Whither Fracking?

Source: Ostroff Law, Wikimedia Commons Although highly controversial, the practice of hydraulic fracturing has allowed for a new abundance of oil and gas in what many are calling an “energy revolution” that is undermining the stature of petrostates like Russia and Iran and drastically changing the calculus for producers and consumers of energy at all levels.

Record high oil prices in 2008 and 2009 set the stage for the current production boom, with corporations breaking ground on new ventures at record pace; however, most industry experts argue that fracking is still in its infancy, with significant room to grow in both the United States and across the world. The International Energy Agency, which provides countries with technical expertise and consulting on energy supply and security, is in clear agreement. In 2012, the organization published a policy document titled “Golden Rules for a Golden Age of Gas”, providing advice on best practices for fracking so that countries with shale reserves could use their resource wealth as environmentally and fiscally responsible as possible. To the chagrin of many consumer advocacy groups fearing water contamination and pollution, the agency viewed fracking as a way to generate wealth, promote energy security, and reduce global energy costs. Industry groups echoed this call, arguing that countries rejecting fracking will lose out on significant revenues and weaken their domestic businesses by contributing to higher energy prices. Critics counter that the consequences of fracking on the environment and public health at best have yet to be fully explored; in the meantime, fracking provides relatively few jobs at considerably environmental cost. This debate rages in countries and communities across the world.

The future of fracking is anything but assured. In addition to facing substantial public opposition - a 2013 EU study found that a full 80% of French citizens opposed fracking under any circumstances – companies must contend with a litany of other economic factors, including infrastructure requirements, access to water resources, and regulatory environments, before they decide to move forward with projects. The prospect of long-term low prices has had an additional dampening effect on oil and gas investment, with the IEA forecasting a 10% cut in investment in the U.S. for 2014 and significant delays for many other projects across the globe. While fracking for the most part has exploded in the United States, overseas projects face significant headwinds.

One commonly cited problem is the lack of infrastructure, especially in developing nations. In many cases, public roads and ports must be built in conjunction with commercial projects so that the oil and gas becomes available for delivery after it is extracted. Although this has been of minimal concern in advanced countries like Poland, other nations – notably China, which possesses the most shale reserves in the world – lack the sufficient infrastructure to make extraction profitable. Moreover, governments often find it politically difficult to justify these public infrastructure investments for the benefit of a few international oil companies.

Another issue is water usage. Fracking is an extremely water-intensive industry, with a typical well in the United States’ Marcellus Shale requiring upwards of 5 million gallons of water over the course of its lifetime. Some wells suck up five times that number. In an age of increasing water scarcity, many countries have decided that it is irrational to waste this valuable water on fracking. Moreover, the effect of fracking’s liquid waste on water supplies is unknown, and most countries are proceeding with caution. Such concerns have led to bans on fracking in Germany, France, and select communities in the United States.

A final (but crucial) reason fracking hasn’t taken off across the world has to do with the allocation of property rights. The United States operates under a system known as “fee simple estate”; private owners have the rights to everything above and below the land they own, and they are free to buy, sell, rent, or give away that land and any associated resources to whomever they like. Therefore it has been commonplace for companies to offer huge sums of money to landowners in the U.S. in return for access to the shale reserves below their property. This contrasts sharply with the rest of the world, where governments have rights to mineral wealth. Companies must negotiate with sovereign governments and often receive much less lucrative negotiations. While necessary, consulting with government officials and communities rather than individual stakeholders add significantly to the cost of completing projects.

Consider the case of South Africa. Last year, when Shell and other oil companies expressed an interest in studying the potential shale reserves of a region called the Karoo, the government announced that it was lifting a moratorium on fracking. As in countless other situations, the decision prompted significant backlash from advocacy groups and NGOs who oppose fracking on the grounds that fracking would degrade the natural environment and endanger public health.

It soon became apparent that initial reserve estimates were vastly overblown - scientists estimate that the region contains around 50 trillion cubic feet of natural gas, as opposed to initial guesses predicting nearly 500 trillion cubic feet of gas. This may have not been enough to totally forestall commercial exploitation, but it has dampened the ambitions of companies who wished to operate commercial projects in the region significantly.

Poland is another interesting case study regarding troubles for fracking. It has vast reserves of shale, the most out of any European country, but drilling for gas has faltered recently despite fears over Russian energy supplies and significant tax incentives. Petroleum companies blame an inefficient bureaucracy and costly regulatory requirements, which make for an unfriendly investment environment.

The biggest question mark by far, however, is Asia, which is already the largest consumer of energy but will see massive growth in demand in the coming decades. As mentioned above, China possesses the world’s most extensive shale reserves, and there is no reason to doubt its intentions to invest in the infrastructure and drilling equipment as part of a broader push to occupy the dominant role in the Asian economy. A highly centralized government and focus on industrialization would mean fracking will face fewer environmental concerns that we’ve seen in the United States and Europe. China’s commitment to reduce its carbon dioxide emissions after 2030 provides an additional incentive to delve into fracking, as it would help China to wean itself off of coal. Finally, fracking offers China security from the threat of energy supply disruptions. However, it is altogether possible that environmental concerns derail fracking in China in the same way that they have stalled projects in Europe and select places in the United States.

Low prices have also played a significant role in the collapse of these projects, and cannot be expected to last forever. But the weight of public opinion has combined with underlying structural forces to keep fracking on the back burner throughout most of the world. A consensus of any kind seems to be a long ways off.