The Shale Gas Revolution: Risks and Opportunities


It seems that hardly a day goes by lately that fracking is not making headlines. On the one hand, investors practically salivate at what they see as a massive moneymaking opportunity. On the other hand, environmental and community activists see an ominous threat to health and natural resources. A new report out from KKR a leading private equity (PE) investment firm, suggests that both have the potential to be true, depending on how the shale gas boom is handled going forward.

Private equity uses its powers for good
It's worth taking a moment to consider why a huge PE firm like KKR would even write and release such a report. In the last five years, KKR has made enormous strides in advancing its decision to include sustainability as a key strategic driver for enhancing shareholder value. I recently discussed KKR's sustainability initiatives with Elizabeth Seeger, who manages environmental and social issues and opportunities across KKR's portfolio. Her very background speaks volumes: prior to KKR, she worked for the Environmental Defense Fund (EDF).

KKR produced its report, "Historic Opportunities from the Shale Gas Revolution," in partnership with EDF. Its reasons for writing the paper are straightforward: KKR sees transformative potential in shale gas development, but believes that significant risks and challenges must be addressed in order to realize that potential. If you share The Motley Fool's and KKR's belief in long-term investing, then this report -- and companies' ability to manage the issues therein -- should be extremely important to you.

A kinder, gentler frack?
KKR identifies several necessary conditions for a successful shale gas revolution. "First and foremost, industry must continue to proactively engage with regulators, the local community, environmental and other stakeholders to develop appropriate regulation and best practices that reduce impacts and protect human health and the environment, including the reduction of fugitive methane emissions."

That's right, folks. The anti-fracking activists' complaints are not without merit. If companies wish to continue developing this resource, they must get out in front of the harmful effects of shale gas drilling and mitigate them to the extent possible. Groundwater contamination, increased seismicity, and air pollution from fugitive emissions are all risks of shale gas development. Some of these have been exaggerated in the public discourse, but perception can be just as important as reality.

Anadarko Petroleum , Encana , Shell , and ExxonMobil subsidiary XTO Energy are setting a good example through their work with EDF on methane leakage testing. Their aim is to quantify methane emissions more accurately, so as eventually to eliminate them completely.

If you're not convinced that managing environmental risks is important, just follow the money. An $18 billion industry has risen up strictly to clean up fracking's toxic wastewater. GE makes the Mobile Evaporator, which can be towed from well to well, cleaning up to 50 gallons of wastewater per minute. Chesapeake Energy's Green Frac is said to reduce the use of fracking fluid additives by 25%.

Halliburton -- a company not traditionally hailed for its green credentials -- is experimenting with new fracking machinery like the SandCastle, which uses gravity and solar energy. As the leading servicer of fracking operations, Halliburton's movement in this area is noteworthy.

Natural gas for the world
KKR also concludes that support for U.S. natural gas exports is critical to the ongoing development of this resource. KKR argues that while an aggressive pursuit of the export market would have only a modest impact on domestic prices, it would also provide the necessary stimulus for domestic expansion of the natural gas infrastructure and have a beneficial effect on the U.S.' trade balance.

Cheniere Energy is certainly betting heavily on export market expansion. Barely even 10 years ago, Cheniere was pouring capital into developing import facilities, but has since done an about-face and placed its chips squarely on overseas markets. After securing long-term contracts with major overseas buyers -- including a $6.3 billion, 20-year contract with a Total affiliate announced just this week -- Cheniere seems to be lining up exactly the support it needs to be successful in this radically shifting landscape.

Of course, the export market remains far from assured. A Stanford economist released a policy brief this week that questions the long-term viability of natural gas exports. Meanwhile, chemical and manufacturing interests have been lobbying for limits on natural gas exports, out of fear that price increases would constrain their capital spending plans. No matter whose predictions prove correct, the outcome of the export debate will profoundly influence companies along the natural gas supply chain.

Shale gas revolution
Despite some uncertainty about its contours, the shale gas revolution appears by all accounts to be poised to transform our energy landscape. Whether this happens in a manner that is good for most of us remains to be seen. For my part, I am going to pay close attention to any factors that a major PE firm like KKR deems important enough for a white paper.

Investors should carefully monitor the export debate. Also, even if environmental considerations are not dear to your heart, KKR makes a compelling case that they will be dear to your bottom line. Look for companies that are getting out in front of fracking's environmental risks and doing so in a transparent manner. They will have one of the key ingredients for long-term success.

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Sara Murphy has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric, Halliburton, and ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and short JAN 2014 $15.00 puts on Chesapeake Energy. Motley Fool newsletter services recommend Halliburton and Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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