License to Operate

Shale Gas PR Problems and a Company’s ‘License to Operate’

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)

Billions of dollars of planned spending for shale gas projects could be threatened by public relations initiatives mounted by those who oppose the development, industry speakers told a natural gas conference in Denver earlier this month.


Don McClure, vice president for Government Affairs, Stakeholder Relations & Legal at Encana Oil & Gas USA Incorporated, a subsidiary of Encana Corporation (NYSE:ECA) (Calgary, Alberta), said: “I spent 18 months climbing out of a hole in 2004-05, which is how I learned about companies’ requiring a ‘social license’ to operate.” At that time, subcontractors did a poor cementing job on some of Encana’s gas wells near Rifle, Colorado, and gas bubbled out in local streams, he explained. The episode was featured in the documentary Gasland, which is currently up for an Academy Award for best documentary. The movie claimed–incorrectly, McClure says–that the released gas was caused by the hydraulic fracturing process.


“In a technologically intensive business like shale gas drilling, we’re all one banana peel away from a disaster,” McClure told a conference organized by EUCI (Greenwood Village, Colorado). “As an industry, we have to do a much better job managing local expectations and local knowledge” if companies want to continue exploring for, producing, processing and transporting shale gas.


Encana is the second-largest natural gas producer in North America, and the company is highly concentrated in unconventional resources, McClure said. Encana produced about 3.3 billion cubic feet of gas per day from its wells in 2010.


The Marcellus Shale accounts for 175,000 jobs and state and local tax revenues that amount to $12 billion on a net-present value basis–that is, with the effects of inflation removed–McClure said, citing a study from Pennsylvania State University.


Although Encana does not operate in the Marcellus Shale in the eastern U.S., McClure said there is an “extraordinarily hostile environment there” now that could limit companies’ ability to explore, extract, process and transport gas from the formation.


The cities of Buffalo, New York, and Pittsburgh, Pennsylvania, recently banned shale gas drilling within their boundaries, citing concern about the environmental impacts of drilling. New York State enacted a one-year moratorium on hydraulic fracturing. The U.S. Environmental Protection Agency (EPA) (Washington, D.C.) is conducting scientific studies on the environmental impacts of hydraulic fracturing. And congressional investigators have uncovered evidence that diesel fuel was used in hydraulic fracturing fluids, apparently in violation of the federal Safe Drinking Water Act.


“Corporate decision-making needs to strike a balance between shareholders and stakeholders,” Encana’s McClure told the EUCI conference. “We can’t only be about shareholders. We have to take a longer-term, holistic view when making decisions. Sustained financial success in shale drilling is partly a result of companies working to showcase their operating record, protecting their reputations and winning a social license to operate from a local community. Companies that can figure out the value of community relations will be the ones rewarded with a license to operate on a sustainable basis.”


Communicating with and educating local residents about shale gas drilling can be particularly challenging in areas that have not seen a lot of oil and gas drilling in the past, agreed attendees at the EUCI conference. “When people are not familiar with something, they tend to ‘fill in the blank’ with the worst-possible information,” McClure said. “Most Texans have some familiarity with oil and gas drilling, but Pennsylvanians do not.”


Encana is trying to proactively engage local community leaders and groups to create long-term value to all stakeholders–a broad category that includes investors, employees, communities, elected and appointed officials, suppliers and contractors. Encana officials stress politeness and sensitivity to community concerns at their tailboard meetings. “Oil and gas workers are paid significantly more than the media wage in local markets, and people in the field need to conduct themselves with that in mind. Courtesy matters.”


But securing a long-term license to operate from regulators and members of the community requires more than acting friendly, McClure commented. He said Encana is addressing community and environmental concerns about its shale gas drilling footprint by putting more wells in a smaller footprint, which he called the “resource hub.”


“The resource hub is a new departure for companies in the industry, and we’re still working out the kinks,” McClure acknowledged. “For the resource hub approach to work, employees need to be willing to work differently than they have in the past. For example, the biggest problem with the resource hub is that employee worksite injuries have increased: There are more people and more equipment concentrated in a smaller area. Vehicular backing injuries are up.” The company plans to address that via increased safety training.


The resource hub approach has allowed Encana to cut well-completion costs by 65% in the Piceance basin in western Colorado.


Industrial Info is tracking a significant number of active shale gas drilling projects in the U.S., including:

  • 93 projects worth $7 billion in the Marcellus Shale
  • 29 projects valued at $3 billion in the Bakken Shale
  • 20 projects worth $2 billion in the Eagle Ford Shale
  • 17 projects valued at $1 billion in the Haynesville Shale
  • five projects worth $200 million in the Barnett Shale
  • five projects valued at $400 million in the Fayetteville Shale


Many of these projects require the construction or expansion of additional midstream processing and pipeline capacity, as they are not located in areas with a significant oil and gas presence now, said Jesus Davis, IIR’s vice president for research for the Storage Terminals, Transmission and Production industries.


Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR’s quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what’s happening now, while constantly keeping track of future opportunities.


Originally Posted February 24, 2011 | DENVER, COLORADO

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