The “Cleaner” Fossil Fuel? Not Quite Yet
By Larisa Ruoff
Larisa Ruoff directs the Shareholder Advocacy program at Green Century Capital Management.
This article appears in Trillium Asset Management Corporation’s Investing for a Better World Fall/Winter 2009 newsletter. Trillium Asset Management Corporation provides portfolio management services to Green Century’s Balanced Fund.
Natural gas is widely recognized as the least environmentally damaging fossil fuel, one that will play a key role in bridging our transition to a greener energy future. Although reserves of conventional natural gas have been steadily decreasing in recent years, recent advances in the unconventional drilling technique known as hydraulic fracturing (or “hydrofraccing”) are unlocking vast reserves of previously unavailable natural gas. According to the Energy Information Administration of the Department of Energy, onshore unconventional production, which often requires hydrofraccing, has surpassed onshore conventional production and is expected to increase exponentially in the next two decades. But the process entails very serious risks.
Hydrofraccing is the process of injecting huge quantities of water, chemicals and sand into the ground under very high pressure to create fractures through which natural gas can then flow and be collected. The process was developed by Halliburton Company* in the middle of last century. By some estimates, hydraulic fracturing is used in over 90 percent of natural gas wells in the country.
The use of hydrofraccing has opened up a drilling and exploration boom across the country including the Rocky Mountain west, Texas and Louisiana, and the mid-Atlantic region. Development of the Marcellus shale (which runs underneath West Virginia, Ohio, Pennsylvania and New York), according to the US Geological Survey, could supply the natural gas needs of the US for 15 years.
As the use of hydrofraccing skyrockets, communities, regulators and investors are growing increasingly concerned about the environmental impacts of this process. Hydrofraccing requires significant land use modification, including the clearing of up to five acres per drilling site, disruptive new roads and the trucking of toxic chemicals through established communities. Furthermore, it is incredibly water intensive, with each well requiring three to nine million gallons of water — a high level concern considering that much of the nation’s gas drilling takes place in drought- prone Texas and the Rocky Mountain west. What is receiving the most attention, however, is that while toxic chemicals make up only a tiny fraction of the fracturing fluid, given the significant quantities of water used and produced, the quantities of toxics present are very significant. For example, an average fracturing operation using 3 million gallons of water produces wastewater containing 15,000 gallons of chemicals which are then often stored in open-air pits.
These toxic fluids have the potential to contaminate groundwater and the surrounding environment. According to independent tests done in Colorado in 2008, at least 65 chemicals used by natural gas companies were defined as hazardous under the major federal statutes designed to protect against toxic contamination. If these chemicals were released from an industrial facility, reporting to the Environmental Protection Agency (EPA) would be required, and specific clean-up protocols prescribed. But thanks to what has become known as the “Halliburton loophole,” natural gas drilling has escaped rigorous regulation by the EPA.
The EPA regulates chemicals used in underground injection under the Safe Drinking Water Act. The 2005 Energy Policy Act, shepherded through Congress by former Vice President Dick Cheney, a former CEO of Halliburton, stripped the EPA of its authority to monitor hydraulic fracturing — resulting in natural gas being the only industry to benefit from such an exemption. Environment America, Earthjustice, the Natural Resources Defense Council, the Oil and Gas Accountability Project and the Western Organization of Resource Councils are some of the organizations calling on Congress to close the Halliburton loophole. In June of this year, legislation was introduced in Congress to reinstate the EPA’s authority to regulate hydraulic fracturing under the Safe Drinking Water Act. According to one of its sponsors, Representative Jared Polis (D-CO), “It is irresponsible to stand by while innocent people are getting sick because of an industry exemption that Dick Cheney snuck in to our nation’s energy policy. Many new sources of energy, including natural gas, will play an important role in our nation’s transition to cleaner fuels, but we must make sure this isn’t at the expense of public health. The problem is not natural gas or even hydraulic fracturing itself. The problem is that dangerous chemicals are being injected into the earth, polluting our water sources, without any oversight whatsoever.” But in this year’s packed legislative agenda, the bill has yet to significantly move forward.
Green Century Capital Management, in partnership with the Investor Environmental Health Network, is playing a leading role in mobilizing investors concerned about hydrofraccing. As environmentally responsible investors, we are highly cognizant of both the potential environmental and financial impacts of hydrofraccing. For companies using hydraulic fracturing, the increased costs and financial risks include accidents and explosions, regulatory action and media attention. In Colorado, New Mexico, Alabama, Ohio and Pennsylvania, one thousand cases of contamination attributable to fracturing have been documented by the courts and state and local governments. For example, in Pennsylvania, Cabot Oil & Gas* was forced to shut down its fracturing operations and pay thousands of dollars in fines after failing to adequately protect the environment.
In another highly publicized case, a Colorado woman developed a very rare tumor that had been linked to a chemical used in fracturing operations. While initially denying the use of the chemical in the wells surrounding her house, EnCana Corporation* eventually disclosed its usage and paid out a reportedly multi-million dollar settlement. In other cases, companies have been forced to truck in water to individuals alleging damage to their water supplies. Situations such as these are motivating our investor group to encourage companies to eliminate the most harmful toxic components of hydrofraccing fluids, switch to safer alternatives, and increase transparency around both the chemicals used and the risks associated with this process.
The desire of companies to drill in close proximity to the New York City watershed is generating serious backlash. Community groups and regulators are concerned that even one accident could devastate the drinking water supply for 9 million people.
New York State is currently revising its regulations governing natural gas drilling, including in the watershed area. An encouraging trend is the recent willingness of some companies to take action even before these guidelines are completed. In late October, Chesapeake Energy*, the only company to hold leases within the watershed, announced it would voluntarily refrain from drilling within the boundary. In announcing its decision, Chesapeake’s CEO said, “How could any one well be so profitable that it would be worth damaging the New York City water system?” Beyond this admission, companies are beginning to support calls by the investor and environmental communities for increased transparency and disclosure. Earlier in October, Chesapeake’s CEO called on the industry to “disclose the chemicals that we are using and search for alternatives….” Days before, Schlumberger*, second only to Halliburton in providing fracturing services to natural gas companies, said it is pushing its suppliers to increase disclosure. A Southwestern Energy* board director was quoted saying, “[L]et’s just put it out there, we’re better off.”
Investors have contacted more than 20 companies, including Chesapeake, Williams*, and Halliburton, to gather more information about their employment of this technique, any steps they are taking to minimize the use of toxic fluids, and their willingness to disclose the chemicals being used. Trillium Asset Management Corporation has written to Halliburton, a leader in developing hydrofraccing technology that plays a particularly important role in the proliferation of this technology, and will also be reaching out to Anadarko* and Southwestern Energy.
As more and more companies drilling exploratory wells and determining the viability of their lease holdings, it is imperative to ensure that hydrofraccing unlocks natural gas in a way that does not endanger our drinking water and other natural resources.
*As of December 31, 2009, neither the Green Century Balanced Fund nor the Green Century Equity Fund held Halliburton, Cabot Oil & Gas, EnCana Corporation, Schlumberger or Anadarko. As of December 31, 2009, Chesapeake Energy was not held by the Green Century Balanced Fund and comprised 0.32% of the Green Century Equity Fund; Southwestern Energy was not held by the Green Century Balanced Fund and comprised 0.32% of the Green Century Equity Fund. Portfolio composition will change due to ongoing management of the Funds. Please refer to the Green Century Funds’ website for current information regarding the Funds’ portfolio holdings. These holdings are subject to risk as described in the Funds’ prospectus. References to specific investments should not be construed as a recommendation of the securities by the Funds, their administrator, or their distributor.
Green Century Capital Management is an investment advisory firm focused on environmentally responsible investing. Founded by a partnership of non-profit environmental advocacy organizations in 1991, Green Century’s mission is to provide people who care about a clean, healthy planet the opportunity to use the clout of their investment dollars to encourage environmentally responsible corporate behavior. Green Century believes that shareholder advocacy is a critical component of responsible investing and actively advocates for greater corporate environmental accountability.
You should consider the Green Century Funds’ investment objectives, risks, charges, and expenses carefully before investing. For a prospectus that contains this and other information about the Funds, call 1-800-93-GREEN, visit www.greencentury.com or email firstname.lastname@example.org. Please read the prospectus carefully before investing. Investments are not FDIC insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
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