ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for analysis available only to subscribers.
The United States' supply of natural gas is expected to surge, and Enbridge Inc. is proposing to expand existing pipelines in the Greater Toronto Area to carry cheap gas from the Marcellus shale reserves in the northeastern U.S. . When given the opportunity to participate in the Ontario Energy Board's hearing, environmental groups naturally lodged their protests. Surprisingly, however, the critique fostered by left-leaning social justice organization the Council of Canadians wasn't solely based on concern for mother nature. Their filings raise a more interesting question (at least, for investors): what if regulation makes importing U.S. shale gas uneconomic?
There's little middle ground between advocates for, and skeptics of, hydraulic fracturing ("fracking"). Studies such as the U.S.' Environmental Protection Agency report from 2004 are popular among fracking proponents. The study found that fracking coalbed methane (CBM) production wells posed "minimal threat" to underground sources of drinking water; in 2005, Congress exempted hydraulic fracturing from being regulated under the Safe Water Drinking Act. Fracking supporters also endorse substituting natural gas for more carbon-intensive fuels such as coal and oil as a way to rein in CO2 emissions.
By contrast, the Council of Canadians' OEB filings survey a broad sampling of concerns. A paper by Lisa Sumi, a science and research advisor to Earthworks, a U.S. environmental non-profit, cites research ranging from peer-reviewed reports of the dangers of chemicals used in hydraulic fracturing, to dubious anecdotal reports of exposure reactions and natural gas-infused water you can light on fire – a centrepiece of the Council's fundraising outreach.
The economic aspect of Ms. Sumi's report focuses on the amount of water used in fracking, as well as the potential regulatory costs arising from both the cleanup of waste materials and of tax burdens imposed at the state and/or federal levels. Ms. Sumi cites estimates that a Marcellus Shale fracking operation could require as much as 10 million gallons of water; one study by a civil engineering professor at the University of Pittsburgh estimates water use and transportation could add costs of up to $2 (U.S.) per barrel. In addition, states such as Pennsylvania and New York (where there is currently a moratorium on fracking) may consider imposing "severance taxes," which could either drive up production costs or prompt producers to move to states without such fees. Though given that both West Virginia and Texas have them, it's hard to imagine a state whose leaders are libertarian enough to turn down such a potential whopper of a revenue generator. And finally, there's the possible cost imposed by requiring producers to safely dispose of contaminated wastewater, which Pennsylvania state regulators estimate could cost between $0.12 and $0.25 per gallon.
If all of the regulatory costs the Council describes are ultimately imposed on the producers, the gas flowing through Enbridge's proposed pipeline expansion will be far from cheap. But with federal attempts to mandate the disclosure of chemicals used in fracking having more or less died in a congressional committee, regulatory risk will ultimately depend on the outcome of comprehensive studies like the EPA's current one, or the Robert F. Kennedy Jr.-endorsed Geisinger Health System study – both of which aren't expected to report findings until 2014 or later. In the meantime, politicians seem to be adopting a distinctly drill-baby-drill-esque tone on the subject, if London mayor Boris Johnson's insistence that he would frack beneath the streets of his city if that would solve its power needs – "Leave no stone unturned, or unfracked," he said. Frack first, ask questions later.