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Part 3 of the ESG series: Unconventional gas and a low carbon economy

Date: Dec 17th, 2015
While the unconventional gas industry can provide a significant economic benefit to rural and regional areas, there are environmental and social issues that must be addressed. In this article we look at some of these issues and examine why and how the industry can build the trust of stakeholders.

Unconventional gas’ has lower greenhouse gas emission intensity than other fossil fuels and as such, will form an important part of the transition to a low carbon economy. Environmental and social issues are emerging as part of this transition and while some of these issues are being managed effectively, others are presenting more of a challenge to the industry and to the communities affected.

Hydraulic fracturing or ‘fracking’ has been used in the conventional oil and gas industry for some time and, with the development of horizontal drilling techniques, has enabled the development of shale gas assets, especially in the US. Fracking involves pumping water under pressure, with sand and a mixture of other chemicals, to open up fractures within the rock. It aims to improve the gas recovery rates from the shale or coal seam. While fracturing is required for shale gas developments, it is not necessarily required for coal seam gas. The pressures needed for fracking for coal seam gas tend to be less than those needed for shale gas. This is due to the lower depth of coal seam gas developments and the nature of coal compared to shale.

Environmental issues relating to unconventional gas

Groundwater disposal

The dewatering of coal-seams to facilitate the production of coal seam gas can create a significant amount of groundwater which needs to be disposed of. Reverse osmosis plants is a preferred option, so this water can be reused to supplement industrial and/or domestic water supplies.

Impact on systems and resources

In order to manage and mitigate the impact of groundwater, the levels and quality of groundwater should be comprehensively monitored – both during and after coal seam gas operations. Groundwater impact models should also be updated throughout the operation.

The use of high quality water

In areas where water resources are scarce or in high demand, such as in parts of the US, the sourcing of large volumes of high quality water for fracking has been controversial. As such, there is a growing expectation that fracking should use poorer quality water and collect and reuse flow back water. Any fracking flow back water that will not be reused should be appropriately treated and disposed of.

The use of chemicals

In the US, the potential toxicity of fracking chemicals has been a significant issue. There has been community concern around the lack of disclosure of chemicals being used, or the use of the potential carcinogen BTEX. Australian companies have committed to disclosing which chemicals are used, and have also committed to not use BTEX in fracking operations.

Potential cross-contamination of groundwater systems

Potential cross-contamination of groundwater systems –which can result from poorly completed unconventional wells or from improved conductivity from changes to geological faults from fracking – have raised concerns.

To avoid fracking in high risk-faulted areas, we believe that 3D seismic surveys should be used prior to fracking. In addition, there is a need to construct and complete wells to the highest quality in order to minimise groundwater cross-contamination.

Fugitive emissions

Cold venting of gas during work-overs or exploration, poorly constructed wells and poorly maintained compressors and gas and water gathering systems may lead to significant fugitive methane emissions. These issues can and should be addressed through the use of ‘green’ well completion techniques and collection systems.

Underground coal gasification

Underground coal gasification, which involves the partial combustion of coal underground, is considered by some as an unconventional gas technique. We believe that underground coal gasification has significantly more environmental risks than either shale gas or coal seam gas. Neither the Responsible Investment Leaders funds nor Sustainable Funds invest in companies involved in underground coal gasification.

We believe key environmental issues can be managed

While there is a range of environmental issues that need to be addressed for unconventional gas, we believe that the key environmental issues can be appropriately managed through baseline monitoring, impact assessment prior to development, use of best available technology, ongoing review and reassessment of future impacts and adaptive management.

Social issues relating to unconventional gas

The social issues relating to unconventional gas are possibly even more challenging to manage than the environmental issues.

Conflicts in land use

Much of the development of unconventional gas, and in particular coal seam gas in Australia, has occurred in areas that have had either little or no association with the oil and gas industry. This has caused conflicts in land use and changes to local communities.

While these changes may have benefitted some, for others they have caused economic and social problems. In addition, government regulation regarding access to land for exploration and development of unconventional gas has not been regarded as appropriately recognising landholder rights.

Due to poor community and landholder consultation practices by some players, a lack of trust for coal seam gas and shale gas companies has developed. This is particularly the case with early players in coal seam gas in Australia and a minority of shale gas players in the US.

The over-riding of perceived landowner ‘rights’, inadequate compensation and a power imbalance in negotiations has led to a backlash against some unconventional gas developments. Some companies have not been sufficiently transparent or respectful of stakeholders, leading to a lack of trust not only for the particular companies involved but for the industry as a whole.

Finding a way forward

It is inevitable that as the unconventional gas industry develops, it will change the nature and character of some areas. The planning and approval process should balance the potential costs and benefits that may accrue at a local, regional and national level, and the industry needs to recognise that these costs and benefits will be different at each level. It is also critical that the planning and approval process is transparent, open and comprehensive to enable all stakeholders to participate. Unconventional gas companies need to engage with impacted communities and work with them to minimise and manage potentially negative social impacts that may occur over both the short and long-term – listening to and being responsive to the issues raised by stakeholders.

Some unconventional gas companies have gone beyond what is required by law and committed to respecting landholders who refuse coal seam gas developments on their land. In addition, they have provided appropriate support to landholders during negotiation, recognising that in many cases landholders do not have the time or resources to be able to negotiate landholder agreements on an equal footing.

Some social aspects are difficult to manage, such as short-term impacts on social services in regional communities. This can be the result of a large influx of people during the construction phase of a development. Again, it is critical that companies liaise with local communities and government service providers to minimise adverse impacts.

Finally, there are some impacts that are difficult to reconcile. While companies may be able to minimise the potential aesthetic impacts of developments, there may be a more negative impact on the character of the landscape. In these cases, any change may be considered unacceptable to some, while others see the opportunities. Where there is a natural tension in the community, it will be critical that the planning and approval process is transparent and that the company builds trust and works with all of the stakeholders in the community.

Source: AMP Capital

About the Author

Ian Wood is the Head of ESG Investment Research and has been instrumental in establishing and developing AMP Capital’s approach to ESG issues, and their integration into the investment processes for Australian and international equity and fixed income funds. He also oversees the corporate governance and proxy voting of AMP Capital.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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