Head of ESG Research at AMP Capital
Around eight years ago, horizontal drilling and fracking was finally perfected in the US. As a result of this new technology, we have seen the emergence of the shale gas and oil industry. Indeed, the actual shale gas itself is now a by-product as most of the value is in the crude oil and liquids (Ethane, Propane, Butane, Pentane etc.) that are brought up with the gas. These liquids are used as feedstock in hundreds of industries including heating, plastics and pharmaceuticals.
While the shale gas revolution in itself has been a true paradigm shift to create cheap energy and raw materials in the US, there has been another extremely important leg to the story. This has been played out in the media around the world and increasingly in Australia – the social and environmental impacts of fracking. In the article below, Ian Woods, Head of ESG Research at AMP Capital provides an overview of fracking and explores some of the opportunities and environmental considerations associated with this ‘game-changing’ technique.
What is fracking?
Fracking (or hydraulic fracturing) is a technique that makes it possible to extract natural gas by fracturing rock layers that were once unreachable deep within the earth. This process involves pumping a high-pressure mixture of water, sand and chemicals into a wellbore (well) to allow gas to flow up the well and be collected. Drilling to the rock layer is carried out vertically or more commonly, horizontally to create new pathways that release gas or to extend existing channels.
Fracking was a game-changer in the commercialisation of the well-known and vast shale gas deposits in the US. In particular, the ability to drill horizontally meant that access to natural gas could be increased by up to 50 times per well.
Prospects for fracking in Australia
Unlike the US (where fracking activity has been largely focussed on shale gas deposits), current development activity in Australia is focussed on coal seam gas (CSG) deposits. It is important to note that the pressures needed to frack CSG wells are lower than shale gas. As a result, some of the potential problems associated with fracking may not be as severe.
Not all CSG operations need to be fracked – it depends on the geology of the site. When CGS fracking does occur, it is generally performed at a lower depth than shale gas and so this raises other issues such as contamination of groundwater and concerns about small earth tremors.
In order to get projects approved, built on time (as well as on budget) and also manage potential long-term liabilities, companies need to manage the environmental and social issues surrounding fracking.
Generally speaking, the key environmental issues or concerns include:
The potential contamination of groundwater;
The disposal of water run-off from coal seam dewatering;
Long-term integrity of the wells; and
Sourcing water for the fracking process.
Social issues surrounding fracking are largely universal around the globe and include misinformation and lack of trust in the community due to poor practices by early players in the industry and the issue of landowner rights over what happens on their property and what appropriate compensation would be. For example, there may be groundwater impacts for landowners who don’t actually have any wells on their land but are neighbours to those that do. This may be a cause for community tension.
Occasionally, a game-changing, disruptive technology appears on the scene. The full ramifications of these innovations are rarely fully known or valued immediately and it takes time for the new industry to emerge and adjust to the new status-quo. This leaves the development of fracking activities – particularly in Australia – in a sort of stasis while legislators attempt to catch-up with the rapid evolution in technology and increasing community concerns.
AMP Capital has been engaging with Australian CSG companies on these issues. We understand the need to include all stakeholders in the management of environmental and social considerations so that investors – and society – can reap the benefits of this disruptive technology.
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