With escalating shale oil production putting the US on track to become the world’s largest oil producer, investors are challenging an increasingly common industry practice – burning off or ‘flaring’ associated natural gas from shale oil wells – as environmentally damaging, economically wasteful and a threat to the industry’s bottom line.
“We are concerned that excessive flaring, because of its impact on air quality and climate change, poses significant risks for the companies involved, and for the industry at large, ultimately threatening the industry’s license to operate,” wrote three-dozen investors in a letter sent this week to 21 of the industry’s largest shale oil producers, including Continental Resources and Chesapeake Energy.
The letter notes that in North Dakota alone, which produced an average of 418,000 barrels each day last year and is now the third largest source of domestic oil production behind Texas and Alaska, annual flaring-related emissions were equivalent to more than two million tons of carbon dioxide, as much as adding 384,000 cars to the road.
Shale oil holds the potential to transform the US oil industry, but its benefits will be drastically reduced if we don’t address flaring head-on,” said Mindy Lubber, president of Ceres, the business-investor coalition that helped organize the letter. “The industry’s current approach to the issue raises serious questions as to whether that will happen, and merits a red flag from an investment community that looks to companies for long-term sustainability.”
“Excessive flaring is not only environmentally damaging but also a waste of a valuable resource,” added Karina Litvack, director, head of governance and sustainable investment at F&C Asset Management, one of the investors sending the letter. “We want to encourage companies to articulate plans for resolving this issue while shale oil production is still in its relative infancy.”
Shale oil production is growing rapidly as a result of advances in recovery technologies, particularly directional drilling and hydraulic fracturing, or fracking. These technologies have opened up previously inaccessible reserves of oil in shale formations in North Dakota, Texas, California, Colorado, Ohio, and several other states. Goldman Sachs recently forecast that the U.S. is poised to become the world’s top oil producer in the next five years – a position it last occupied in 1973. Nearly all of this increased production would come from shale oil fracking.
The letter focused on the industry’s practice of allowing billions of cubic feet of natural gas to be flared or vented as a byproduct of shale oil production. The practice is only loosely regulated at the state level.
“Few if any companies appear to have well-articulated plans for managing this growing risk,” said Steven Heim, director of social research and advocacy at Boston Common Asset Management. “As long-term investors, such a short-sighted approach raises significant concerns.”
“On a lifecycle basis,” the investors’ letter continues, “emissions from oil produced with high flaring rates may be comparable to those from Canada’s vast oil sands region” – a particularly high-carbon oil source. “This could make it subject to penalties under clean fuel standards like those adopted by California, and being actively considered by the 13 Northeast states that are members of the Regional Greenhouse Gas Initiative. Such standards reduce the carbon intensity of fuel over time and limit the market for more carbon-intensive sources.”
Shale oil fracking takes place in an environment where regulation hasn’t kept up with booming production. At the moment, this type of energy production is mostly regulated by the states, many of which are relatively new to oil and gas production and don’t yet have strong regulatory regimes in place.
The investor letter requests “information about the amount (each company) is currently flaring, as well as details about your plans to reduce flaring at existing wells and prevent it at future wells.” The response deadline is May 1. Investors also asked to meet with the companies.
The letter, addressed to the CEOs of companies with major shale oil holdings, was sent to Anadarko, Apache, BP, Chesapeake Energy, Chevron, Continental Resources, Devon Energy, EOG Resources, ExxonMobil, Hess, Marathon Oil, Noble Energy, Oasis Petroleum, Occidental Petroleum, Pioneer Natural Resources, Royal Dutch Shell, SM Energy, Statoil, Talisman Energy, Total, and Whiting Petroleum.
The investor signatories, representing $500 billion in assets, include, among others, Boston Common Asset Management, F&C Asset Management, Local Authority Pension Fund Forum, PaxWorld Management, Portfolio 21 Investments and Presbyterian Church (USA). The investor letter, with a full listing of signatories, can be found at: http://www.ceres.org/files/oil-gas/investor-flaring-letter