Beyond the Fracking Wars: Reaching Consensus with Multi-Stakeholder Frameworks

  February 10, 2013

This is the second installment of a two-part series that was originally published by the International Law News, Volume 44, Number 2, 2015. © 2015 by the American Bar Association. View the first installment here.

Creating Conditions Above and Below Ground for Unconventional Oil and Gas Development through a Governance and Sustainability Framework

In the Southern Cone, regulatory frameworks, public policy initiatives, and opportunities for public-private partnerships are neither harmonized nor harmonious. South America shows different approaches to government regulation over hydrocarbons and ownership schemes over minerals, as well as their development and management, government-private sector relations and development, access to technology, regulations, implementation of industry sustainability standards, and different jurisdictions’ approaches to their own quality of governance and rule of law. Creating opportunities for leveraging, engaging, and innovation will require that the immediate future of unconventional oil and gas development in South America be characterized by development on three fronts:

1) a strategic approach to hemispheric policy development, diplomacy, and cooperation;

2) understanding the importance of social licensing processes and how that could affect the private-sector bottom line; and

3) the role of the legal profession in these developments.

Hemispheric Multi-Stakeholder Engagement

Strategic engagement and dialogue within the Americas among those who share the wealth of unconventional oil and gas resources will prove to be beneficial for the region and hemisphere at different levels. So-called energy diplomacy can have a direct impact on the establishment of solid dialogue and diplomatic relations that leverage good policy, regulatory frameworks, and industry best practices supporting energy independency and/or efficiency (depending on a country’s needs). When it comes to preventing and/ or mitigating the environmental, social, and governance (ESG) impacts of hydraulic fracking, one company’s best sustainability practices or even research initiatives trying to understand the true environmental impact of this activity are not enough. A multi-stakeholder approach, one that brings together governments, the oil and gas industry, research and academic institutions, industry associations, investors, shareholders, and even NGOs, can be the catalyst for leveraging best sustainability practices, investing in serious academic research that identifies the true impact (even the negatives) of hydraulic fracking, and providing standards for prevention, mitigation, and further technological and research development. This, in turn, will leverage international and regional standards that governments, the private sector, and even NGOs can agree upon to integrate as important for their own operations and activities. At the same time, it will serve to create the conditions for operating within a governance and rule-of-law framework.

Social License to Operate and Shareholder Participation

Bans and moratoria are denials of companies’ social license to operate arising from concerns about environmental and social risks. Richard A. Liroff, Shareholder Engagement as a Tool for Risk Management and Disclosure, in Beyond the Fracking Wars, supra. Confronted with this reality, the unconventional oil and gas industry needs to incorporate sustainability standards that call for a responsive management guided by committed shareholder participation on these issues. Reducing environmental and community impact requires not only strengthening federal, state, and local regulations within a governance and rule-of-law framework but also having industry itself incorporating the highest international safeguard, sustainability, and multi-stakeholder engagement standards at the operational level—even when there are no local regulations requiring them to do so.

And this is when shareholder engagement is so very important. Management cannot do it alone or be left alone on these key strategic decisions that have a direct impact on risks and rewards. Today, it is widely acknowledged by the investor community that how a company manages ESG has a direct impact on financial numbers and investor’s returns. Id. The investor and shareholder communities have already begun mobilizing around these issues by developing best practices that permeate management at different levels. Id. (citing 12 core management goals for natural gas operations identified in Extracting the Facts: An Investor Guide to Disclosing Risks from Hydraulic Fracturing Operations, a guide published by Investor Environmental Health Network (IEHN) and the Interfaith Center on Corporate Responsibility (ICCR), including Green Century Capital Management and Boston Common Asset Management. While this is still a process in development, it certainly is already creating a positive impact that should be leveraged and embedded across the industry and within standards even more forcefully in jurisdictions that have different approaches to regulating, governance, rule-of-law, and sustainability frameworks.

The Legal Profession and Sustainability

The sustainability, business, and human rights movement is a movement that has begun to change how businesses across the globe operate that has gained momentum in recent years with the private sector and legal profession, owing in part to the passage by the UN Human Rights Council in 2011 of the UN Guiding Principles on Business and Human Rights (Guiding Principles) and the 2012 Rio+20 Sustainability Conference. In light of these, many corporations and the legal profession as a whole are looking at how to adopt sustainability and human rights policies as part of their headquarters and field operations to avert costly disruptions and reputational harm in the context of implementing due diligence mechanisms. Other international multi-stakeholders, as well as industry-related initiatives, are at the heart of this discussion because they are providing the framework for the private sector to engage with other sectors and generate best practices across regions through sustainability reporting and integrated operational practices.

An entirely new regime and system are emerging; these are comprised of both soft and hard law (international law), where soft law standards are being increasingly embedded as part of due diligence mechanisms and sustainability operations of the private sector. It has been noted that this process is acknowledging the “standard setting power of soft law into the development of emerging norms into the international community while also integrating social expectations into these rule making process.” U.N. Human Rights Council, Business and Human Rights: Mapping International Standards of Responsibility and Accountability for Corporate Acts, Report of the Special Representative of the Secretary-General (SRSG ) on the Issue of Human Rights and Transnational Corporations and Other Business Enterprises , A/HRC/4/035 (Feb. 9, 2007).

In turn, this new regime and system are also influencing a new field of practice that does not only involve human rights or environmental law. The complexity of the legal questions emerging from this new field of practice increasingly requires that corporate lawyers, whether in-house or those advising industries that, as a result of hydraulic fracking, have the potential to collide with ESG standards and run into serious conflicts or reputational damages, be well versed in these standards and emerging system of laws so that they can integrate them as part of their advisory services to their clients.

This is the second installment of a two-part series that was originally published by the International Law News, Volume 44, Number 2, 2015. © 2015 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion 35 thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

by Lelia Mooney   September 23, 2015

Aligning Conditions Below and Above Ground for Unconventional Oil and Gas Development within a Governance and Sustainability Framework

The Shale Revolution Phenomenon Below Ground

Hydraulic fracturing or “fracking,” the process of injecting sand, water, and chemicals into shale rocks to crack them open and release the hydrocarbons trapped inside, is already a big topic of conversation in South America because the promises of fracked energy are so great. These include job creation, lower carbon emissions, achieving energy independency and efficiency, and industry development. At the same time, this projected bonanza does not come concern free. Critics in the United States and elsewhere challenge this new phenomenon by claiming that “fracking” pollutes the water, ground, and air and holds the potential for seismic movements, all leading them to affirm that these costs outweigh the benefits. Alex Prud’homme, Hydrofracking: What Everyone Needs to Know (2014).

The development of hydrocarbons trapped within underground shale formations generated the so-called shale revolution phenomenon that led many to affirm that shale may be the most transformational technology advancement in the twenty-first century. It has transformed the Western Hemisphere into the new center for oil and gas production while lowering both gas prices and greenhouse gas emissions (Robert A. Manning, The Shale Revolution and the New Geopolitics of Energy (2014). This paramount development is challenging geopolitics worldwide and within the Western Hemisphere in particular with respect to regulatory frameworks, public-private partnerships, multi-stakeholder engagement, environmental concerns, and matters of diplomacy and national security.

In practical terms, the shale gas and oil phenomenon, driven by the impressive size of proven reserves, is revolutionizing the global energy landscape, positioning the Western Hemisphere in a unique situation for resources exploration and development. Americas Society/Council of the Americas, Shale Gas Development in Latin America, (2014), A close look at the 2013 United States Energy Administration report maps the presence of 137 shale formations in 41 countries outside the United States and across regions. According to the report, two-thirds of the assessed, technically recoverable shale gas resource is concentrated in six countries: the United States, China, Argentina, Algeria, Canada, and Mexico, and the top 10 countries from this list account for over 80 percent of the currently assessed, technically recoverable shale gas resources of the world. U.S. Energy Administration, Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States (2013).

This report shows that Argentina ranks fourth after Russia, the United States, and China in terms of the top 10 countries with technically recoverable shale resources. Moreover, Argentina has world-class shale gas and shale oil potential, and the report affirms that, besides the United States, it is possibly this South American country that has the greatest prospects, given its large and potentially high quality shale gas and oil resources in four main sedimentary basins: the Neuquen Basin, the Golfo San Jorge Basin, the Austral Basin, and the Paran√° Basin.

Brazil’s most prolific petroleum basin lies offshore, while the country has 18 mostly underdeveloped and lightly explored sedimentary basins onshore. Three of these basins—the Paran√° in the south and the Salim√µes and the Amazonas in the north, produce significant amounts of conventional oil and gas, although these three basins also have geological data indicating that assessment of shale gas and oil potential is warranted.

In a closer look at South America, the report shows that northern South America has prospective shale gas and shale oil potential within marine deposited cretaceous shale formations in three main basins: the Middle Magdalena Valley and Llanos basins of Colombia, and the Maracaibo/Catatumbo basins of Venezuela and Colombia. Bolivia, Chile, Paraguay, and Uruguay have prospective shale gas and shale oil potential in three large sedimentary basins with organic rich and marine-deposited black shales: the Paran√° Basin of Paraguay and Uruguay, the Chaco Basin of Bolivia and Paraguay, and the Magallanes Basin of Chile.

Exploring and Understanding Conditions Above and Below Ground

The paramount latent opportunities that exist below ground for the unconventional development of oil and gas resources cannot be explored in isolation from the conditions that exist above ground. Shale Gas Development in Latin America, supra. Fracking is an activity that is also associated with high levels of risks and challenges, particularly with respect to the environmental and social impact of the activity below ground, which, in turn, has a direct impact above ground.

The impact does not go unnoticed by different stakeholders because it has a subsequent direct influence on the value proposition of this activity, and therefore calls for a different kind of business approach. Such an approach welcomes a broad concept of corporate sustainability that focuses on long-term value creation as opposed to philanthropic activities embedded as part of corporate social-responsibility practices. This approach also requires the type of government regulation that creates conditions for the private sector to operate and create long-term value with clear rules that will operate within a fully functioning governance and rule-of- law system.

The term “fracking wars” represents the “polarized debate between those in favor of this development and those opposed or highly skeptical of it.” Beyond the Fracking Wars, at xxxiii (Erica Levine Powers & Beth E. Kinne, eds., 2013). Fracking “possesses potential environmental risks, such as the draining or polluting of underground aquifers, the spurring of seismic activity (earthquakes) and the spilling of waste products during their aboveground transport.” Edward L. Morse, Welcome to the Revolution: Why Shale Is the Next Shale, 93 Foreign Aff. 3 (2014) (addressing the theme, “Big Fracking Deal: Shale and the Future of Energy”). Confronted with these latent challenges, communities have already begun mobilizing across the Western Hemisphere to impose moratoriums and bans on this activity. In other words, they are denying public consent and thereby canceling their social license to operate. For instance, “from Pennsylvania to North Dakota, more and more people are expressing concern about the environmental problems associated with this production, including local air pollution from drilling sites known as ‘well pads,’ the contamination of drinking water from spills or leaky wells, and noise and dust from trucks serving drilling sites.” Fred Krupp, Don’t Just Drill, Baby—Drill Carefully: How to Make Fracking Safe for the Environment, 93 Foreign Aff. 3 (2014).

Two very important cases from Argentina and the United States are good illustrations of how communities are beginning to take a stand on the shale boom while also canceling a company’s social license to operate. By using the jurisdictional venues, these communities have sought jurisdictional redress to confirm a ban or restriction on this type of extractive operation through the issuing of local zoning laws. Inre Wallach v. Town of Dryden, 16 N.E.3d 1188 (N.Y. 2014) (local municipality exercising its local policy legislative powers to completely ban this activity); Provincia de Rio Negro c/ Municipalidad de Allen s/ Conflicto de poderes, (case of the municipality of Allen in the province of Rio Negro in Argentina). Both cases, regardless of their outcomes, reflect serious concern over the quality of life of towns and their citizens and demand careful consideration of the development and sustainability framework that regulators should follow if they set out to try to fulfill the remarkable economic development promises brought about by the shale gas boom.

In 2013, the municipality of Allen in the province of Rio Negro in Argentina did not succeed with its claim due to the fact that the regulatory authority over hydrocarbons rests in the province of Rio Negro according to the National Constitution. The municipality of Allen ended up exceeding its local policing authority to exercise legislative power over the provincial government’s authority. By contrast, the towns of Dryden and Middlefield in New York State ended up succeeding with their claim when the New York Court of Appeals affirmed a lower court ruling in 2014 and found that the towns did have the authority to ban fracking through zoning laws that foster “the health, safety, morals, or the general welfare of the community . . . [and that] are directed at regulating land use generally and do not attempt to govern the details, procedures or operations of the oil and gas industries.” Town of Dryden , 16 N.E.3d at 1194, 1197.

These concerns are not going away; they are projected to increase as the exploration and development take root in the South American region.

This is the first installment of a two-part series that was originally published by the International Law News, Volume 44, Number 2, 2015. © 2015 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion 35 thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.