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The fossil fuel conundrum

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Despite the known perils, fossil fuels continue to persist as dominant power sources at present (see Figures 1A and 1B below). In fact, the European Commission’s Joint Research Centre & Institute for Environment and Sustainability reported that global emissions from fossil-fuel combustion and industrial processes reached 35.7 billion tonnes (Gt) in 2014, the highest year on record (prior to 2015 data being available).

Fossil Fuels charts - both

The Thomson Reuters Global 500 Greenhouse Gas Report: The Fossil Fuel Energy Sector outlines how the GHG-emissions gap is widening. For example, from 2010 to 2013, emissions increased by 1.3 percent when they should have decreased by 1.4 percent per year. This equates to a 5.5 percent gap over that period. Figure 2 below shows the projected long-term effects of this gap and sharp adjustment needed to meet goals set for 2050.

Powering the Planet - Top 32 GHG-Producing Companies Globally

Despite their ubiquitous prevalence, fossil fuels have peaked. Thomson Reuters analysts state that it’s now clear that 2005 was the year with the largest volume of oil consumption in the US and other advanced economies, as reported in A Brief History of the Oil Crash.

A confluence of factors has contributed to the decline of oil: the shifting landscape and production of oil in the Middle East and elsewhere, an increase in shale drilling and natural gas consumption, and expanded awareness of the ill effects of greenhouse gas emissions. These have resulted in extremely low oil prices. Figure 3 shows hedge fund positions versus oil prices for the 12 months of 2014. Brent oil dropped over the last quarter of that year from $86/barrel to less than $47/barrel at the beginning of 2015, and the slide has continued.

Powering the Planet - Figure 3 - 2014 Hedge Fund Positions and Oil Prices

Where natural gas loses steam

The US increased its shale drilling and natural gas production to offset oil’s uncertainties.
In response, the US Department of the Interior’s Bureau of Land Management (BLM)
developed new regulations for hydraulic fracturing (“fracking”), acknowledging that “this
technology has opened large portions of the country to oil and gas development.” The
new federal rules took effect on June 24, 2015 (80 FR 16128-01; 43 CFR Part 3160). Prior
regulations were developed 30 years earlier and hadn’t anticipated the widespread use
of fracking or the advanced horizontal-drilling technology now used to extract oil and
natural gas.

The Fish & Wildlife Service in the US expressed its concerns about fracking in a recent
document: “…hydraulic fracking and steam injection are relatively new techniques and
there is limited knowledge and evidence of their potential to affect surface resources.
Due to these uncertainties, data limitations prevent us from quantifying the likelihood or
magnitude of …the potential impact of hydraulic fracking.”

Although natural gas and clean coal have been hailed as saviors from the hazards affiliated
with traditional coal and oil, contributing less to the world’s carbon footprint than their longstanding cousins, their use as a viable, long-term source of power is questionable. Professor James O’Reilly explains this in his book The Law of Fracking (2015, Thomson Reuters).

Despite improvements in techniques used to extract the gas from new and previously used
oil sites, the process is disruptive and its aftereffects uncertain. Lateral drilling requires
pumping massive volumes of water and chemicals into underground caverns to extract
the gas. Once extracted, it is accompanied by hazardous elements such as radium-226,
thorium, radium-228, brominated compounds, volatile organics, lead and other hazardous
waste. These are typically left at the drilling site for the local community to handle,
alongside the standing ponds with their contaminants and sludge that pose a threat to
local residents and the environmental ecosystem. News reports cite an increase in earthquakes and aftershocks in regions where shale drilling and hydraulic fracturing occur,
regions that previously were immune to these environmental calamities.

Professor O’Reilly explains that today’s natural gas fracking is virtually always done by LLCs
interacting at a well site under some form of a master agreement with the extracted gas
sold into export or interstate uses.

Americans have yet to work out the fiscal puzzle of gas fracking’s “legacy costs,” which
economists call “environmental externalities,” O’Reilly states. Who owns the legacy cost of
the fracking boom after the boom has shrunk, and when will the repair funds for roads and
bridges and culverts that suffered mega-sized convoys of supply trucks arrive? Who remains
to restore the stream flow and neutralize the toxins – and more practically, who pays for the
fence to keep out children or animals at risk of adverse exposures?

“Legacy costs cannot be borne by the shadows in an empty Delaware post office box, the
former home of a dissolved LLC,” O’Reilly professes. “Full speed ahead for extraction’ was
the rallying cry of the fracking blitz. Now, the United States and its smaller communities
have inherited legacy costs earlier dismissed as an irrelevant obstruction. How legislation
responds is still to be determined.”

“The cheap natural gas boom in the US has helped to undercut coal economics, and coupled with very cheap wind power and declining solar costs, this has actually helped renewable adoption. As an example, the US installed more solar capacity in 2015 than it did natural gas capacity, despite record low natural gas prices. This is likely a trend that will continue, and once the coal is largely displaced, natural gas will be the natural next target.”

Neil Fromer, Executive Director, Resnick Institute

Litigation: Oil & Gas vs. Coal

Professor O’Reilly warns about the potential for increasing litigation and legal action
related to hydraulic fracturing, greenhouse gases, oil and gas transportation, among other
things. In order to monitor this, it’s important to have a benchmark to understand the
current litigation landscape for leading sources of power that generate electricity. The Oil & Gas and Coal industries face differing challenges in terms of litigation. Westlaw® data on cases in US District Courts from 2012 to 2015 reveals significant differences in the makeup of lawsuits impacting each industry, reflecting a degree of their divergent fortunes.

Oil & Gas

For the Oil & Gas industry, torts/negligence cases make up the largest proportion of
lawsuits. A sizable minority percentage of those cases are related to the BP/Deepwater
Horizon accident in 2010 and resulting litigation.Together with commercial law & contracts and real property cases, the top three practice areas make up roughly half the lawsuits the industry faced from 2012 to 2015, as shown in Figure 4.

Coal

In contrast, the Coal industry faces increasing pressure on several fronts, including stricter,more costly environmental regulations and competition from significantly lower oil prices.

This has led to higher levels of corporate debt, falling profit margins and widespread
layoffs.

Analysis of lawsuits on Westlaw reflects some of these pressures. Employment and labor
law cases make up the largest proportion of them, as companies, labor unions and workers deal with contentious employment issues involving layoffs, labor agreements, work actions and unemployment. These cases accounted for nearly one-quarter of all industry lawsuits from 2012-2015. In contrast, employment and labor-law cases accounted for less than five percent of lawsuits facing the Oil & Gas industry.

Powering the Planet - Oil and Gas industry lawsuits

Environmental cases made up a slightly higher percentage of lawsuits for the Coal industry
(5.6 percent) compared to the Oil & Gas industry (3.6 percent). Meanwhile, bankruptcy
cases made up 4.1 percent of cases facing Coal, as shown in Figure 5, as more than half a
dozen coal producers filed for bankruptcy in 2015. In comparison, bankruptcy cases made
up less than one percent of cases for the Oil & Gas sector.

Patent litigation in the oil & gas industry

Many of the major Oil & Gas industry players have avoided being involved in patent
litigation in US courts in recent years, the notable exception being Royal Dutch Shell PLC.
Analysis of Westlaw data from 2012 to 2015 shows that Royal Dutch Shell was named as a
defendant or counter-claimant in nine cases in US Federal Courts, by far the most of any Oil
& Gas company, as shown in Figure 6. BP Biofuels North America LLC, part of UK-based BP
PLC, was named in five cases. Marathon Oil Corp. was a defendant in two. Gulf Oil LP, BP
Energy Co., and Occidental Petroleum Corp. had one case each over the same period.
Notably absent are many of the other large oil and gas companies, particularly US-based
ExxonMobil, Chevron and ConocoPhillips.

Nearly all the litigation was filed by smaller companies, claiming that others had illegally
appropriated their technology. An example is Deep Water Slender Wells Ltd., a small
US-based company, which claimed that Shell had infringed on its patent for deep-water
drilling technology.

Major Oil & Gas companies were rarely involved as plaintiffs. Royal Dutch Shell PLC filed
two cases between 2012 and 2015. There were no patent litigation cases involving two large
Oil & Gas companies on opposing sides during that period.

Powering the Planet - Figures 5 and 6


Learn more

Electric car is plugged in to rechargeRead the full Power the Planet report at tr.com/power

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