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Countries Approach Fracking With Interest and Caution

New York Law Journal

January 2, 2014

In my last column (“Keystone and Fukushima: Balancing Needs and Risks,” Sept. 18, 2013), I pointed out the significant environmental risks from both Canada’s oil sands and Japan’s nuclear facilities and concluded that, after balancing their respective benefits and risks, neither represented a desirable model for either the United States or the international community to meet their future energy needs. Those needs are expected to grow substantially as developing countries strive to improve their standards of living and the world’s population grows from seven billion to more than nine billion people.

Where is that new energy going to come from? While the first choice, especially in the United States and other developed countries, must surely be conservation, energy efficiency and renewable energy sources (solar, wind, geothermal and tidal), those are not sufficient for most developing countries, where average consumption is much less than in the United States, renewable options are often fewer and the additional infrastructure required for renewable energy makes it an unrealistic foundation for national energy policy. Indeed, even in the United States, conservation, energy efficiency and renewables are seen as part of a comprehensive energy mix, not as a complete substitute for fossil fuels until at least 2050.

That leaves coal, oil and natural gas as the most realistic base energy choices for many developed and developing countries. While coal is recognized as a major source of greenhouse gases (GHGs) and other environmental impacts, its low cost and wide availability continue to make it attractive to China, India and many other countries. Oil contributes less than coal to climate change, but it too is a major source of GHGs and is often tied to politically unreliable regions (the Middle East) or governments (Russia, Venezuela).

Vastly increased, and less expensive, natural gas from hydraulic fracturing (“fracking”) is therefore attractive to economists seeking to stimulate development, to national security officials seeking independence from unreliable oil suppliers and to those environmentalists who believe (as I do) that substituting natural gas for coal and oil is necessary if the world is to have any chance of avoiding runaway GHG emissions from developing countries. Such emissions already threaten to overwhelm any efforts to hold global warming to “only” two degrees above pre-industrial levels, a goal unlikely to be achieved absent a significant slowdown in future GHG emissions from China, India, South Africa and other emerging economies that now rely heavily on coal.

This column describes the current fracking debate in Europe and several Asian, African and Latin American countries, including the extent to which the resolution of concerns about fracking’s environmental impacts in the United States may affect policy decisions abroad.

The U.S. Fracking Debate

Much has been written about fracking in the United States, where fracking now accounts for about 25 percent of domestic natural gas (a figure expected to rise to 50 percent by 2035). In addition to lowering domestic energy costs, fracking is widely credited with reducing U.S. “carbon intensity” and GHG emissions in 2012 by substituting gas for coal in energy production. Nevertheless, fracking has been subject to intense attack, particularly in the Northeast, by environmental organizations and neighborhood groups concerned with potential impacts on local and regional water supplies, contamination of homeowners’ wells, industrial traffic in rural or recreational areas, disposal of untreated fracking fluids in local wastewater treatment plants, potential methane releases during well development or operation, water availability in drought-affected areas and the oil and gas industry’s arrogant refusal to disclose the composition of its fracking fluids. Some recent studies have also suggested that, unless methane releases from fracking are strictly controlled, the GHG advantages of natural gas over coal could be significantly reduced.

These concerns have lead the Natural Resources Defense Counsel, EarthJustice and other environmental groups to demand a halt to further fracking in New York, Pennsylvania and other nearby states. These campaigns, echoed by many grassroots groups in the Northeast, have persuaded both New York State’s Department of Environmental Conservation and the U.S. Environmental Protection Agency to extend their already lengthy environmental reviews of fracking, during which further natural gas development in the Northeast is effectively on hold, even while fracking and natural gas exploitation proceed rapidly in the western United States.

EU Search for a Unified Policy

Natural gas is still largely a localized commodity. It is in gas form at normal temperatures and pressures and thus difficult to transport globally.[1]  While gas can be converted into liquefied natural gas (LNG), the technology involves specialized equipment and transport infrastructure, which are only starting to be developed on a large scale in the United States. Other countries with ample natural gas reserves similarly cannot export their natural gas until the necessary pipelines and LNG terminals have been constructed. This has led the European Union (EU) to consider how its member states can secure the benefits of expanded natural gas through domestic fracking without the environmental risks raised by U.S. environmentalists.

Like the United States, Europe relies on natural gas for approximately a quarter of its energy needs, but virtually none of that comes from fracking within the EU. Instead, many EU states rely on natural gas from Russia, a reliance that makes them (and others) anxious to find alternative sources of supply independent of President Vladimir Putin’s continued good will. Despite this strategic concern, most EU states, and the EU itself, have been reluctant to embrace fracking because of the widespread public perception that it is environmentally harmful or, at the very least, risky and thus contrary to the “precautionary principle” that is a fundamental feature of EU environmental law.

At the same time, however, European coal consumption has continued to increase, and Europe saw a 3 percent increase in total carbon emissions in 2012. It seems likely, therefore, that EU policymakers will in the future reconsider their current stance on fracking, not only on strategic and competitiveness grounds, but also to meet their own reduced GHG targets under the Kyoto Protocol (to which the EU remains committed), provided the emissions benefits of fracking can be confirmed and its environmental impacts satisfactorily mitigated.

First, however, Europe’s regulatory framework would need to be reformed. Most EU members rely on general mining or environmental laws to regulate fracking, resulting in sometimes conflicting laws and multiple permit requirements for a single project.[2]  In an effort to deal with this multiplicity of sometimes conflicting regulations, in November 2012, the EU, after refusing to approve a complete moratorium on fracking, embarked on its own effort to develop a coherent European policy for this new technology and in October 2013 voted to require energy companies to conduct environmental audits before fracking.[3]  As the EU search for a unified policy continues over the next year, it is useful to consider how several EU countries are approaching fracking in the interim.

France: In 2011, France, which relies largely on nuclear power, banned fracking entirely because of its perceived environmental risks. In October, 2013, the French Constitutional Court upheld the ban as constitutional.

Germany: Germany has 1.3 trillion cubic meters of technically recoverable shale gas, though much of it in nature and drinking water protection areas.[4]  Germany has also adopted environmental goals for 2022 that include getting 80 percent of energy from renewable sources, reducing GHG levels by 80 percent below 1990 levels and closing all nuclear plants.

To achieve these goals (and restrain price increases following the nuclear shutdowns), in February 2013 Chancellor Angela Merkel announced that the government would draft regulations to allow fracking outside of water protection areas.[5]  However, following the September 2013 elections, the German government placed a moratorium on fracking until it assessed its environmental risks, particularly with respect to drinking water and seismic activity.[6]

United Kingdom: Fracking had been used in a single well in the U.K. until 2011, when seismic activity, which had never been recorded there before, was detected in the area. The government temporarily suspended all fracking until it completed an assessment of the seismic activity and determined how to mitigate such events in the future. Regulations now require review of seismic risk and faults in the area before a license to frack can be issued.[7]

Overall, the government now appears eager to exploit the U.K.’s shale gas reserves, particularly in the Bowland Basin, which contains 1,300 trillion cubic feet of gas (enough to provide energy to the U.K. for the next 50 years).[8]  In July 2013, the British treasury lowered the tax rate for onshore shale gas production to 30 percent.[9]  Not unexpectedly, protest movements have sprung up throughout the U.K. to stop the exploitation of shale gas. As in the United States, fracking opponents seek to use local land-use laws to slow fracking, pointing to the need to secure landowners’ consent before drilling horizontally through subsurface shale.[10]

Poland: Poland is home to the largest shale gas reserves in western Europe[11] and has progressed farther than other EU countries in exploiting natural gas. By May 2013, 44 shale gas wells were completed, three were being drilled and almost 20 wells used some sort of hydraulic fracturing. Meanwhile, more than 100 exploration licenses have been issued by the government. Poland has been eager to exploit its reserves because of its dependence on domestic coal, which provides 95 percent of its energy,[12] and on Russia for oil and natural gas.[13] Poland’s commitment to fracking, while therefore understandable on multiple grounds, nevertheless triggered opposition at the recent Warsaw conference on climate change, where opponents argued that fracking actually increases GHG emissions, presumably through uncontrolled methane releases.[14]

China

The U.S. Energy Information Agency ( EIA) estimates that China has the largest reserve of shale gas in the world (1,115 trillion cubic feet), more than both the United States and Canada combined.[15]  It is widely understood that a shale gas revolution, like that in the United States, would have enormous benefits for China, a country with extremely high levels of pollution in its cities and the largest energy importer in the world.[16]  Currently, China relies on coal for nearly 70 percent of its energy and on natural gas for just 5 percent.[17]  In 2012 China’s National Energy Administration released a national strategy that sets ambitious targets for shale gas development by 2015 (6.5 billion cubic meters) and 2020 (60-100 billion cubic meters).[18]

However, China has only just started developing its shale extraction technology, and a number of factors have slowed the process, including its shortage of natural gas pipelines (some 22,000 miles compared to 300,000 miles in the United States).[19]  China’s shale is said to be older than that in the United States, and thus more dense and harder to exploit. Moreover, much of its shale gas is located in desert regions where access to water is scarce. This may prove to be a limiting factor for China as it struggles with limited, and already polluted, water for many of its cities, where the scarcity of clean water has become a focal point for environmental reform.

Despite these factors, it is all but certain that China will pursue fracking with the same intensity that it has invested in solar energy. The Chinese National Oil Companies have already begun investing in U.S. energy companies in order to acquire relevant expertise, and in the past year China has awarded exploration rights to 16 domestic companies that have pledged to invest some $2 billion in natural gas exploration in 19 regions around the country.[20]  The Ministry of Land has also labeled shale gas as a “hydrocarbon,” allowing fracking by international, not just state-owned, companies.[21]

South Africa

In April 2011, the South African government placed a moratorium on licenses for oil and gas exploration in the Karoo region,[22] a semi-desert region that covers one third of the country. Karoo has an estimated shale gas reserve of 390 trillion cubic feet—the eighth largest shale gas reserve in the world.[23]  At the same time, the government created a task force to explore fracking’s implications.[24]  In September 2012 the government lifted the moratorium, but refused to allow fracking until regulations are adopted to control fracking operations.

Draft fracking regulations were released in October 2013 in an effort to regulate current industry practices and mitigate any adverse environmental risks from shale gas. Since South Africa relies heavily on imported fuel and coal for power, the government views shale gas as a potential game changer for the sparsely populated Karoo region and, indeed, for all of South Africa because of the estimated $100 billion that it believes could be generated from gas production in Karoo.

But, as elsewhere, opposition to fracking in Karoo is fierce.[25]  A strong grassroots movement argues that fracking will harm the very delicate Karoo environment, which is home to rare animals and is extremely arid.[26]  Farmers and villagers are worried about contamination of the region’s communal wells and the diversion of scarce seasonal water to fracking operations. Moreover, South African farmers appear to have little financial incentive to allow drilling on their land; South African law grants the landowner only surface rights, with the government retaining all subsurface mineral rights.

Australia

Between 2004 and 2010 in Australia, the production of natural gas through fracking coal seams (rather than shale) increased 22 times; by 2012, it accounted for one third of the gas used in eastern Australia and made LNG Australia’s fastest growing export commodity.[27]  Australia is now the third largest exporter of LNG (behind Qatar and Malaysia) and hopes to produce 83 million tons of LNG by 2017. But here too fracking has proven controversial. As in South Africa, landowners own only the surface of their land, while the government owns all subsurface rights.[28]  Farmers and others may negotiate compensation arrangements with drilling companies (normally about $5,000 from large companies), but they may not prevent drilling, even when it decreases the market value of their property. Many others have also expressed fears about pollution and water scarcity from fracking.

In June 2013 the government responded by amending the Environment Protection and Biodiversity Conservation Act of 1999 to require federal environmental assessments and approval for coal seam gas developments that could have significant impacts on wetlands or on water quantity, quality or pressure on subsurface water tables.[29]

With these amendments in place, it seems clear that, notwithstanding public opposition, Australia intends to pursue natural gas and LNG production, whether through fracking or otherwise, because of its significant contribution to the Australian economy (expected to reach some $180 billion over the next five years). UNESCO, for example, has stated that natural gas development should not take place on Curtis Island, a World Heritage site in the state of Queensland, and the largest island connected to the great barrier reef.[30]  There are currently three LNG plants under construction on the island, and a fourth is likely to be approved.[31]  Meanwhile, Amour Energy has been granted an exploration lease in the Northern Territory across the border into Queensland to explore 133,000 square kilometers of land,[32] while Goshawk Energy has secured exploration rights in the Kimberly region of Western Australia and has begun land right negotiations with indigenous groups there.[33]

Argentina

Argentina is at the forefront of the fracking movement in Latin America. It is estimated to have the third largest shale gas reserves in the world (behind the United States and China) with 774 trillion cubic feet of recoverable shale gas.[34]  In March 2012 the government expropriated 51 percent of YPF, Argentina’s energy company, and declared “ hydrocarbon self-sufficiency” as a national goal. In July 2013 YPF contracted with Chevron to invest $1.24 billion in developing fracking in Argentina, with the goal of drilling 1,500 gas wells by 2017. If developed as planned, these wells could provide a huge boost to the Argentinean economy, which currently imports $10 billion of oil and gas annually.

As in other countries, however, there has been growing opposition to fracking. Argentina’s largest natural gas reserve is under the Andes mountains, and environmental groups worry about the damage that fracking might cause to that region because of the substantial forest clearing required for well pads and ancillary operations. Indigenous groups have protested as well, staging a 24-hour demonstration after Chevron announced its plans in July. Other indigenous groups have called for the Argentinean government to honor its promise under the International Labor Organization’s Convention 169, which grants indigenous groups the right to consult before large projects are undertaken in indigenous territories.

As in other countries, sub-surface mineral rights in Argentina are owned by the state, leaving little opportunity for landowners to realize financial benefits from fracking on their land. However, Argentine provinces have substantial autonomy to develop their own laws regarding fracking, and some have declared themselves “free of fracking.” Whether such declarations will prove enforceable in the face of a determined central government policy favoring fracking is not yet clear.[35]

Conclusion

As even this brief review indicates, fracking promises a wide range of countries both economic and strategic benefits, and possibly significant GHG reductions for the world. However, to achieve these economic, strategic and global benefits, fracking proponents will have to deal more successfully than they have so far with the array of regional environmental concerns—some real and some theoretical—raised by fracking opponents.

Many of these concerns echo those of U.S. environmentalists about the fracking process itself. These will best be addressed by clear demonstrations in the United States that (1) fracking fluids do not in fact contaminate watersheds or well fields; (2) water consumption can be minimized through recycling or other procedures; (3) double-walled drill shafts, pipelines and other controls effectively minimize methane releases; (4) waste fluids can be adequately treated on-site before being recycled, discharged to water treatment plants or re-injected; (5) drilling companies can be required to disclose the contents of fracking fluids and regularly test potentially affected aquifers and well fields; and (6) fracking is prohibited entirely in urban watersheds.

Beyond these generic issues, individual countries will need to address the specific concerns raised by fracking opponents, including the seismic issues raised in the U.K., the EU’s invocation of the “precautionary principle,” China’s shale composition and its looming water scarcity and South Africa’s, Australia’s and Argentina’s protected natural resources, indigenous communities and similar water concerns. Only when fracking policies include, in addition to the reforms noted above, meaningful consultation and environmental reviews with affected communities (and predictable compensation for surface landowners) will the potential benefits of fracking be realized.


Stephen L. Kass is a partner and codirector of the environmental practice group at Carter Ledyard & Milburn. He is an adjunct professor at Brooklyn Law School and at NYU’s Center for Global Affairs.  Iliza Bershad, an associate at the firm, assisted in the preparation of this column.

Reprinted with permission from the January 2, 2014 edition of the New York Law Journal © 2014 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.
 
Endnotes


[1] Edward Alden, Policy Initiative Spotlight: Does Fracking Increase U.S. Competitiveness?, Council on Foreign Relations (June 1, 2012); U.S. Energy Information Administration, Analysis & Projections, Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of the 137 Shale Formations in 41 Countries Outside the United States (June 10, 2013) (EIA Report).

[2] Regulatory provisions governing key aspects of unconventional gas extraction in selected Member States, FINAL REPORT, Milieu Ltd., submitted to European Commission Directorate General Environment, 8, (July 1, 2013) (EC Report). Additionally, the EIA directives relating to exploration and extraction is applied differently in member states—only Bulgaria, Denmark and Lithuania specifically apply the EIA directive to unconventional gas activities. In all other countries, it is unclear whether the directive will apply to those activities or not. Id. at 9.

[3] “Europe Votes to Tighten Rules on Drilling Method,” James Kanter, New York Times, Oct. 9, 2013.

[4] EC REPORT, 23 (July 1, 2013).

[5] “Germany Agrees on Regulation to Allow Fracking for Shale Gas,” Bloomberg, Feb. 26, 2013.

[6] “No Fracking in Germany for Now Backed in Merkel Coalition,” Bloomberg, Nov. 8, 2013; “New German Govt would put moratorium on fracking—party officials,” Reuters, Nov. 8, 2013.

[7] EC REPORT, 10, (July 1, 2013).

[8] “Fracking Opponents Find Lawyers Beat Superglue in Slowing Shale,” Bloomberg, Oct. 17, 2013.

[9] George Osborne unveils ‘most generous tax breaks in the world’ for fracking, The Guardian, July 18, 2013.

[10] “Fracking Opponents Find Lawyers Beat Superglue in Slowing Shale,” Bloomberg, Oct. 17, 2013.

[11] In 2011, the EIA estimated Poland had 187 trillion cubic feet of exploitable shale gas beneath the surface, but the Polish Geological Institute has since revised that number, now estimating there is 85 percent less gas than the EIA asserted. Either way, Poland has enough shale gas to meet its energy demands for 35-65 years. Shale Development in Poland, Vinson & Elkins; “Fracking Heaven,” The Economist, June. 23, 2011; EC REPORT, 27 (July 1, 2013).

[12] “Fracking Heaven,” The Economist, June. 23, 2011.

[13] Poland to get gas from ‘fracking’ in Europe, Aug. 29, 2013; EC REPORT, 27 (July 1, 2013).

[14] “‘This Is Nuts’: Poland Announces ‘Radical Acceleration’ of Gas Fracking at UN Climate Summit,” Common Dreams, Nov. 20, 2013

[15] EIA Report (June 10, 2013).

[16] “China Firms to Invest $2 Billion Exploring Shale Gas Reserves,” BBC News, Jan. 22, 2013. Between 2008 and 2035, China’s demand for electricity is expected to triple. World Energy Outlook 2010, International Energy Agency, 217, 2010.

[17] “China’s Energy Rebalancing: A New Gazpolitik?” The Diplomat, Nov. 18, 2013.

[18] “China’s Shale Gas Dream,” The Diplomat, Jan. 25, 2013. The goal is to produce 6.5 billion cubic meters of shale gas each year by 2015, and 60-100 billion cubic meters by 2020. Id.

[19] “China’s Shale Gas Dream,” The Diplomat, Jan. 25, 2013.

[20] “China Firms to Invest $2 Billion Exploring Shale Gas Reserves,” BBC News, Jan. 22, 2013; “China’s Shale Gas Dream,” The Diplomat, Jan. 25, 2013.

[21] “The “Fracking” Revolution Comes to China,” The Diplomat, March 24, 2013.

[22] “S. Africa Imposes “fracking” moratorium in Karoo,” Reuters, April 21, 2011.

[23] EIA Report (June 10, 2013).; see also Karoo Shale Gas Report, Econometrix (Pty) Ltd, January 2012.

[24] S. Africa Imposes “fracking” moratorium in Karoo.

[25] Over 200 people marched 3km to the Shell offices in Cape Town on Oct. 18, “Marchers protest against fracking,” ioL news, Oct. 19, 2013, Friends of the Earth sent a letter to South African President Jacob Zuma demanding an end to fracking, South Africa Accused of ignoring shale gas fracking dangers, Platts McGraw Hill Financial, Oct. 21, 2013.

[26] Insight: Water, wealth and whites—South Africa’s potent anti-fracking mix, Reuters, Oct. 28, 2013.

[27] “Can Australia become the world’s leading LNG exporter?” ABC News, Oct. 14, 2013.

[28] “Fracking in Australia, Gas Goes Boom,” The Economist,

[29] Greater Protection for Water Resources, Press Release, Australian Government, March 12, 2013. A “significant impact” on water includes instances such as a change in the quality or quantity of water, an alteration in the ecological composition of wetland or alteration in ground water pressure or water table levels. See Water Resources—2013 EPBC Act Amendment—Water Trigger, Australian Government Dept. of the Environment (available here: http://www.environment.gov.au/legislation/environment-protection-and-biodiversity-conservation-act/what-protected/water-resources#legislative).

[30] UNESCO Decision 35COM 7B.10, World Heritage Committee; “The Impact of Fracking, Great Barrier Grief,” The Economist, June 2, 2012.

[31] Enviro Minister Hunt urged to reject fourth gas processing plant on Curtis Island, Fight for the Reef, Oct. 22, 2013.

[32] “Energy Company Talks up Northern Gas Prospects,” ABC News, Nov. 6, 2013.

[33] “Tourism Mecca’s Water Supply on Fracking Alert,” The Age, Oct. 20, 2013. Meanwhile, the New South Wales government just introduced legislation setting aside land on which it will require vigorous investigations before fracking may begin, and draws a 2km boundary between residential space and fracking activity. “Australians ‘Lock the Gate’ to Fracking,” Christian Science Monitor, Oct. 16, 2013.

[34] Shale Development in Argentina, Vinson & Elkins.

[35] “Fracking Controversy Arrives in Argentina,” Buenos Aires Herald, July 21, 2013.


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