IHS CERAWeek 2013: Understanding and managing community impacts of unconventional oil and gas development

The following is a summary of the strategy session "Understanding and Managing Community Impacts of Unconventional Oil and Gas Development" which took place on day three of IHS CERAWeek 2013. You can access more summaries like this through IHS CERAWeek On Demand.

Tanuj Deora, Director, IHS, chaired a morning Strategy Session, "Understanding and Managing Community Impacts of Unconventional Oil and Gas Development." Mr. Deora was joined by Doug Bannerman, Head of Social Responsibility for Statoil Gulf Services; Keryn James, CEO, Asia Pacific for ERM Group, Inc.; and Barry Smitherman, Chairman, Texas Railroad Commission (TX RRC). The panel agreed that although unconventional oil and gas development is important for energy security and the economy, earning the trust of communities is critical to obtaining and maintaining a "social license to operate."

Mr. Smitherman discussed the increase in oil and gas development in Texas as a result of technology advancements in hydraulic fracturing and horizontal drilling. Crude oil production grew from less than 1 million barrels per day (mbd) in 2009 to nearly 1.5 mbd in 2012. Rising production is expected to lead to a 34% increase in industry jobs by 2020, he noted, and to net approximately $3.5 billion per year in tax revenue to the state of Texas.

Ms. James and Mr. Bannerman raised the issue that increased development is creating a more challenging operating environment in which environmental and community risk can affect the bottom line. Ms. James said that negative media attention to unconventional resource development is increasing and that this "opposition comes with a price tag." She cited a study that concluded that 70-75% of delays in the industry are caused by community, environmental, or regulatory factors, and 20% are the result of technical problems. Industry is beginning to factor in these sustainability risks when evaluating the net present value of projects. Mr. Bannerman said that industry invests millions of dollars in the development of each well, and friction points with the community can devalue that investment by raising costs, causing delays, or derailing the project entirely.

All panelists agreed that regulation plays an important role in community engagement and protection. Mr. Smitherman noted the emphasis that the TX RRC places on regulating well integrity and protecting water resources. He said he expects TX RRC to adopt new regulations to enable more wastewater recycling.

Mr. Banerman stated that going beyond regulatory compliance to gain the trust of communities is even more important; community attempts to expand regulation can be a symptom of distrust. Ms. James agreed that it is frequently not possible for regulation to cover all aspects of a community's concern about development. Communities sometimes protest using the regulatory process when their real concerns, such as climate change, lie elsewhere, she said.

Mr. Banerman and Ms. James both emphasized that gaining the communities' trust was critical to obtaining and maintaining a social license to operate. Mr. Smitherman said regulators must also gain that trust. He added, however, that an emphasis on "fact-based analysis" of the environmental risks is essential to developing sound regulations.

The panelists discussed several methods for gaining a community's trust and thereby preventing potential delays or cost increases. Mr. Bannerman discussed a three-pronged approach in which industry must listen, respond, and collaborate with communities. For example, Statoil, ConocoPhillips, and the governments of Alberta and Canada developed an "opportunity center" that offers community members in Alberta education and training to take advantage of the job opportunities in oil and gas development.

Ms. James noted that while all communities are unique, with different concerns, the practice of building a "bank of trust" with through early engagement and transparency is always an effective strategy. This makes communities more likely to be forgiving when a problem does occur and to be adaptable to the industry's boom-bust cycles. Mr. Smitherman added that these cycles can be mitigated through a steady supply of oil and gas production and said he believes the current boom in Texas is here to stay.

Mr. Deora summed up the session by emphasizing the importance of bridging relationships among industry, regulators, and community stakeholders with transparent, fact-based data.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.