and/or have undertaken exploratory drilling or hydraulic fracturing in countries other than the USA, plus some of the services companies able to support unconventional gas or oil operations worldwide.

Exploration And Production CompaniesCuadrilla ResourcesLeading the field in the UK, Cuadrilla Resources is privately owned. Majority shareholders Riverstone (US based) and AJ Lucas (Australian) each hold just over 40 per cent of the stock with the remainder held by management and staff. Lord Browne, former CEO of BP, is a partner in Riverstone and chairman of Cuadrilla. Riverstone has reportedly invested nearly $60 million (£37 million) in Cuadrilla.

Cuadrilla holds exploration licences in the UK, Holland and Poland. While opposition to its drilling activities at Balcombe, West Sussex has attracted extensive media coverage, the majority of its UK activities have taken place in the Bowland Shale basin in Lancashire.

Listed energy group Centrica owns a 25 per cent stake in the Bowland exploration licence (PEDL 165) which it acquired from Cuadrilla and AJ Lucas in June 2013 for £40 million cash. Centrica also agreed

would be submitting new permit applications to meet the revised guidelines.

In February 2014 Cuadrilla announced it would apply for permission to drill, frack and test for gas flow at up to four exploration wells on each of two new sites in Lancashire, one at Roseacre Wood, the other at Preston New Road. Separate applications would be made to install two seismic arrays to monitor the hydraulic fracking process and Arup would prepare an EIA for each of the sites.

At the same time, the company said it would not apply for permission to frack at the Grange Hill, Singleton site, but that the existing well would be used as a base for a seismic monitor to complement the seismic arrays at the other two sites. In March 2014 it said it would seek planning permission in order to allow time to carry out measurements of gas pressure in the shale rock at Becconsall, Banks; the well would not be fracked but would be sealed and subsequently restored to its former condition.

After a period of consultation with local residents, Cuadrilla announced it would be submitting a planning application to Lancashire County Council for the Preston New Road site before the end of May 2014, accompanied by an EIA for the site produced by Arup, and that a separate planning application for the Roseacre Wood site would

company has been listed on the London AIM since December 2011 and is the UK’s biggest shale gas licence holder. Formed in 2003 it acquired Nexen Exploration and Star Energy in 2011 and PR Singleton in 2013. With £220 million market capitalisation, it produces approximately 3,000 barrels of oil and gas per day from over 100 sites across the UK. In May 2014 IGas Energy announced that it was to acquire Dart Energy (see below) thereby creating the UK’s biggest shale gas explorer in a deal worth £117 million.

IGas holds licences for shale gas exploration in the Bowland Shale basin within an area of 300 square miles between Liverpool and Manchester. It believes this area is likely to contain in the region of 170 trillion cubic feet (4,810 cubic km) of shale gas. ‘It’s not unreasonable to assume that there could be as much as 500 trillion cubic feet in the Bowland Shale across the North West,’ IGas chief executive Andrew Austin told the BBC in June 2013.

The company has permits to drill two shale gas test holes though not, as yet, to conduct fracking. In March 2014 IGas announced it had completed drilling operations at the Irlam-1 well at Barton Moss, Eccles, and that well operations would be suspended pending core analysis results. Test drilling at the Barton Moss site, close to the M62 near Manchester and part of an area of moss lands (peat bog) collectively known as Chat Moss, has attracted a series of protests

to pay exploration and appraisal costs of up to £60 million. Arup has been appointed to provide independent Environmental Impact Assessments (EIAs) for this licence area.

According to the Cuadrilla annual report 2012, the group capitalised exploration and evaluation costs of $22.7 million during the year (2011: $23.7 million), relating principally to the acquisition of 3D seismic data for the Bowland licence area. CEO Francis Egan stated that analysis of the Bowland shale formation ‘has given us increasing confidence about the huge quantity of natural gas in place, the quality of the shale, and also helped us to improve the process of exploration site selection. We successfully established the basis for EIAs in Holland, where we have very promising exploration licences and also acquired a new exploration licence in Poland.’1

Cuadrilla has stated it has 200 trillion cubic feet of shale gas reserves within its licence area in the Bowland Shale, which could have a market value of £136 billion. In December 2012, Egan told the Daily Telegraph: ‘Our plan is to get shale up and running in Lancashire then to repeat that model in the licences we have in the Netherlands and Poland,’ adding that the company had been frustrated by the 18 month moratorium on fracking that was imposed following earth tremors linked to drilling near 1 Cuadrilla Annual Report 2012

be submitted a few weeks later. If approved, drilling at these two sites is expected to start later in 2014 with hydraulic fracturing for shale gas commencing in 2015.

In September 2013, exploration at the Balcombe, West Sussex site was put on hold. Cuadrilla withdrew its application to extend drilling and horizontal well testing beyond 28 September 2013 when its permit expired, instead applying for a six month extension for well testing only.

In January 2014 Cuadrilla announced there was no need to frack at Balcombe, as the rocks were naturally fractured: ‘The analysis of the samples we obtained from the exploration well confirmed that the target rock underneath Lower Stumble is naturally fractured.

‘The presence of these natural fractures and the nature of the rock means that we do not intend to hydraulically fracture the exploration well at Lower Stumble now or in the future.’ The company confirmed it had found oil at the site and would make a fresh application to check the oil supply suitability by flow testing. Opponents, while pleased there would be no fracking, maintained their objections to the exploitation of fossil fuels and the industrial activity that would accompany it.

IGas Energy plcThis onshore oil and gas exploration and production

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in the UK.’ Later in the same report he noted: ‘The results of our own technical study, in the North West, supports our view that these licences have a very significant shale gas resource with the potential to transform the company and materially benefit the communities in which we operate.’

Dart Energy LtdHeadquartered in Singapore but listed on the Australian Stock Exchange, Dart Energy specialises in exploring and developing unconventional gas resources, notably coal bed methane, and has identified the UK as a major area for shale gas activity. Dart has a total of 31 UK exploration licences, including 13 licences in the Bowland Shale; in October 2013 French group GDF-Suez acquired a 25 per cent stake in the latter, for $12 million cash and a further commitment of £27 million towards drilling costs. Dart’s shares jumped 30 per cent on the announcement.

In May 2014 Dart Energy Ltd announced it was to be acquired by IGas Energy (see above), thereby creating the UK’s biggest shale gas explorer, a move which Dart’s CEO John McGoldrick said ‘heralds a new era for the UK gas industry’.

Dart also has licences in Scotland for coal bed methane development. It has stated it has no plans to frack in Scotland, however its Australian website notes that the area ‘also contains

from opponents of fracking.

IGas also has a 14.5 per cent share in the two PEDL areas of Lincolnshire in which major energy group Total has taken a 40 per cent share. IGas will operate the initial exploration programme, while Total will take over operations as the project moves into production. IGas has also said it sees potential for shale extraction at its existing onshore oil well sites in Surrey and Sussex.

In June 2014 IGas said it was preparing to submit planning applications to drill, frack and test gas flow at two sites, one in the North West the other in the East Midlands.

The company raised £23.1 million through a placing of shares in January 2013 and announced planned capital expenditure over a two year period of £35 million. Its share price rose to 134p in July 2013 following publication of the British Geological Survey Bowland Shale gas study, and of IGas’s revised estimate of gas initially in place in its North West licence area. After the farm-out agreement with Total was announced in January 2014 IGas shares jumped 11.4 per cent to peak at 160.3p.

In the IGas Annual Report 2012/13, CEO Andrew Austin stated: ‘I am particularly pleased with the progress we have made in developing our position in the exploration and evaluation of unconventional resources

Dart Energy Ltd had been looking at an IPO on London’s AIM in 2014 but this was cancelled following the agreed acquisition by IGas. [Dart Energy Ltd is not connected with Dart Energy Corp of the US].

Magellan Petroleum (UK)Holds a 50 per cent stake, with joint investment partner Celtique Energie, in licences covering 1000 square kilometres in the Central Weald area of Southern England. Magellan has submitted proposals for exploratory drilling at two sites to test for oil or gas. No plans for fracking have as yet been announced but it may apply for permission to frack if tests prove positive. The Weald Basin is believed to contain oil shales that could hold up to 200 mmbbls of recoverable oil resources, with a mid-case estimate of 125 mmbbls.

Magellan Petroleum is based in the US with assets in Australia and the UK, and is listed on the Nasdaq. The UK appears to be its first unconventional oil/gas play. A letter to shareholders from Magellan’s CEO in May 2013 said:

‘In the UK, we maintain a large acreage position in the Weald Basin, which we believe is a very promising unconventional play ... Magellan remains one of only three publicly traded companies to offer significant exposure to this emerging UK shale play.’

Magellan’s 11 licences in the Weald and Wessex basins comprise: 1) four licences co-

lead to fracking at a new well on the same site.

Celtique has likewise stated that drilling at its Woodbarn Farm, Billingshurst site is purely for conventional resources and it will not be undertaking fracking, however there is a layer of shale rock beneath this site which has caused anti-fracking group Frack Off to question Celtique’s true intentions here. In its application in December 2013 for a third well site at Fernhurst the company states it will be drilling through shale formations and that, while fracking does not form part of this application, it might wish to do so at a later date.

Celtique also has an exploratory licence covering 200 sq km of Cheshire. It holds two exploration licences in Poland, one in Germany and three in Switzerland.

Alkane Energy plcAn independent UK gas to power generating company, mainly focused on coal mine methane, Alkane has more than 800 sq km of acreage under various PEDLs including licences in the Bowland area containing shale gas. The company, which is AIM listed, had been undertaking an evaluation of the development options in relation to its potential shale gas resources. In May 2014 it announced the sale of its onshore shale assets to Egdon Resources in return for an 18 per cent share in Egdon.

shale gas potential in the Black Metal and Lotinan (Broxburn) shale zones.’ Other main areas of operation are Australia, China and Indonesia.

In January 2014 Dart Energy announced it had entered into a farm-out agreement with French-owned Total UK. This gives Total a 40 per cent interest in Dart’s exploration and development licences covering the Gainsborough Trough basin in Lincolnshire. This deal was greeted by the UK government as a milestone on the progress towards shale gas fracking in the UK. Other interests in the licences are Dart, through its subsidiary GP Energy Ltd, (17.5 per cent), Egdon Resources UK Ltd (14.5 per cent), IGas subsidiary Island Gas Ltd (14.5 per cent) and eCorp Oil & Gas UK Ltd (13.5 per cent). Island Gas will act as operator on behalf of the joint venture partners and Total will operate the production phase.

Dart’s CEO McGoldrick made headlines with his remarks to a meeting of shareholders in Australia in 2013. Speaking about the company’s Bowland Shale licences, he said these held in place reserves of 110 trillion cubic feet, about a tenth of the Bowland shale total, and explained that this area was in Cheshire – ‘That’s where all the Man United players live – I can’t wait to drill in Rooney’s backyard.’ He also predicted that opponents to fracking ‘will be pushed aside’.

owned 50 per cent with Celtique Energie; 2) five licences operated by Northern Petroleum; and 3) two licences wholly owned and operated by Magellan.

Celtique Energie Holdings Ltd Celtique Energie is a privately owned, UK-based oil and gas exploration company. It has subsidiaries and operations in five European countries (France, Switzerland, Germany, Poland and the UK). Largely focused on conventional resources it has also acquired some licences to explore for unconventional resources.

Together with joint investment partner Magellan Petroleum, it holds four drilling licences covering 1000 sq kilometres in the Central Weald area of Southern England. It has submitted proposals for exploratory drilling at two sites to test for oil or gas.

Celtique’s website states that its first two well site explorations will be for conventional rock formations; however in a statement about its planning application for its well site in West Sussex (near the villages of Kirdford and Wisborough Green, West Sussex, to test for oil or gas in the Kimmeridge Limestone and Great Oolite formations) CEO Geoff Davies said that, while this application does not include the use of fracking, it will involve drilling through shale formations and should the data prove positive it might wish to explore these formations further, which could

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