Fracking and Finance: The Pros and Cons of New Fossil Fuel Energy

Gas drilling rigWith lawsuits, moratoriums and bans on hydrofracking popping up across the United States, the promise of natural gas for a cleaner and more independent energy future is stuck between a rock and hard place

Hydraulic fracturing, also known as hydrofracking or fracking, has emerged as one of the main battlegrounds between the energy industry, which sees vast potential in a domestic source of fuel that is cheaper and potentially cleaner than oil and coal, and environmentalists, who are concerned that the process to extract natural gas by injecting chemicals—many of which are known carcinogens—into dense rock formations deep underground is simply too hazardous.

The pros are pretty clear. For the energy industry and many politicians who are clamoring for American energy independence, the Marcellus shale—a massive bed of sedimentary rock that runs through Ohio, Pennsylvania, New York, Maryland, Virginia and West Virginia—holds a main key to the nation's energy security. Gary Lash, a geologist from the State University of New York at Fredonia, estimates that the Marcellus contains some 516 trillion cubic feet (TCF) of natural gas in the black shale beds that straddle New York and West Virginia, 10 percent of which—around 50 TCF—is accessible using current fracking technology. As the U.S. consumed around 25 million cubic feet of natural gas in 2011, the Marcellus has enough accessible gas to supply the nation's natural gas needs for two years.

Lash's colleague Terry Engelder, a geosciences professor at Pennsylvania State University, said, "The value of this science could increment the net worth of U.S. energy resources by a trillion dollars, plus or minus billions," noting that the Marcellus may hold enough natural gas to supply the U.S. for two decades.

ENVIRONMENTAL CONCERNS LEAD TO FRACKING BANS

Unfortunately, there are grave concerns about the safety of fracturing rock deep underground using a cocktail of toxic chemicals to get the job done, including toxic emissions that pollute the air, carcinogenic compounds released into the groundwater, possible spills that would impact the environment, wildlife and public health, and even earthquakes.

Such concerns have led to local bans and, so far, one statewide ban. Earlier this year, environmentalists hailed as Vermont became the first U.S. state to ban hydrofracking. "Fracking for gas is not the solution to our energy needs, it's part of the problem," said Paul Burns, executive director of the Vermont Public Interest Research Group (VPIRG), describing the decision as a choice "for clean renewable energy over fossil fuels."

But the legislation is more than just a choice about what kinds of energy investments Vermont is interested in making (and not making): It underlines the life-or-death choice that is at the base of the anti-fracking movement: dirty fuel or clean water.

"To ensure that the state's underground sources of drinking water remain free of contamination," the Act reads, "the general assembly should prohibit hydraulic fracturing for the purpose of the recovery of oil or natural gas."

"Very soon, there is going to be a shortage of clean water on this planet. Drinking water will be more valuable than oil or natural gas," said Vermont Governor Peter Shumlin, who signed the bill into law on May 16. "Human beings have survived for thousands of years without oil or natural gas. We have never known humanity or life on this planet to survive without clean water."

It's a powerful argument, and one that has helped environmentalists to convince state and local lawmakers across the country that there is simply too much at stake, too many unknowns. The decision followed the passage, in April, of a fracking ban in Albany, which became the 95th municipality in New York state to outlaw the controversial process.

NEW YORK: A FRACKING BATTLEGROUND

Indeed, New York is much more of a battleground state for anti-fracking groups than Vermont. The Empire State, after all, sits on the Marcellus shale. Vermont, on the other hand, has very limited natural gas resources—the fracking ban there was largely symbolic.

For New York, fracking has real consequences, and not just regarding the environment and the economy, but the state's own financial investments. In May 2011, Gannett reported that the New York state pension fund had more than $1 billion invested in fracking companies, a figure that raised the eyebrows of environmentalists and sustainable finance advocates. "It's something that I think we'd like the Comptroller's Office to look at," said Roger Downs, a conservation associate for the Sierra Club Atlantic Chapter. "I think if the state is profiting from natural-gas development at the same time that they are looking at potentially new regulations for the industry, there is a bit of conflict of interest."

"One of the risks for a company that is involved in mineral extraction is that something goes wrong and the company is held liable, and then the shareholder value decreases," said Susan Lerner, executive director of government watchdog group, Common Cause New York. "If the pension funds are shareholders, then they should behave like capitalists and demand that their investment be protected in whatever way is appropriate."

EPA'S NEW RULES = $29 MILLION SAVED

While the conflict between regulation and profit continues to foment in New York state, a similar conflict may have been assuaged a bit on the federal level when, in April, the Environmental Protection Agency (EPA) issued the first federal standards under the Clean Air Act to regulate natural gas fracking, standards that see regulation and profit as two sides of the same coin. The rules require the implementation of technology to control air pollution released during natural gas and oil drilling, pumping and distribution at production facilities across the country. Every year, some 13,000 new and existing natural gas wells are fractured or re-fractured.

"Some of the largest air emissions in the oil and gas industry occur as natural gas wells that have been fractured are being prepared for production," according to an EPA fact sheet. "During a stage of well completion known as 'plowback,' fracturing fluids, water, and reservoir gas come to the surface at a high velocity and volume. This mixture includes a high volume of VOCs and methane, along with air toxics such as benzene, ethylbenzene and n-hexane." Benzene, ethylbenzene and n-hexane are known cancer-causing agents.

The combined annual cost to industry in meeting the requirements is $754 million in 2015, according to EPA estimates. Subtract that cost from $783 million—the estimated value of the natural gas and condensate that would go to market because of the new technology, and the oil and gas sector nets a savings of $29 million. Not a bad reward for playing by the rules.

FROM LAWSUIT TO REGULATION TO INDUSTRY SAVINGS: UNINTENDED CROSS-SECTOR COLLABORATION

While the EPA's new rules were the result of a lawsuit filed by the environmental group WildEarth Guardians and San Juan Citizens Alliance, represented by the public interest law firm Earthjustice, they were also informed by the energy industry. As the agency notes, the rules "specifically require operators of new fractured natural gas wells to use cost-effective technologies and practices to capture natural gas that might otherwise escape the well, which can subsequently be sold." And, if the hydrofracking process doesn't include the capture of methane, then natural gas becomes dirtier than coal as a fuel source, as methane is more than 20 times more potent that carbon dioxide as a greenhouse gas emission.

"he final standards reduce implementation costs while also ensuring they are achievable and can be met by relying on proven, cost-effective technologies as well as processes already in use at approximately half of the fractured natural gas wells in the United States," according to an EPA press release. "These technologies will not only reduce 95 percent of the harmful emissions from these wells that contribute to smog and lead to health impacts, they will also enable companies to collect additional natural gas that can be sold."

"The president has been clear that he wants to continue to expand production of important domestic resources like natural gas, and today’s standard supports that goal while making sure these fuels are produced without threatening the health of the American people," said EPA Administrator Lisa P. Jackson. "By ensuring the capture of gases that were previously released to pollute our air and threaten our climate, these updated standards will not only protect our health, but also lead to more product for fuel suppliers to bring to market.

It's a win-win situation. Or is it? Well, for one thing, the new rules apply to air pollution, not the potential pollution of groundwater. In December 2011, the EPA announced for the first time that fracking could pollute water sources in an investigation of groundwater contamination near Pavillion, Wyoming, conducted in response to complaints by domestic well owners who reported bad taste and odor problems in well water.

Still, the air pollution rules are certainly a step in the right direction, and although it involved the courts, it represents one example of (unintentional) cross-sector collaboration between non-profit groups, a federal agency and the private sector, showing how environmental stewardship can be a part of good business, with the help of government. But talk about unsustainable finance: This kind of smart, money-saving regulation shouldn't have to come at the expense of a lawsuit.

FRACKING'S NICHE MARKETS

While the EPA has targeted the effects of fracking on air quality, treating the waste and wastewater by-products of the fracking industry represents an emerging niche market for the private sector.

In his excellent article, "What Is the Future of Fracking?" Jeremy Bowman of The Motley Fool reviews a few alternative fracking plays, such as Heckmann Corporation (NYS: HEK), a services company that handles water management for shale oil and gas exploration, and Gasfrac (OTC: GSFVF.PK), an oilfield-services firm that, instead of using water to fracture rock, uses liquid petroleum gas (LPG), which is 100% recoverable and thus avoids the pollution associated with water-based methods.

"Complaints about fracking often focus on the huge quantities of water that are used to extract gas out of the shale," Bowman writes. "It takes 4.5 million gallons of water to frack a well, and with demand for clean water expected to grow as supply declines, fracking could send water prices even higher. One example can be seen in Colorado, where drillers recently outbidded farmers at a water auction. This transition signals not only that water the commodity will become more valuable but also water-focused companies, who specialize in treatment, infrastructure, filtration, and other services."

THE WAITING GAME: BANS, MORATORIUMS, LAWSUITS AND UNFINISHED STUDIES

Who knows what the future will hold? The jury is out on fracking safety; several scientific studies are still underway. While Vermont has banned it, the law refers to its own possible repeal: "When hydraulic fracturing can be conducted without risk of contamination to the groundwater of Vermont, the general assembly should repeal the prohibition on hydraulic fracturing for oil and natural gas recovery."

In New York, it's a waiting game. Governor Andrew Cuomo, who is expected to green-light fracking in at least five counties, said that he would not rush the state Department of Environmental Conservation (DEC) to issue their highly-anticipated ruling on whether hydrofracking can be done safely.

"I promise you there will be lawsuits, whatever the decision is," Cuomo said. So the day right after the decision, there will be another press conference that says, 'Now we're going to step two, which is a series of legal challenges and political challenges, and we're going to try to get federal legislation and state legislation…It's going to be an ongoing situation for a long, long time."

But while some environmentalists are happy about the delay, which allows more time for scientific study on the issue, others are more cynical and see New York's 2014 gubernatorial race playing a role in Cuomo's delay. "It kind of means he's saying 'I'll decide later, after the election,'" said Emily Genser, a senior at NYU majoring in Environmental Studies.

Last month, New Jersey governor Chris Christie vetoed a bill to ban fracking, but ordered a one-year moratorium to give time for current fracking studies to complete their findings, citing concerns about groundwater contamination. In California, a fracking moratorium is currently making its way through the state legislature.

OPPORTUNISTIC OPTIMISM: FUNDING INNOVATION

Fracking companies and their investors need to have a little more patience for various state moratoriums to be lifted, for the courts to have their say and perhaps, for the next round of elections to end. In the meantime, the American Gas Association (AGA), the trade organization that represents the nation's natural gas supply companies, might suggest that its members take the $29 million that will be saved by implementing the EPA's new air pollution rules and use it to fund job-creating greentech solutions focused on chemical-free treatments of fracking wastewater—technologies that have the potential to clean up other environmental messes, like the kinds caused by chemical spills, coal mines, even pig farms. If bans ultimately shut the fracking industry down, natural gas companies would still hold valuable stakes in emerging technologies that eliminate toxic waste, purify water and maintain healthy ecosystems in general.

"Because states are persuading themselves to let fracking go on, they will create a booming market for cleanup," said Riggs Eckelberry, CEO of OriginOil, a biofuel startup that has been working on algae technology to clean up fracking waste.

As Winston Churchill once said, "A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty." Beyond the cynicism, the political maneuvering, the corporate greed and the knee-jerk environmentalism lies a science-based, conservation-minded, profit-seeking entrepreneurial spirit funded by sustainable finance and guided by environmental stewardship. For the fracking debate to have a good ending—and perhaps even a few positive unintended consequences as well—unlocking Churchill's "opportunistic optimism" should be a prerequisite to safely unlocking the natural gas buried deep within the Marcellus shale.

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NOTES

Buffalo Business First. Researchers: Shale holds vast supply of natural gas. February 11, 2008. Accessed September 11, 2012.
United States Energy Information Administration. U.S. Natural Gas Consumption by End Use. August 31, 2012. Accessed September 11, 2012.
Penn State University. Unconventional natural gas reservoir could boost U.S. supply. January 17, 2008. Accessed September 11, 2012.
Freeman Klopott and Jim Efstathiou Jr. Cuomo Said to Want to Limit Fracking to 5 New York Counties. Businessweek. June 13, 2012. Accessed September 11, 2012.
Peter Shumlin. Vermont Bans Fracking. Vermont.gov. May 16, 2012. Accessed September 11, 2012.
Vermont Public Interest Research Group. It's Official: Vermont Bans Fracking. May 17, 2012. Accessed September 11, 2012.
Vermont State Legislature. No. 152. An act relating to hydraulic fracturing wells for natural gas and oil production. May 16, 2012. Accessed September 11, 2012.
Ibid., 5.
Jon Campbell. State pension fund invests over $1 billion in gas companies. Gannett. May 6, 2011. Accessed September 11, 2012.
Ibid.
Environmental Protection Agency. EPA Issues Updated, Achievable Air Pollution Standards for Oil and Natural Gas. April 18, 2012. Accessed September 11, 2012.
Environmental Protection Agency. Oil and Gas Fact Sheet. July 28, 2011. Accessed September 11, 2012.
Ibid.
Ibid., 11.
Ibid., 12.
Ibid., 11.
Ibid.
Environmental Protection Agency. Draft Report: Investigation of Ground Water Contamination near Pavillion, Wyoming. December 8, 2011. Accessed September 2012.
Jeremy Bowman. What Is the Future of Fracking?. The Motley Fool. May 22, 2012. Accessed September 11, 2012.
Ibid.
Ibid., 7.
Jessica Bakeman. Andrew Cuomo: No rush to decide fracking. DemocratAndChronicle.com. September 10, 2012. Accessed September 11, 2012.
Melissa Cronin. Fracking Update: Cuomo Says Wait A Minute. NYU Local. September 11, 2012. Accessed September 11, 2012.
Ilya Marritz. Christie Vetoes NJ Fracking Ban, But Orders Moratorium, WNYC.org. August 25, 2012. Accessed September 11, 2012.
Michael J. Mishak. Fracking moratorium advances in California Legislature. Los Angeles Times. June 26, 2012. Accessed September 11, 2012.
Davd Worthington. Hydrofracking drives new water treatment solutions. Smartplanet.com. June 11, 2012. Accessed September 11, 2012.

image: gas drilling rig (NYC.gov)

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