Less-Secretive E&Ps Provide Data To Restless Public, Shareholders

Fred Krupp, head of the Environmental Defense Fund (EDF), seems a rather laid-back agitator.

Krupp has been in the thick of debates, but now that companies have started coming to the table to create laws both sides agree on, he offers a caution.

“People need to be willing to take the heat that will inevitably come from folks on both sides,” he said.

Since collaboration in Colorado bore regulations that both sides fostered, other oil and gas operators have stepped up efforts to show they are good corporate citizens.

With the debate over hydraulic fracturing mounting, the world’s largest publicly traded oil and gas company is ready to look at water, fracking fluids and possible health concerns near drilling. And even one of the most prolific service companies has promised to disclose the ingredients for fracking fluid.

The summer was a busy month for exploration and production (E&P) companies who are, in some cases, quietly working with environmental groups and government to build credibility in the communities where they operate.

On Sept. 19, for instance, Houston’s Southwestern Energy Co. (NYSE: SWN) was among international oil companies, such as Norway’s Statoil ASA, Italy’s Eni SpA and Mexico’s Pemex, that pledged to use the latest technologies in production to ensure that gas leaks are contained, and to study what works and what doesn’t, Mark Boling, Southwestern’s president for development solutions, told Bloomberg.

Earlier this year, Southwestern, Apache Corp. (NYSE: APA), BG Group Plc (LSE: BG.L), Hess Corp. (NYSE: HES), Noble Energy Inc. (NYSE: NBL) and other companies joined with the EDF to challenge technology developers and engineers to design cutting-edge methane monitors that can help the oil and gas industry better detect, and ultimately reduce, methane emissions.

Five methane monitor applicants have been chosen with the aim of pilot testing in 2015.

Apache said methane is about 20 times more potent than carbon dioxide. As production of natural gas in the U.S. has soared, so have so-called fugitive emissions—unintended leaks throughout the production chain.

“Estimates suggest that 2% to 3% of the product escapes into the atmosphere between the wellhead and the end user,” Apache said.

Apache reported a leakage rate of 0.57% in 2013. This has potential consequences for the environment and reduces the amount of natural gas that operators can sell to market.

Another participating company, Anadarko Petroleum Corp. (NYSE: APC), said it prides itself on being a leader in the control and reduction of emissions.

“This requires we evaluate and implement proven methods of controlling and measuring emissions, as we continuously strive to improve our operational performance through sound science and technology,” said David McBride, Anadarko’s vice president, health safety and environment. “The diverse technologies being tested through the Methane Detectors Challenge hold real promise, and we look forward to the next phase of this process.”

Companies are also examining who they associate with. In late September, Occidental Petroleum Corp. (NYSE: OXY) cut ties with a group, the American Legislative Exchange Council, that some consider opposed to climate regulation or climate science, The Hill reported.

The Sit-Down

The agreement Krupp and oil companies reached in Colorado was not a breakthrough, but a long series of conversations and stress that resulted in one of the toughest regulations in the country for fugitive emissions.

Because of the strong collaboration between environmentalists and the industry, the two sides helped shape new rules made by the Colorado Air Quality Control Commission to reduce air pollution from oil and gas drilling—including regulations to reduce methane emissions—as a model for other states. The commission approved the measure in February.

Among those who participated were Krupp, Colorado Gov. John Hickenlooper, and oil and gas executives from Noble, Anadarko and Encana Corp. (NYSE: ECA, TO: ECA).

The rules they created are meant to be a template for other states fighting to reduce methane leaks. Operators must perform frequent checks for leaks using infrared cameras and other technologies, and move quickly to repair them. The rules also address methane leaks from storage tanks and other equipment.

Hickenlooper asked the EDF, Encana, Noble and Anadarko to meet and seek common ground, Krupp said.

“He deserves the credit for launching the very productive process,” Krupp said. “The key was we started with a committed group of participants who had at least roughly common objectives.”

The broad, common goal was adoption of a program for reducing oil and gas emissions that all parties could point to as the best in the nation, Krupp said.

“People may be motivated by different things, and that’s OK,” he said. “The important part is that the motivation is there and that people have a vision for reaching a win-win solution.”

At a Colorado forum in March, Doug Suttles, president and CEO of Encana, said there was an “uncomfortable” aspect to “stepping away from the industry” in working on solutions with environmental and other groups.

“But we needed answers,” he said. “We needed to find solutions. And the whole industry isn’t going to get to that.”

Not unexpectedly, once the parties sat down to negotiate details, tensions and conflicts began to emerge, Krupp said.

“It’s critically important that participants enter a process like this with a rock solid commitment to bargain in good faith and stay at the table even when it looks like agreement can’t be reached,” he said.

The fine-point details mattered. A highly technical conversation took place over a number of weeks.

“Fundamentally, EDF was trying to do a couple of things,” Krupp said. “First, we wanted to get the greatest emission reductions possible. Second, we wanted to break new ground and get controls in place for pollutants and emission sources that have historically been ignored.”

The companies were concerned chiefly by costs but by other matters as well.

“As an environmental advocacy group, we can’t pretend cost doesn’t matter,” Krupp said.

Much of the negotiation was spent looking at data to understand the emissions of oil and gas in the state.

“When disagreements arose—and there were certainly some tense moments—sometimes the solution was in taking a step back and coming at it from a different angle,” Krupp said.

Being creative was a key, as was putting a contentious matter on the back burner.

“And sometimes, you just have to call it a day. The important part is that everyone remains willing to come back the next day and keep at it,” he said.

The coalition of E&Pcompanies and environmental groups proposed rules that remained largely intact when they were approved 8 to one by the commission.

Push and Pull

Like any extreme group, radical environmentalists will continue to loathe fracking and foment fear about it.

But Jacqueline Weaver, a University of Houston professor who studies oil and gas law, energy law and policy and other energy areas, said that companies are taking steps to change because of the general public and their stockholders.

The industry shouldn’t be surprised by some of the backlash, she said.

“Look at the massive scale at which fracking is done,” she said. “They always talk about one well and not many emissions. But we’re talking 10,000 wells, sometimes grouped in communities that experience very real air pollution affects.”

Weaver said oil companies have been working with groups that understand methane emissions and the damage they can do.

“Everyone always touts the statistics that burning the natural gas has half the CO₂ as burning coal,” she said. “That may be true at the combustion end. But natural gas leakage from the vast infrastructure we have and the wellhead can almost wipe out the greenhouse gas benefits that occur at the combustion end.”

For about two years, operators have been responding to the increasingly negative portrayal of fracking. Companies are now trying to combat reputations tarnished by accusations of secrecy.

Baker Hughes Inc. (NYSE: BHI) hopes to increase public trust in the process of hydraulic fracturing, while still protecting the market-driven commercial innovation that has helped the company become a global industry leader.

On Oct. 1, it implemented a new policy of disclosing 100% of the chemistry contained within its hydraulic fracturing fluid systems without the use of any trade secret designations.

The chemicals used in such fluids are often a source of controversy because they are not fully disclosed because they are considered proprietary.

In March, the company had said it plans to provide complete lists of all products and chemical constituents for all wells it fractures using its hydraulic fracturing fluid products, without detailing specific product formulations.

"Introducing greater transparency about the chemicals used in the hydraulic fracturing process and protecting the ability to innovate are not conflicting goals," said Derek Mathieson, Baker Hughes' chief strategy officer. "The policy we are implementing is consistent with our belief that we are partners in solving industry challenges, and that we have a responsibility to provide the public with the information they want and deserve. It simultaneously enables us to protect proprietary information that is critical to our growth."

For each fracturing job the company performs on or after Oct. 1, the policy mandates that Baker Hughes will disclose a single list of all of the chemical constituents of its products used, while also specifying their maximum concentrations.

Baker Hughes is a leading supplier of oilfield services, products, technology and systems to the worldwide oil and natural gas industry. The company employs 60,000 in more than 80 countries.

“We are encouraged by Baker Hughes’ disclosure pledge and applaud their leadership,” said Mark Brownstein, EDF associate vice president of the U.S. climate and energy program. “We hope it will influence the rest of the oil and gas industry. The public deserves transparency from industries that impact their local communities, and this company’s disclosure of the full list of chemicals used during drilling operations is a very important step in the right direction.”

On Sept. 30, ExxonMobil Corp. (NYSE: XOM) also stepped into the ring, releasing a public report describing how the company assesses and manages risks in unconventional resources, including the use of fracking.

The company said it respects the intellectual property of service companies’ fracking fluids in exact amounts.

However, ExxonMobil said it believes community members have a right to full disclosure of all ingredients used in these fluids.

“Hydraulic fracturing has been responsibly and safely used by the oil and gas industry for more than 60 years, but the process isn’t without risks,” said Jeffrey Woodbury, vice president of investor relations. “This report to shareholders details how ExxonMobil uses sound risk management processes and engages with stakeholders to ensure safe and environmentally responsible operations.”

The report candidly notes concerns about possible health risks from unconventional resources due to the proximity of industrial activity and local populations.

“We recognize these concerns and are working to address them through internal and external activities, involving multiple collaborations with experienced researchers,” the company said.

ExxonMobil helped create an “Exploration and Production Health Issues Group” within the American Petroleum Institute devoted to upstream oil and gas health effects and currently serves as the group’s chair.

“We seek to highlight and support studies that are conducted according to accepted scientific protocols,” the report said.

In particular, Exxon believes studies should define:

An examination of potential hazards originating from unconventional resource development;

• Plausible routes by which humans are exposed;
• Assessments of risk to health; and
• Clinically-confirmed adverse health effects that can plausibly result from those exposures, through epidemiological studies that follow standard, acceptable protocols.

The company said it will also focus efforts on preventing adverse impacts to water resources and conserving what it can.

Weaver said such moves aren’t a surprise.

"The public in many places is in an outcry against this fracking and the entire infrastructure of well drilling, trucks and pipelines,” she said.

Krupp said he believes the approach taken in Colorado can work elsewhere and the companies he worked with said the same thing.

Certainly, if it worked in Colorado, there’s no reason why it can’t work in the Marcellus region,” he said. “The key ingredients you need are a shared objective, motivated participants, a willingness to negotiate in good faith, support from top state officials and support from stakeholders.”

All that, he said, and a fair dose of courage.