Modern shale gas extraction, known as hydraulic fracturing, has expanded access to carbon fuel reserves in the U.S. that would have been considered unattainable just five years ago. The implications are significant for both the economy and the environment. Natural gas currently accounts for almost a quarter of U.S. energy consumption and is predicted to rise. This technological breakthrough and the resulting drilling boom have driven natural gas prices to decade lows. The NYMEX Division futures contract, widely used as a national benchmark price, has dropped from around $12 per million British Thermal Units (mmBTU) in mid 2008 to just above $3.50 per mmBTUs today. In April of this year the price dipped briefly below $2 per mmBTUs. The environmental implications are also significant; but I’m not going to deliberate all of the drawbacks of hydraulic fracturing in this post, rather I’m going to highlight one specific area of risk: water use.
Water and energy are two commodities that are interdependent but priced very differently. The future projections of global water and energy use plus food production equal long-term challenges for an expanding world population. It takes a lot of water to produce energy, and shale gas extraction requires more water than traditional energy extraction techniques. According to Chesapeake Energy, it takes 4.5 million gallons of water to drill and fracture a typical deep shale gas or oil well. Furthermore, it is estimated that up to 20 billion barrels of waste water is generated from hydraulic fracturing per year. This figure is also expected to accelerate. While the energy sector accounts for a relatively small percent of total water use in the U.S., it is forecast to rise due to increases in shale gas supply. There are many questions about the future of hydraulic fracturing, like where to source water over the next 100 plus years, as it won’t likely be available from current sources, and then what to do with the waste water. Water use in hydraulic fracturing is affecting many groups, including energy companies, state and local regulators, the U.S. Environmental Protection Agency, municipalities, landowners, lawyers, water treatment and disposal companies, and equipment suppliers. Dialogue among these parties is shaping standards of practice.
At the heart of the matter is water supply and demand dynamics. State and local officials in many regions are forecasting a growing gap between supplies and demand as a result of expectations about population growth and climate change. Increasing water demand from hydraulic fracturing is exacerbating the problem, as water is the key link in the supply chain that enables energy sector growth. The hydraulic fracturing industry can address some water risk using various techniques. Sourcing and disposal is key. First, the use of “brackish” water instead of potable water to preserve fresh water supplies can be increased. Recycled municipal water is also a viable option for energy production. Waste water from gas and oil production can be treated and reused. It could also be remediated for agricultural use. Furthermore, metals and solids with commercial value can be extracted from the waste stream using advanced separation technologies. However, there is more technological development needed to improve the cost dynamics. Desalinization and reverse osmosis technologies are expensive, though costs are coming down. It may even be possible to one day harvest water from flue gas. Water distribution to and from drilling sites poses another problem. Currently, most water is trucked, and trucking is struggling to keep up with demand. It is also the biggest cost component of disposal. Pipelines may be feasible solutions in some cases, or there may be cost effective ways to evaporate produced water.
Drilling companies are attempting to meet these challenges; however, changing regulations are complicating the matter as well as the mobility of the energy sector, and options vary by region. Often the practices used come down to economics and the low cost solution is likely to win out. The hope is that the solution is long-term in nature and environmentally responsible. There will be investment opportunities in finding effective solutions to the water challenges as it relates to new energy production. At Portfolio 21 Investments, we have a policy not to invest in the extraction or production of oil, gas, or coal; however, we are proactively exploring potential investment opportunities in companies that apply environmental solutions and preservation in the energy sector.
Tony is Senior Portfolio Manager with Portfolio 21 Investments. He has 15 years of experience in the field of investment management.