Our movement has momentum: in the past few years “fracking” has gone from being an unknown topic to a household word and topic of mainstream debate. An industry report acknowledged the anti-frack movement’s global success with local fracking bans in the US and UK and national fracking moratoriums in France and Belgium. However, arguments based on environmental or community concerns have a limit. The multi-trillion dollar oil and natural gas industry only speaks one language: profit. This strategy piece analyzes how the anti-frack movement can exploit an awareness of the industry’s profit streams to devise economically compelling attacks.
The Economic Lay of the Land
Finding weak points in the industry’s business models requires an understanding of its economics. Fortunately for environmental and social justice activists, the natural gas industry faces a number of structural constraints. First, the extremely low price of gas keeps profits tight. Gas is currently around $3.5 per mmBtu and analysts expect gas to remain low for some time (in 2012 the low was only $1.9 compared to the 2005 high of $15). 4 The minimum price for ‘unconventional’ gas to be profitable is $3 – $6, depending on the gas formation.
Second, the price of oil is relatively high and analysts predict it will stay high. The difference between oil and gas prices has pushed companies to shift focus to shale that produces oil or “liquids” instead of just “dry” gas like methane. Natural gas liquids (NGL) include ethane, propane, and butane, which are derived from “wet” gas and can substitute for some uses of petroleum, such as producing plastics. Companies are being forced to switch to drilling for oil and NGLs, which fetch higher prices, in order to survive.
Third, the gas industry is stuck in a vicious cycle of falling profits and overproduction. They produced record supply levels of gas which drove the price so low they were losing money to produce it. However, they keep drilling and producing more gas because of requirements in investors’ contracts, leases that expire, and significant initial investments they don’t want to lose. There are over 1000 drilled Marcellus wells waiting to be connected to pipelines, guaranteeing additional supply and keeping prices low. Companies’ value is based on their reserves and low prices mean those reserves are worth much less, which deeply cuts their profits and worth.
Finally, fracking is expensive and produces a diminishing rate of return. Drilling and fracking a single Marcellus shale gas well costs an average $3-$4 million dollars and as much as $7.6 million. While fracking initially produces a large amount of gas production levels drop within months, requiring another round of fracking. All these factors conspire to make the economic outlook of the oil and gas industry tenuous at best.
The Natural Gas Players
In the face of these challenges the natural gas industry has developed survival strategies, but with careful analysis we can uncover vulnerabilities. Each type of gas industry player has different incentives and weak points, and the misalignment of these incentives presents opportunities for fractivists to intervene. Let’s take a closer look at how the types of businesses involved make a profit.
How To Hit Them Where It Hurts
How can we use this knowledge of the natural gas industry to devise economically effective fractivism? Overall our strategy follows a simple guiding principle: shrink profit margins by increasing the costs of production and keeping demand low.
In response to the structural pressures of their industry and the sector-specific interests above, each class of the natural gas players has created business strategies to turn a profit. Each of these profit models presents an attack opportunity for fractivists.
They: Decrease Production To Maximize Cashflow and Increase Gas Prices
We: Increase Cost Of Production to Cut Into Profits, Cause Cashflow Problems
Operators that have sufficient cashflow, such as ExxonMobil, Chesapeake, and EQT, are pulling back on production with the hopes of causing gas prices to rise to more profitable levels. They either sit on existing leases waiting for market conditions to improve, sell leases to smaller operators, or let some leases expire rather than produce gas at a loss. Overall, the number of rigs in operation has dropped dramatically.
The industry has dug itself into a hole, and fractivists can help keep them there. With current low prices, any increase in the cost of production cuts into the industry’s profits and pushes them further into unprofitability. There are a diversity of tactics that can be used to increase costs. Fracking is the most expensive part of production and requires timed deliveries of supplies (water, sand, chemicals) and equipment (pressure pumping). Any disruption or increased expense in these long supply chains, whether from sabotage, civil disobedience, or additional regulations, will increase the cost of the service companies and impact multiple wells and companies. Passing legislation or local ordinances that require new environmental or economic impact assessments, fees or taxes, worker safety evaluations, or transportation/storage safety evaluations can disrupt operators’ cashflow. To maximize frustration, requirements should be passed at all levels of government: federal, state, municipal, and county. Contradictory or conflicting guidelines with different filing requirements can further increase the legal costs of doing business.
They: Shift To Natural Gas Liquids (NGL) To Increase Profit
We: Target New NGL Infrastructure
Operators have shifted focus to NGLs (derivatives of wet gas such as ethane, propane, and butane) in order to make profit from NGLs higher prices. This has caused high production levels of NGLs and a similar round of oversupply and dropping prices. Midstream companies are working to build new NGL infrastructure to handle this extra supply and deliver it to petrochemical consumers. This requires new NGL pipelines such as the 1,230 mile ATEX (Appalachia-to-Texas) Express, new NGL storage facilities such as Inergy’s proposed LPG storage in New York, and the construction of specialized “ethane crackers” that turn ethane into ethylene, a petrochemical feedstock. Shell is planning to build a $2 billion ethane cracker petrochemical facility in Pennsylvania, though the plans are not yet finalized.
New infrastructure offers opportunities for fractivists to disrupt industry plans and build alliances with other activists, such as those concerned with public health and toxins, economic justice activists, or landowners concerned about use of eminent domain. Fractivists can learn from the resistance of Texan land owners in the Tar Sands Blockade against Keystone XL who are upset about the use of eminent domain to enable foreign companies to seize Americans’ land for their own profit. In Canada, the indigenous Idle No More movement has had success in blockading rail lines and stopping transportation of propane. In British Columbia, the Unist’ot’en Clan of the Wet’suwet’en Nation has blocked several proposed tar sands oil and fracked gas pipelines from crossing their unceded sovereign territory.
They: Develop New Markets to Increase Demand
We: Expose Their Greenwashing And Block Access to New Markets
The industry’s main strategy to deal with oversupply is to increase the demand to match. Overall the industry seeks to bolster demand by replacing coal with gas for electrical production, promoting compressed natural gas (CNG) vehicles as environmentally friendly, exporting gas as liquefied natural gas (LNG), and selling NGL for plastic production and other petrochemical uses. Blocking access to these markets with a broad diversity of tactics is a key priority for fractivist strategy.
The environmental costs of natural gas production have already been detailed as hugely detrimental elsewhere, but the industry is attempting to sell their technology as an environmentally friendly replacement for coal and gasoline, a technique known as “greenwashing.” Exposing the industry’s greenwashing is important to win the PR war. Fractivists have already scored a major victory with “fracking” becoming a household word with negative connotations and the industry is explicitly trying to avoid the “F” word. Fractivists need to use the word “frack” to expose the industry, set the framework, and develop strong partnerships with anti-coal, anti-diesel, and climate change activists to make sure that they don’t advocate natural gas as a “solution.”
They: Use Mergers, Partnerships, and Foreign Investment To Manage Cashflow
We: Target Investors With Public Pressure And Support Divestment
Smaller operators without large cash reserves are feeling the squeeze of market conditions. Even Chesapeake, one of the biggest producers, had to sell off $6.9 billion of pipeline and gas field assets to focus on oil and liquids. Domestic gas producers formed joint ventures with or were bought out by foreign companies such as StatOilHydro (Norway), Total (France), Sinopec (China), BHP Billiton (Australia), and others. A total of $51 billion from overseas was invested in US oil and gas fields in 2011. Investment firms like Jefferies, Barclays, and Goldman Sachs are essential to this reshuffling, not only providing financing but structuring the deals and creating requirements for production levels, which incidentally are what led to current levels of oversupply.
Targeting investors can take many forms. Concern is growing that shale gas investment is the next bubble, with companies purposefully overstating the size of their reserves and productivity of their wells. Fractivists have used the economic analysis of former investment banker turned public servant Deborah Rogers and others to expose this concern, which could be used to scare off risk-averse investors. Public pressure campaigns against firms financing mountaintop removal have proven successful and provide an example for fractivists to learn from. Finally, divestment is a tactic successfully used in support of the South African anti-apartheid movement and the Palestinian Solidarity Movement, and is proposed as a tactic against fossil fuel companies.
The goal of the ideas presented here is to help create unity and focus to make our movement more successful: not by searching for a magic bullet but by weaving together many local struggles within a general strategic framework. An overall framework that encompass a wide range of tactics, targets, and efforts is more likely to be successful than strategies that call for everyone to do one single thing. Like a healthy ecosystem, the more diverse and interconnected our movement is the stronger it will be.
This is not the first or last word on this subject, but an addition to ongoing conversations. As market conditions change and as the industry tries to respond to the ongoing success of our global movement, we will have to adjust our efforts accordingly. By maintaining an economic analysis of the industry and continuing strategies that target their weaknesses, I believe we have the power to go on the offensive and win. Together, we’ll protect the land, water, local economies, and communities that we love.
Resources: Industry documents
• Oil and Gas Investment Environment (Ralph Eads, Vice Chairman, Jefferies & Co)
• The US Energy Revolution: How Shale Energy Could Ignite the US Growth Engine (Goldman Sachs, Asset Management – Insight on Today’s Investment Issues, September 2012)
• Shale Fueling Chemicals Boom (Zacks Equity Research, January 2013)
• Task Force on Ensuring Stable Natural Gas Markets (American Clean Skies Foundation) Note: see last pages of report for list of industry participants and list of commissioned papers on the subject
• Oil & Gas Financial Journal – Unconventional Resources
Resources: Activist Economics
• (Event) FRACKONOMICS – Debunking the financial myths of shale gas and embracing a green energy future. Video of talks available at http://shaleshockmedia.org/2012/05/08/frackonomics/
• Energy Policy Forum – Deborah Rogers Shale Gas Economic Presentation (video)
I am a fractivist from New York’s Marcellus Shale gasfields. I am not an economist, but have spent years studying gas industry business news looking for strategic insight. This article’s goal is to summarize some strategy ideas for fellow fractivists.
 Control Risks, “The Global Anti-Fracking Movement: What it wants, how it operates, and what’s next.” 2012. Available at http://www.controlrisks.com/Oversized%20assets/shale_gas_whitepaper.pdf
 The gas industry and the oil industry are truly the same thing with most companies working in both oil and natural gas. Fracking is used to produce both gas (from shale gas and coal bed methane) and oil (shale oil). However, the market conditions and infrastructure needed for gas compared to oil are very different, and fracking has had a much larger impact on the production of gas. This short article will focus solely on gas.
 mmBtu is a common measurement for natural gas and means 1 million British Thermal Units. 1 BTU is the amount of energy needed to raise 1 pound of water 1 degree Fahrenheit. See http://www.eia.gov/tools/faqs/faq.cfm?id=45&t=8
for details. Gas can also be measured by volume instead of heat content, using measurement of Mcf (1000 cubic feet). 1 MCF = 1.023 mmBtu, and is roughly the amount of gas needed to last an average American household four days (see: http://www.crmu.net/PDF%20files/Natural%20Gas%20pdfs/How%20to%20Measure%20Natural%20Gas.pdf
 US Energy Information Administration. “Short Term Energy Outlook, Global Crude Oil Prices”. January 2013. http://www.eia.gov/forecasts/steo/report/prices.cfm
 US Energy Information Administration. “U.S. marketed natural gas production levels off in the first half of 2012
 US Energy Information Adiministration. “What are Natural Gas Liquids and how are they used?” http://www.eia.gov/todayinenergy/detail.cfm?id=5930
 Wolf Richter “Following the Natural Gas Roller Coaster Ride”. October 2012. http://oilprice.com/Energy/Natural-Gas/Following-the-Natural-Gas-Roller-Coaster-Ride.html
 Clifford Krauss and Eric Lipton, New York Times. “After the Boom in Natural Gas.” October 2012. http://www.nytimes.com/2012/10/21/business/energy-environment/in-a-natural-gas-glut-big-winners-and-losers.html
 Reuters. “Waking giant-Marcellus Shale bullies U.S. gas market.” October 2012 http://www.reuters.com/article/2012/10/15/us-energy-natgas-marcellus-idUSBRE89E12B20121015
 Reuters. “Low U.S. natural gas price seen sapping reserves, valuations.” January 2013. http://finance.yahoo.com/news/low-u-natural-gas-price-060255466.html
 “The Economic Impact of the Value Chain of a Marcellus Shale Well”. University of Pittsburgh, 2011 http://marcellusdrilling.com/2011/09/how-much-does-it-cost-to-drill-a-single-marcellus-well-7-6m/
 Wolf Richter “Following the Natural Gas Roller Coaster Ride”. October 2012. http://oilprice.com/Energy/Natural-Gas/Following-the-Natural-Gas-Roller-Coaster-Ride.html
 “The US Energy Revolution: How Shale Energy Could Ignite the US Growth Engine.” Goldman Sachs, 2012
 Ranked list of top 10 operators based on footage drilled: http://www.rigdata.com/counts_rankings/operator_rankings.aspx
Top 10 ranking of biggest reserves and profits:
 Ranked list of the top 10 drillers: http://www.rigdata.com/counts_rankings/driller_rankings.aspx
 Ranked list of the top US-based oilfield service and supply companies: http://www.ogfj.com/articles/print/volume-9/issue-2/features/top-us-based-oilfield.html
 Top 10 Midstream companies: http://www.fool.com/investing/general/2012/10/25/the-top-10-midstream-companies.aspx
 Wall Street Journal. “Chesapeake Energy Pulls Back Amid Natural-Gas Glut” January 2012. http://online.wsj.com/article/SB10001424052970203806504577178651732511974.html
 Data on current and historical rig counts at http://investor.shareholder.com/bhi/rig_counts/rc_index.cfm
 “The Economic Impact of the Value Chain of a Marcellus Shale Well”. University of Pittsburgh, 2011 Available at http://marcellusdrilling.com/2011/09/how-much-does-it-cost-to-drill-a-single-marcellus-well-7-6m/
 US Energy Information Administration “2012 Brief: Natural gas liquids prices down in 2012.” January 2013. http://www.eia.gov/todayinenergy/detail.cfm?id=9590
 ATEX Express Pipeline, “What is the ATEX Express Pipeline,” http://www.atexexpresspipeline.com/faq/what-is-the-atex-express-pipeline/
 Inergy’s LPG expansion project: http://www.inergylp.com/midstream/fingerlakes/index.asp
 Shell, “How petrochemicals are made,” http://www.shell.com/chemicals/aboutshell/our-strategy/marcellus-cracker-project/petrochemical-production.html
 Shell, “US Appalachian petrochemical project,” http://www.shell.com/chemicals/aboutshell/our-strategy/marcellus-cracker-project.html
 The Intelligencer, “‘Cracker’ Plant Still Not Finalized,” December 2012, http://www.theintelligencer.net/page/content.detail/id/579080/-Cracker–Plant-Still-Not-Finalized.html
 Democracy Now, “Texas Landowners Join Environmentalists for Historic Blockade of Keystone XL Tar Sands Pipeline” October 2012. http://www.democracynow.org/2012/10/15/texas_landowners_join_environmentalists_for_historic
 Sun News, “Thousands affected by Idle No More rail blockade: Propane industry,” December 2012, http://www.sunnewsnetwork.ca/sunnews/canada/archives/2012/12/20121228-094320.html
 Richard Bass, Gordon Pickering. Forbes. “The U.S. Has A Natural Gas Glut; Why Exporting it as LNG Is A Good Idea.” June 2012 http://www.forbes.com/sites/energysource/2012/06/13/the-u-s-has-a-natural-gas-glut-why-exporting-it-as-lng-is-a-good-idea/
 For more information on “greenwashing” of natural gas, see http://itsgettinghotinhere.org/2012/02/15/big-greenwashing-101/
 John Kemp, Reuters. “Making fracking politically acceptable.” February 2012. http://www.reuters.com/article/2012/02/06/column-fracking-politics-idUSL5E8D62Q920120206
 Associate Press “Energy Industry Won’t Back the ‘F’ Word.” January 2012. http://www.naturalgasamericas.com/energy-industry-wont-word
 Oil & Gas Financial Journal. “Big Overseas investors supply momentum for North American shale growth.” July 2012. http://www.ogfj.com/articles/2012/07/big-overseas-investors-supply-momentum-for-north-american-shale-growth.html
 Washington Post. “Debt-plagued Chesapeake Energy to sell $6.9 billion worth of its holdings.” September 2012.
 1) Reuters. “Statoil agrees $1.3 billion U.S. shale gas JV with Talisman” October 2010 http://www.reuters.com/article/2010/10/10/us-norway-talisman-idUSTRE69913Y20101010
 Bloomberg. “Total Acquires $2.3 Billion Stake in Utica Shale From Chesapeake, EnerVest” January 2012. http://www.bloomberg.com/news/2012-01-03/total-buys-2-3b-utica-stake-from-chesapeake-enervest.html
 Reuters. “Sinopec, Devon in $2.2 billion shale deal.” January 2012. http://www.reuters.com/article/2012/01/03/us-sinopec-devon-shale-idUSTRE8020PX20120103
 Oil and Gas Financial Journal. “BHP Billiton swoops on PetroHawk Energy in $15.1 billion acquisition.” July 2011. http://www.ogfj.com/articles/2011/07/weekly-update-bhp.html
 Financial Post. “Hunt for shale resources set to go global,” January 2012. http://business.financialpost.com/2012/01/06/hunt-for-shale-resources-set-to-go-global
 New York Times. “After the Boom in Natural Gas.” October 2012. http://www.nytimes.com/2012/10/21/business/energy-environment/in-a-natural-gas-glut-big-winners-and-losers.html
 United for Action “Frackonomics” Event: Event page at http://unitedforaction.org/2012/03/17/frackonomics-april-24th-ethical-culture-society-645-pm/
and Video at http://shaleshockmedia.org/2012/05/08/frackonomics/
 Fossil Free, “From South Africa to Sewanee: Reflections on Divestment and the Anti-Apartheid Movement,” December 2012,