In an emissions-constrained economy, natural gas is often viewed as a more environmentally friendly alternative to coal. It produces half the carbon dioxide on an energy-equivalence basis and contains almost none of the heavy metals that are typically associated with coal. Accordingly, natural gas is a significant and growing source of electricity in North America. We expect this trend to continue as a result of plans to shut down coal facilities over the next decade and concerns over the safety of nuclear power, particularly after the Japanese nuclear crisis. Despite the perceived environmental benefits of natural gas, however, opposition to a relatively new process for extracting the resource – known as hydraulic fracturing, or “fracking” – is growing in North America and Europe.
The use of hydraulic fracturing has changed the natural gas industry over the past decade. This new process has allowed companies to extract natural gas from hard-to-reach geologic formations, such as shale, through the use of large volumes of water and various chemicals. As a result, US natural gas production in 2010 reached the highest level in decades according to the House of Representatives Committee on Energy and Commerce. This plentiful supply has contributed to the decline in the price of natural gas to $3.75 (as of November 1, 2011) from its recent high of $13.58 in July 2008.
While hydraulic fracturing has opened up vast local resources of natural gas that could provide an important stepping stone to a cleaner energy future, concerns over the safety and environmental impact of this process have arisen. For example, the Province of Quebec and States of New York and New Jersey have declared moratoriums on shale gas drilling pending additional environmental research while companies temporarily ceased operations in the U.K. and Pennsylvania following fracking-related incidents this year. In this context, we focus on the hydraulic fracturing process and the main environmental concerns while highlighting some companies that are providing solutions.
Hydraulic fracturing is a well stimulation process that is used to maximize the extraction of hydrocarbons. During this process fluids comprised of water and a variety of chemicals are injected at high pressure into a geologic formation, which enlarges fractures in the rock (Exhibit 1). Once the formation has been broken up, sand or ceramic beads are pumped into the fractures to keep them open, allowing the trapped resource to escape. The majority of fracturing fluids then flow back to the surface for treatment and disposal or reuse. The volume and composition of the fracturing fluids used by energy companies varies by site and formation type. For example, according to the US Environmental Protection Agency (EPA), 50,000-350,000 gallons of water may be needed to fracture one horizontal well in coalbeds versus 2 million-5 million gallons to fracture a shale formation, where higher drilling activity has occurred. Although there are a number of industrial processes that consume large quantities of water, the growth of hydraulic fracturing and its effect on water supplies in water stressed and densely populated regions has become a concern.
The chemicals used in fracturing products also vary widely. According to a recent U.S. Committee on Energy and Commerce study of 14 oil and gas companies, over 2,500 fracturing products containing 750 different chemicals were used in a five-year period*. These fracturing products comprise approximately 0.5% of the total fluids used. While a number of these chemicals, such as salt and citric acid, are considered relatively benign, 29 chemicals that were used in more than 650 of these fracturing products are known carcinogens and/or hazardous air and water pollutants. Moreover, the most widely used chemical during this period was methanol, which is flammable and a hazardous air pollutant. Also of concern is that the companies studied were unable to provide a complete chemical breakdown for 279 fracturing fluids they used, as these products had at least one component that was considered a trade secret by the manufacturers. Therefore, a number of these companies are using chemicals that they cannot identify, raising questions about whether proper handling and treatment procedures are being applied.
The use of toxic chemicals has raised concerns over contamination of ground water. Contamination fears also stem from the presence in shale rock of naturally occurring radioactive compounds such as uranium and strontium. Research conducted by geochemists from the University of New York** has shown that the high-pressure fluids striking the shale could dislodge these toxic metals into wastewater. Currently in the U.S., flowback water may be disposed in several ways. It can be placed back underground through a permitted injection well, discharged to surface waters following treatment to remove contaminants, or placed in evaporation pits. Since the wastewater from fracking may contain carcinogenic and radioactive compounds, scientists believe the current treatment methods are inadequate. An investigation by The New York Times last winter provided support for these concerns as it found some sewage treatment plants that are processing wastewater from natural gas wells have been discharging radioactive fluid into public waterways, in some cases upstream of intake sites for drinking water. After concluding in 2004 that fracking did not contaminate groundwater, the EPA has launched a new study on the potential risks to drinking water.
A number of questions remain regarding the environmental risks associated with the hydraulic fracturing process. However, we believe the economic and environmental benefits of natural gas mean that increased drilling in unconventional formations will continue. As the industry grows and regulations tighten, we expect solutions that decrease the environmental impact of fracking will be an attractive investment opportunity for energy services and water treatment companies. We have exposure to this trend in the Acuity Clean Environment Fund through our investments in Secure Energy Services Inc. (TSX: SES), Newalta Corporation (TSX: NAL), and Gasfrac Energy Services Inc. (TSX: GFS).
1. Click here to see a copy of this study.
2. Source: “Fracking Nation,” Discover Magazine, May 2011
Martin Grosskopf, MES, MBA, is Director, Sustainability Research, and Portfolio Manager of Acuity Investment Management Inc., which manages a broad range of traditional domestic and global investment products including socially responsible offerings. As a pioneer in the field of socially responsible investment, Acuity Investment Management Inc. has assessed the market value implications of environmental issues since 1991 within its Acuity Clean Environment Fund. With the launch of the Acuity Social Values Mutual Funds in 2000, Acuity also offers a vehicle that allows investors to apply wider social criteria to the investment decision making process. Rachel Davies, Associate Portfolio Manager, Acuity Investment Management Inc., contributed to this article.
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