CHAPTER 15 SOCIAL LICENSE TO OPERATE: HYDRAULIC FRACTURING-RELATED CHALLENGES FACING THE OIL & GAS INDUSTRY

• Jurisdiction: United States

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2015)
CHAPTER 15
SOCIAL LICENSE TO OPERATE: HYDRAULIC FRACTURING-RELATED CHALLENGES FACING THE OIL & GAS INDUSTRY
Don C. Smith
Director
Environmental & Natural Resources Law & Policy Graduate Program
University of Denver Sturm College of Law
Denver
Jessica Richards ^*
Land Administration Supervisor
Jonah Energy
Denver

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DON C. SMITH is Director of the Environmental and Natural Resources Law & Policy program at the University of Denver Sturm College of Law. In this role, he is responsible for the JD, LLM, and Master's programs in environmental and natural resources law. He teaches Comparative Environmental Law, Contemporary Issues in Oil & Gas Law, and European Union Environmental Law. He is editor-in-chief of the Journal of Energy & Natural Resources Law, which is published by the Section of Energy, Environment, Natural Resources and Infrastructure Law of the International Bar Association. In 2013 he was the Professor in Residence for the Association of International Petroleum Negotiators. Prior to joining the DU faculty, he served as Assistant Press Secretary for former Kansas Gov. John W. Carlin, practiced law with the firm of Schmidt, O'Sullivan and Langley in Hutchinson, Kansas, and served as a Publisher for the international publishing firms of McGraw-Hill and Elsevier Science Ltd. He has a Bachelor of Science degree from the University of Kansas, a JD from the Washburn University School of Law, and an LLM in European Union Law from the University of Leicester (England) Faculty of Law. Currently he is working on a major study involving fracking regulations around the world.

JESSICA RICHARDS is the Land Administration Supervisor at Jonah Energy LLC in Denver, Colorado. Since beginning her career in oil and gas in 2006, she has also spent time at Encana Oil & Gas (USA) Inc. and Noble Energy Inc. Ms. Richards serves as an adjunct professor at the University of Denver, teaching courses such as Oil and Gas Agreements and Contemporary Issues in Oil and Gas. She received undergraduate degrees in History and Politics and Government from Illinois State University in Bloomington-Normal, Illinois. She completed her J.D. and a Masters in Natural Resources and Environmental Law from the University of Denver in Denver, Colorado.

Abstract

The crossroads of urban development and improved technology allowing oil and gas development in new areas can result in contentious community issues. The debate over one of the improved technologies - i.e., hydraulic fracturing - can be highly emotional. Consequently, industry must address community issues, earning trust and therefore a "social license to operate." This paper provides fundamental knowledge of the social license to operate concept, validates its application to the oil and gas industry, particularly with respect to shale gas development, discusses the current status of social license in the unconventional development sphere, analyzes current ongoing efforts for shale gas developers to monitor and establish a social license, and identifies potential new methods of encouraging, establishing, and monitoring a social license to operate. The paper also proposes a new institutional framework in which to promote the social license to operate, "The Center for Social License to Operate in the Oil & Gas Industry."

I. Introduction

Within the past decade, two key technologies have dramatically changed the landscape of oil and gas development, in turn drawing a great deal of attention to the "Shale Revolution": horizontal drilling and hydraulic fracturing.¹ These technologies, coupled with population growth and urban sprawl, have attracted a great deal of scrutiny to shale development. These technological breakthroughs have also led to a paradigm shift in energy scholarship. Many shale resources that were previously considered unrecoverable are now economically recoverable. Interestingly enough, a significant portion of these shale resources encroach upon urban developments. As many as 300 million people around the world across six continents occupy land overlying a shale reservoir.² Large-scale industrial extraction of shale will no doubt impact these urban developments. Whether or not the impacts will be positive or negative for these local communities largely rests with industry's approach to development.³

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Figure 1. Map of basins with assessed shale oil and shale gas formations, as of May 2013

Source: United States basins from U.S. Energy Information Administration and United States Geological Survey; other basins from ARI based on data from various published studies⁴

The oil and gas exploration and production processes are increasingly the topic of discussion in the media, and not always with positive connotation. In the United States, a 2012 Gallup Poll reported that almost two-thirds of Americans have a negative view of the oil and gas industry.⁵ A newspaper in the heart of shale development in Colorado went so far to say the "process of hydraulic fracturing for oil and gas is perhaps one of the most misunderstood drilling practices, becoming as bad of a word in some circles as a racial slur."⁶ Moreover, some local communities have taken matters in to their own hands, going so far as suspending or banning hydraulic fracturing activities within city limits.⁷

Around the world, resistance from local communities continues to threaten shale development. Shale resources often go undeveloped, not for the lack of a legal license, but rather for the lack of a social license.⁸ Many local communities express concerns about the impacts of shale development including ground and surface water protection, air quality, and increased traffic, dust, and noise.⁹ However, "popular concerns about potential hazards to personal health and safety are often inconsistent with

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scientific evidence regarding the probability or risk that such hazards will actually happen."¹⁰ Regardless of whether the hazards are probable, the mere presence of potential hazards creates a stigma of harm.¹¹ A stigma of harm, whether founded in fact, fiction, or emotion, must be addressed by companies wishing to explore for and develop shale resources.

In an effort to address the impacts of shale development on local communities, several energy development scholars recommend that operators obtain a "social license to operate" in communities near extractive industry projects. The process of obtaining a social license to operate includes, among other things, early as well as ongoing communication with communities, transparency and engagement in decision-making, and the establishment of effective conflict resolution mechanisms.¹² While the concept of social license to operate emerged from and evolved to become a standard business practice in the mining industry over the past nearly two decades, the concept of social license to operate is in its infancy in the oil and gas industry. This paper seeks to provide fundamental knowledge about "social license to operate," validate its application to the oil and gas industry, particularly shale gas development, discuss current ongoing efforts for shale gas developers to monitor and establish a social licenses, and identify potential shale gas industry practices to earn a social license to operate.

Impacts of Natural Gas Development

In recent years, natural gas has emerged as the preferred fossil fuel to bridge the gap between fossil fuel dependence and renewable energy. Natural gas has a wide variety of uses for residential use, commercial use, electricity generation, industrial use, and vehicle fuel.¹³ When compared to other fossil fuels, natural gas is considered cleaner because it releases fewer harmful pollutants.¹⁴ It has been dubbed the most environmentally friendly and the "cleanest" fossil fuel.¹⁵ For example, natural gas combustion releases approximately half as much carbon dioxide as coal and 30 percent less carbon dioxide than oil, and significantly fewer pollutants per unit of energy.¹⁶ Moreover, natural gas emits 15 to 20 percent less heat-trapping gases than gasoline when burned in vehicles.¹⁷

However, the natural gas exploration, drilling, production, and consumption processes are not without an environmental footprint. Critics note that the drilling and producing processes can contaminate groundwater, release air pollution including methane, disrupt wildlife habitats and negatively impact local communities.¹⁸ Natural gas emissions occur during both the production process and the combustion, or consumption, process. In the U.S., natural gas production process results in venting or flaring of other fugitive methane releases, attributable to approximately two percent of total emissions, while natural gas combustion process causes approximately 21 percent of annual greenhouse gas emissions. Globally, natural gas combustion in 2011 accounted for 20.2 percent of the world's carbon dioxide emissions

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attributable to production and consumption of fossil fuels.¹⁹ It is important to note that natural gas extraction and transportation processes results in methane release, which is different from carbon dioxide release and is considered by many to be a more potent global warming gas than carbon dioxide.^{20 21}

Despite its downfalls, natural gas is still the preferred fossil fuel of the future. Its abundance makes it a desirable alternative to other non-renewable resources, and its relative cleanliness compared to other fossil fuels - such as crude oil and coal - make it the preferred option in fossil fuel development.²²

Horizontal Drilling and Hydraulic Fracturing

A discussion of social license is relevant today largely because of the technological advances of horizontal drilling and hydraulic fracturing. A common misconception is that the two technologies are synonymous with the drilling process; however, horizontal...