Unconventional Oil & Gas Series: Shale Gas Webinar
Dayna Linley
Senior Analyst, Sustainalytics
Elizabeth McGeveran Senior Vice President, Governance & Sustainable Investment
F&C Investments
April 11, 2012
Sustainalytics
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Sustainalytics is an independent ESG research and service provider with global coverage of capital markets.
We have more than 60 analysts involved in
environmental, social and governance (ESG)
research and analysis
Our company research includes detailed ESG
profiles of more than 3,500 companies
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We have developed a robust and fully
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Speakers
Dayna Linley, Sustainalytics
Elizabeth McGeveran, F&C Investments
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Shale Gas Webinar Agenda
Risks & Implications
Best Practices
Investor Risk Mitigation
Investor Perspective
Questions
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Background
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2010 Natural Gas Production
6 IEA, January 2012 http://www.eia.gov/todayinenergy/detail.cfm?id=4790
Recoverable Natural Gas Reserves
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Shale Gas Extraction
Vertical & Horizontal
Drilling
• Muds and fluids
Hydraulic Fracturing
• Water, sand and 0.5% Chemicals
Natural Gas Production
• Produced water
• Wastewater
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Risks & Implications
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Key Impacts
• GHG
• Other Air Emissions AIR
• Habitat Fragmentation
• Earthquakes LAND
• Community Relations
• Indigenous Peoples SOCIAL
• Site next to site next to site CUMULATIVE
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Key Impacts
• Inputs -sourcing, quality and quantity
• Outputs-disposal, quality and quantity
WATER
• Methane migration • Contaminated drinking
water • Health affects
allegations
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Risks and Implications
Reputational Risk
Dirty tap water Exploding wells
Community Resistance
Decreased access to capital
Decreased access to labour
Decreased access to natural resources
Decreased social license to operate and grow
(permitting)
Best Practices
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If companies want to see a golden age for natural gas they need to come up with golden standards of practice.
-- Fatih Birol, chief economist, International Energy Agency
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• Pre-drilling testing
• Protects company and landowners
Baseline Water Testing
• CAPP hydraulic fracturing operating practice: Testing water wells within 250 metres, or per regulation, before drilling Example
• Design, drilling, cementing & casing
• Cement bond logs
Well Integrity Testing
• Shell does not hydraulically fracture wells unless it has pressure tested for wellbore integrity. Example
• Reduce toxicity in fracturing fluids, drilling muds, cements etc.
Use of Green Products
• Baker Hughes, Halliburton and Schlumberger all have green fracturing technologies Example
Best Practices: Process Changes
Application
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Risks and Opportunities
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• Will leverage current conflicts into opportunity. Strong relationships with innovative service companies ensures access to new technology.
Energy Service Companies
• More populated region, communities more resistant to extractives projects due to lack of experience and personal values. Community engagement will be key here.
• Lack of experienced personnel and physical equipment
Slow Expansion into Europe
• Water use and disposal is a major opportunity area. Watch R&D in waterless technology, very high demand in water stressed areas (Australia, South Africa, Texas)
Water
• Increased natural gas production may keep the price low, which will decrease the economic viability of renewable energy
Risk to Renewable Energy Conversion
Shale Gas Controversies
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Cabot Oil & Gas
Chesapeake Energy Corporation
Encana
EOG Resources
Total
Baker Hughes
Halliburton
Schlumberger
How to Mitigate Unconventional Risk
Who is in unconventionals and how far? Identify exposure
Does the company understand the risk? Environmental and social impact assessments, beyond regulatory requirements Evidence of executive/board awareness of the issues Acknowledgement of concerns, regardless if factual or not Disclosure on sensitive topics Consistent acknowledgement in Sustainability and Financial disclosure
What is the company doing about it? Commitment to company-wide operating principles Disclosure of performance standards with a framework to achieve them (operating
practices, programmes and goals) Educational resources can decrease reputational risks
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How to Mitigate Unconventional Risk
Identify and Track KPI’s Benchmark performance to baselines and peers
Ongoing review, not a static process
Engage Regulators and Industry Associations Level the playing field by requiring best practices
Encourage Continuous Improvement Technology is constantly changing
Opposition groups are dynamic
Apply shale gas learnings to other unconventionals
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Who is doing this well today?
Royal Dutch Shell
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Who is doing this well today?
Talisman Energy
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Investor Perspective
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Expect excellence Expect excellence 23
Frontier Extraction: Types
Ultra deep water
Shale oil
Arctic drilling
Oil sands
Coal bed methane
Shale gas
Expect excellence Expect excellence 24
Frontier Activity: Considerations
Energy security/geopolitical considerations
Cost of energy for the poor
Impact on renewables
Lack of comprehensive life cycle analysis to inform policy
Spectrum of environmental impacts
Multiple social changes
Expect excellence Expect excellence 25
Global Shale Gas Reserves
Source: US Energy Information Administration, 2011
Expect excellence Expect excellence 26
Shale Gas Development: United States
North America is petri dish
for global shale gas development
Expect excellence Expect excellence 27
Global Shale Gas Development: Pace
Bullish industry driving up valuations Acquisitions: ExxonMobil XTO ($35 billion)
Organic Growth: Chesapeake Energy 4,500 land agents signed 600,000
leases; 9 million acres size of Wes Virginia
Will dropping gas prices undermine environmental
& social best practices?
Expect excellence Expect excellence 28
Global Shale Gas Development: Pace
–Can oil & gas companies keep pace with
meteoric pace of shale gas development?
Expect excellence Expect excellence 29
Shale Gas Development: The Biggest Challenges
Thousands of white picket fence line neighbors
Thousands of wells: low failure rates = high numbers
Growing questions about climate change impacts of natural gas
Monitoring & containing fugitive methane emissions
Sensible regional planning
Legacy issues from land agents
Small operators with lower standards – lower barriers to entry
Expect excellence Expect excellence 30
Global Shale Gas Development: The For-Profit
Players
1. The Companies
2. The Banks
3. The Insurance Companies
4. The Water Utilities & Treatment Companies
5. The Investors
6. All actors must drive strong best practice standards
Expect excellence Expect excellence 31
Standard Setting: Financial Industry
Climate Principles Group Fact-Finding
– Day 1: Stakeholder
– Day 2: Oil & gas operators and service companies
– Day 3: Pennsylvania site visit & local meetings
Top-down regulatory action in US unlikely; EU regulatory framework
emerging
Shared financing principles (e.g. Clean Coal Guidance for new coal-
powered utilities)
Leap frog to best practices in new shale gas markets
Expect excellence Expect excellence 32
Standard Setting: Trade Associations
International Petroleum Industry Environmental
Conservation Association (IPIECA)
4-year strategic plan
50% of global production in membership
Could IPIECA experiment with driving high standards in
this emerging area of gas development?
Expect excellence Expect excellence 33
Robust Investor Activity
Investor Environmental Health Network & Rich Liroff
– Comprehensive shareholder resolution campaign
– Excellent document for best practices
Multiple individual dialogues with companies
Input into state and national regulatory processes
Expect excellence Expect excellence 34
Shale Gas
Key Environmental and Social Risks
Source: Nature Magazine, Vol 477, Sept.
2011
Key risks:
• Groundwater pollution
• Unsafe disposal of hazardous
wastewater
• Water stress
• Air pollution
• Earthquakes
• Methane venting and leaks
(Carbon footprint)
• Land footprint (impacts on
local communities and
biodiversity)
• Pressure on infrastructure
• Adequacy of local regulation
and enforcement
Questions?
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Sustainalytics Analyst Insights
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Disclaimer
Copyright © 2012 Sustainalytics. All rights reserved. No portion of this material
may be reproduced in any form without the expressed, written permission of
Sustainalytics.
For more information please contact: Elizabeth McGeveran Senior VP Governance & Sustainable Investment F&C Investments Email: [email protected]
Dayna Linley Senior Analyst, Research Products Sustainalytics Email: [email protected] Website: www.sustainalytics.com Amsterdam – Boston – Frankfurt – Madrid – Paris – Timisoara – Toronto
