Oil & Gas | Energy
Mitigating the environmental
risks of the shale boom
Authors
Bob Orr
Irfan Bidiwala
Producers using new technologies to drill oil and gas wells
in shale fields face special environmental and safety risks
that, left unmitigated, could put their businesses and even
the industry on the line. Companies that cannot manage
this risk in a systematic way face the possibility of litigation
and overly stringent regulation.
Oil and gas companies exploring and producing in
shale fields grapple with complex geology, large-scale
operations, and complicated new technology. The maturing
shale industry therefore is experiencing more safety and
environmental incidents than traditional operations.
In Texas, the largest oil and gas producing state in the country, the number of blowouts for
unconventional oil and shale gas wells was higher in 2009-2011 than for conventional wells
(Exhibit 1). The rate of blowout incidents for shale gas wells was approximately five times
that of conventional gas wells in 2011.
The oil and gas industry has found itself at odds with many communities, where people have
little experience with drilling and worry about health and safety risks. News of blowouts or
environmental incidents increase the risk that regulators will impose onerous rules or shut
down production. To avoid these issues, oil and gas producers must be proactive in developing
an integrated strategy to reduce risk. It is in the industry’s best interest to sustain the social
license to explore and produce from shale resources.
Oil and gas companies need a multi-pronged approach to tackle the problem. Many oil
companies already have safety management systems for their conventional operations.
Where they have expanded into shale drilling, safety systems should address the special
risks inherent in the new technology.
Exhibit 1: Texas well blowout incident trends by type of production
PER 1,000 WELLS
4
3
2
2009
1
2010
0
2011
Conventional oil
Conventional gas
Unconventional oil
Shale gas
Source: Railroad Commission of Texas, US Energy Information Administration, Oliver Wyman analysis
Copyright © 2013 Oliver Wyman2
The ongoing shale debate
Unlocking oil and natural gas from shale promises an economic revolution in North America.
Booming production (Exhibit 2) boosts growth in the energy industry, as well as industries
that benefit from lower prices for fuel, electricity, and petroleum-based chemicals and plastics.
The International Energy Agency predicted last year that, by 2020, the United States would
become the biggest oil producer in the world.
Shale operations have been controversial, however. Some environmental groups,
non-governmental organizations, concerned lawmakers, and citizens are pushing to
limit or even ban shale exploration and production. They worry about environmental
and health issues ranging from deforestation and air pollution, to water contamination
and earthquakes.
Oil and gas industry officials point out that, so far, shale drilling has not caused any
catastrophic environmental incident. Further, industry insiders say no conclusive studies
prove that shale exploration and production can cause more environmental harm than
conventional operations.
Exhibit 2: US natural gas forecast
BILLIONS OF CUBIC FEET PER DAY
80
Shale gas
60
Tight gas
40
Offshore
CBM
20
With oil
0
Onshore
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
Source: US Energy Information Administration, Oliver Wyman analysis
Copyright © 2013 Oliver Wyman3
To understand the risks at the heart of this debate, it’s necessary to objectively examine the
claims about shale drilling and available facts. A few of the major claims are as follows:
1. Claim: Shale oil and gas exploration and
production activities are largely unregulated
There is a widespread perception that oil and gas companies operate in shale fields without
regulatory oversight. It is true that some regulators were initially caught off guard and could
not keep up with the advancement in drilling technologies and practices. But, as the industry
has matured, a number of state and federal regulatory agencies have stepped in to develop
regulations and areas of jurisdiction (Exhibit 3). While there is still room for improvement and
regulation will continue to evolve, the notion that there is hardly any oversight is inaccurate.
Exhibit 3: US state and federal agencies with shale drilling regulatory
oversight responsibilities
WELL
INTEGRITY
WATER
LAND
EMISSIONS
REPORTING
US Environmental
Protection Agency
HEALTH
& SAFETY
Occupational Safety
and Health Administration
FEDERAL
Railroad Commission of Texas
Texas Commission on Environmental Quality
TEXAS
PA Department of
Environmental Protection
PA Department of Conservation
and Natural Resources
PENNSYLVANIA
Susquehanna & Delaware River
Basin interstate commissions
LA Department of
Natural Resources
LA Department of Environmental Quality
LOUISIANA
State Review of Oil and Natural
Gas Environmental Regulations
New York State Department of
Environmental Conservation
OTHER
Copyright © 2013 Oliver Wyman4
2. Claim: Chemicals used in hydraulic fracturing
cause long-term environmental damage
This is perhaps the single most controversial issue in the whole debate. There are two
fundamental concerns: Chemicals in hydraulic fracturing (fracking) fluid could cause
long-term environmental damage to underground formations, and these chemicals
could contaminate underground water aquifers.
The industry is too new to have a sense of the potential long-term environmental impact of
fracking chemicals. Still, the initial reluctance of some companies to disclose the types of
chemicals used played on the public’s worst fears. The industry has since made progress
on public disclosures, but state regulatory requirements are inconsistent and the debate
continues on just how much disclosure is enough.
Both sides raise valid points about the contamination of underground water aquifers. Critics
of fracking point to contaminated water samples taken near oil and gas wells. Industry
officials argue this contamination was pre-existing, and not the result of hydraulic fracturing
chemicals. Stakeholders must agree on a better approach. One step that could reassure
the public and protect producers is baseline testing of water sources prior to drilling. Those
results then need to be compared to post-drilling samples, and the results disclosed in a
transparent manner. This show of good faith on the part of industry would help people better
understand contamination risks.
3. Claim: Water used for hydraulic fracturing is
depleting reservoirs to critical levels
A third criticism of hydraulic fracturing is that the 4 million to 6 million gallons of water
used per well is a significant depletion of already stretched water resources. Some say it is
particularly irresponsible to use so much water for drilling during a drought in several states,
including Texas.
The amount of water actually used for hydraulic fracturing is a small percentage of total
water use: less than one percent of total volume in Pennsylvania and Texas, for example.
If drought continues to plague shale regions, however, the water use debate will likely
continue. One way the oil and gas industry can ease concerns is to improve water recycling,
minimizing the impact of fracking on local water resources.
Copyright © 2013 Oliver Wyman5
Oliver Wyman’s Shale Environmental
Risk Management System (SEMS)
Oliver Wyman’s Shale Environmental Risk Management System (SEMS) can help oil and
gas companies respond to these and other claims by establishing fact-based, objective
information on environmental and safety issues. SEMS can be used to evaluate risks posed
by shale exploration and production compared with traditional oil and gas operations,
(Exhibit 4) and to create a customized approach to mitigate those risks. The system can
also be used to evaluate potential risks along several dimensions, including operational,
environmental, planning, communication, and reporting.
Exhibit 4: Risk identification using Oliver Wyman’s Shale Environmental Risk
Management System (SEMS)
• Sourcing and
pre-treatment
• Management of major
operating risks
• Fracturing/
chemicals usage
• Equipment selection
and maintenance
LIF WA
E C TER
YC US
Y
T
I
LE AG
GR
MA E
E
T
NA AN
N
I
L
GE D
L
ME
WE
NT
• Timely reporting of
incidents to regulators
• Disclosure of
fracturing chemicals
SHALE
ENVIRONMENTAL
RISK
MANAGEMENT
SYSTEM (SEMS)
HE
• Contractor management
• Health practices
management
ALT
HA
ND
SA
FET
Y
D
AN
NS ITY
O
I
L
ISS UA
EM AIR Q
LAND USAGE
AND RESTORATION
• Transparency on
environmental risk
REPORTING
AND PLANNING
• Robust operating
procedures
• Reuse/recycling
• Disposal
• Water use efficiency
• Site set-up
• Soil quality management
• Site restoration
• Spill management
• Greenhouse gases
• Pollutants
• Safety management
practices
• Safety incident rates
(occupational injury)
Copyright © 2013 Oliver Wyman6
The system is used to identify risks for current and planned projects based on an analysis
of all of the factors that could contribute to that risk, combining both quantitative data
(e.g., past incident rate) and an evaluation of potential qualitative changes (e.g., regulatory
scrutiny, public perception, transparency). Consider two examples of risks that SEMS can be
used to understand in detail: well integrity and water management.
•• Well integrity risks: There are two risks to well integrity that could lead to gas migration.
First, faulty cementing or casing could allow gas leaks into underground water or the
air (the risks are higher for faults to develop during casing or cementing of a shale well
than a conventional well). Second, although typically water aquifers lie several hundred
feet above gas shale, shallow shale or natural crevices can expose aquifers to methane.
High fracturing pressures can result in fissures, potentially enabling gas to reach an
aquifer. Thus, a SEMS risk identification process considers the range of factors that might
lead to well integrity risks (or risk perceptions), from the nature of the geology, the well
design, and the well building method, to ongoing operating procedures, selection and
maintenance of equipment, and the current state of water testing.
•• Water management risks: Management of water resources varies from one company or
field to another, with most operators focusing on cost rather than environmental risk. For
example, while shale drillers in certain regions such as Pennsylvania are making heavy
use of water recycling, this is driven primarily by cost and a lack of alternatives, rather
than a comprehensive approach to water management. While cheaper alternatives are
evolving, many companies continue to dispose of water in injection wells. In Texas, for
example, the percent of water recycled is still minimal (2 to 20 percent vs. 90 percentplus in Pennsylvania).
The SEMS diagnostic can identify the most pressing water-related risks for a company’s
shale drilling projects. This could include an analysis of how fast water demand is
ramping up in a given area (due to an increase in drilled wells or frack stages), whether
drought potential is high (thus making water usage a more sensitive issue), and if
permitting is at risk due to increased regulatory scrutiny of injection wells. Once a
company identifies and prioritizes risks, the company can develop a water management
plan to stay ahead of the issue.
After identifying risks, the SEMS framework can then be used to develop an integrated
mitigation strategy. A holistic, proactive risk management strategy combines five key
elements: operations, oil field services, communications and regulatory assessment,
reporting and response planning, and supporting technology.
•• Operational strategy: For each risk, the system identifies best practices, improvement
opportunities, and standards or goals, based on an operational diagnostic and
benchmarks. The implementation plan would include an assessment of level of
transparency and how mitigation strategies would be communicated to all stakeholders.
•• Oil field service provider strategy: The operational risk strategy would form the basis
for developing contracting processes and guidelines that mitigate risks. In addition,
mechanisms would be developed to supervise and monitor contractors’ compliance
with standards (e.g., testing schedules, the percentage of water recycled, site
restoration completion).
Copyright © 2013 Oliver Wyman7
•• Communications and regulatory strategy: The communications strategy must identify
potential stakeholders, the risk issues and perceptions of greatest concern, and the level
and type of information to be communicated to different stakeholder groups. Establishing
a two-way dialogue to educate regulators about the company’s risk mitigation planning
and provide input on potential regulation is particularly important. The communications
plan should be continuously updated as the company’s understanding and response to
shale drilling risks evolve.
•• Reporting and response planning: Reporting guidelines need to be developed (e.g.,
level of transparency), together with a process for monitoring and updating. In addition,
an emergency response plan must be put in place. One critical component is an explicit
process for communicating important information to first responders, such as the types
of fracking chemicals being used.
•• Technology: In the near-term, oil and gas companies should work with service providers
to improve fracking technologies (such as water treatment and well design). At the
same time, oil and gas companies should invest in R&D that could substantially reduce
environmental risks, such as non-water based fracking and the development of safer
chemicals. The SEMS approach can help identify which technologies might be best
suited to the circumstances of each individual company
Exhibit 5: SEMS Integrated Risk Management – Water Management Example
OP
ST ERA
RA TI
TE ON
GY AL
D
AN GY
NS TE
IO RA
AT T
IC Y S
UN OR
M T
M ULA
CO EG
R
Proactively meet with and
educate regulatory bodies
to inform development of
future water management
regulation.
Ensure service providers
clearly integrate water
management standards
into operational processes
throughout the water
management life cycle.
INTEGRATED
MONITORING
AND CHANGE
MANAGEMENT
RE RE
SP PO
ON R
SE TIN
PL G A
AN N
NI D
NG
Implement key performance
metrics and monitoring and a
change management plan to
ensure processes are
embedded within the
working culture.
E
IC GY
RV TE
SE RA
LD ST
IE R
L F IDE
OI OV
PR
Develop a balanced
and holistic water
sourcing, treatment,
and recycling strategy.
Ensure response planning
is regularly updated,
with an explicit process to
communicate response plan
to first responders (e.g.,
types of fracking chemicals).
TECHNOLOGY
Partner with service providers to
advance water recycling technology in
the short term and non-water based
fracking and safer chemicals technology
in the longer term.
Copyright © 2013 Oliver Wyman8
The stakes are high
Neither an individual company nor the industry can afford a negative public perception of
shale drilling. Individual companies run the risk of litigation and consequent financial and
brand penalties, while the industry could see ever-stricter regulation and even possibly a ban
on shale exploration and production.
Establishing a solid and transparent safety record, and evolving safety practices as risks are
better understood, will stem public concern. Further, regulators need to ensure environmental
safety with rules that allow operational flexibility and the economic profitability of shale
exploration and production.
Finally, the environmental groups and non-governmental organizations that serve the
critical role of representing the public interest need to carefully distinguish between real
and perceived risks to maintain credibility and a feasible agenda.
The stakes are high for all involved. Producers can support a sustained economic boom for
themselves and others by keeping the shale boom clean and safe.
Copyright © 2013 Oliver Wyman9
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[email protected]
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Partner
+1 713 276 2187
[email protected]
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Associate Partner
+1 713 276 2237
[email protected]
www.oliverwyman.com
Copyright © 2013 Oliver Wyman
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