Musings: Backdoor Attack On Shale Development And Fracturing
The development of oil and gas shale has been a target of fossil fuel opponents and environmentalists for the past few years, or at least since natural gas evolved into a green-energy killing force due to its growing production and low price. The latest attack, which is actually a backdoor approach, was on the transportation safety record of the oil and gas extraction industry, and was launched in an extended article in The New York Times last week. The article was headlined, "Deadliest Danger Isn't at the Rig but on the Road" and was authored by Ian Urbina who had authored a series of anti-gas shale articles in the paper last summer. The article was placed prominently in the center of the front page, spanning three of the page's six columns, of last Tuesday's newspaper and above the fold (a location designed to ensure importance for people scanning the front page for articles determined by the editors to be of particular interest and importance).
The article begins by describing the death of Timothy Roth in the crash of a pickup truck carrying him and three other crew members returning home from a long work shift on a drilling rig in Ohio. The deadly accident occurred last July and involved the men leaving at 10 pm for a four-hour drive back to their employer's shop in West Virginia. This was not the first time Mr. Roth had been involved in a crash similar to this one in recent months. In both crashes, the driver of the pickup fell asleep at the wheel due to fatigue and ran into a pole or highway sign. Mr. Urbina slides from the story of the fatal accident into a comment that over the past decade the industry has experienced more than 300 deaths of oil and gas workers who were killed in highway crashes, which happens to be the largest cause of fatalities for the industry. The incidents of highway deaths is blamed in part on oilfield service company exemptions from highway safety rules that allow truck drivers to work longer hours than drivers in most other industries.
Mr. Urbina points out that "federal officials" estimate that more than 200,000 wells will be drilled over the next decade. Since most of these wells will be associated with oil and gas shales, there will be a significant increase in oilfield service trucking activity as wells that are hydraulically fractured lead to more truck trips, "roughly 500 to 1,500 truck trips per well," than for conventionally drilled and completed wells. The reason for the increased truck traffic is the need for massive amounts of water to be used in hydraulic fracturing operations. The attack on shale wells is conveniently disguised by this brief reference to the environmental impact from the need for millions of gallons of water for a fracturing job and its contribution to increased oilfield service truck traffic, which is inherently unsafe due to the industry's exemptions from the safety rules governing all other highway trucks.
Mr. Urbina's argument is that the safety exemptions for the oilfield service industry coupled with the dramatic increase in drilling and fracturing work to be undertaken in the future, and the poor condition of oilfield trucks and lax federal inspection efforts will lead to increased deaths. Moreover, and as supported by comments from readers attached to the online version of the article at The New York Times website, the public is concerned about being on the highways with these unsafe trucks. The argument was further targeted to the Marcellus and Utica shale regions of the Northeast with its narrow roads, hilly terrain and snow and ice weather conditions. Here again is another reason why the oil and gas industry needs increased regulation and control, or even outright banning, as not only is the process of drilling and fracturing these wells risky for local citizens, e.g., water pollution and increased earthquake risk, but the associated increase in truck traffic could cause more highway crashes and deaths for the locals.
There is little doubt the petroleum industry is a risky business, but safety is an area of intense focus by company managements and oilfield workers. Are there accidents in this business? Sure, but accidents can happen despite following the best safety practices and having the finest equipment. Operator error is among the leading causes of oilfield accidents, and it often happens when workers are fatigued or lax in following procedures, which can be related to not only being tired but also being overconfident in performing routine tasks. Unsafe equipment was an area Mr. Urbina explored in the article, citing data from the Pennsylvania State Police department showing that "40 percent of 2,200 oil and gas industry trucks inspected from 2009 to this February were in such bad condition that they had to be taken off the roads." This statement was followed by a section of the article discussing Mr. Roth's employer having been repeatedly cited for allowing its drivers to exceed the 14-hour legal limit for shifts. As a result, the company had lost its federal transportation registration but soon merged with another company and began operating under that company's registration. He also discussed claims that the company and its supervisors had instructed its drivers how to falsify their logbooks. These claims were denied in court documents and a lawyer for the firm declined to comment on the claims in the article.
In discussing the role highway accidents played in the fatality data for the oil and gas extraction industry, Mr. Urbina analyzed industry data available from the federal Centers for Disease Control and Prevention. We went to this same data source to verify his claims, which we found to be essentially correct. But in examining the data, we also gained a greater appreciation for the safety trends of the industry and the role transportation accidents play in its fatalities. Mr. Urbina said that "Nearly a third of the 648 deaths of oil field workers from 2003 through 2008 were in highway crashes." In our examination of the data, we found that highway deaths accounted for 38.8%, or more than a third. It is possible Mr. Urbina miscounted, or merely wanted to be conservative in making his point. The more telling statistic is that for all industry fatalities due to highway crashes, after elimination of the oil and gas industry ones, the rate was only 24%.
We have charted the oil and gas extraction industry fatality and highway-related deaths data versus overall industry and against the Baker Hughes drilling rig count. The chart in Exhibit 2 allows us to see just how much more dangerous oilfield work is compared to the rest of corporate America. What we see is that between 1992 and 2010 the rate of fatalities per 100,000 workers for industry overall has slowly declined from 5 to 3.6. Over the same time period, oil and gas extraction industry fatalities went from 24.8 to a peak of 31.3 in 2006 before improving in recent years. There was a sharp drop in fatalities in 2009, which coincided with the shutting down of oil and gas activity due to the financial crisis. The rate jumped back up in 2010 to nearly the same rate experienced in 1992. What is most interesting is the similarity of the pattern of the industry fatality rate and the rise and fall of the Baker Hughes drilling rig count. This suggests that the challenges of developing a consistent safety pattern for contract drillers are significant. What is also interesting, especially in relation to the thrust of The New York Times article is the steadily declining oil and gas extraction industry fatality rate related to transportation. This pattern would suggest, despite the upturn in 2010, that the oil and gas industry has actually become safer, rather than more dangerous over time.
Another way of looking at the oil and gas extraction industry fatality data is shown in Exhibit 3. We have plotted the absolute number of fatalities for the oil and gas extraction industry and the oil and gas extraction support industries. The support data is divided between oil and gas well drilling and oil and gas extraction support. This additional detail has only been available since 2003, so we also show the sum of the three industry components. Once again, as in the fatality rate chart, there is a very strong correlation between the changes in the Baker Hughes rig count and the total number of industry fatalities. But when we examine the components, there are interesting patterns. The drilling group showed a fairly stable number of fatalities with a rise associated with the sharp ramp up in drilling activity in 2007 before it collapsed in 2008 and 2009. The number of fatalities for the extraction portion of the industry showed a steadily declining trend during the period. The support group showed the greatest increase during the drilling boom associated with the climb in oil prices toward $150 per barrel and the growth in gas shale drilling. For the entire period, the support fatalities mirrored the movement in the drilling rig count.
Another interesting set of data accompanying The New York Times article was a chart showing the difference in fatality rates by company size and industry focus. We present that data in Exhibit 4. Not surprisingly, the data shows that smallest companies, i.e., those with fewer than 20 employees consistently have the worst fatality experience. The companies with the best records are the largest. This is not surprising as larger companies are better able to develop safety education programs. That, however, does not excuse the smaller companies from being more lax in both their development of safety programs and their enforcement of the guidelines and regulations that are at the heart of the programs. The data also shows that drilling companies have the highest fatality rates while oil and gas operators have the lowest rates. Again not a surprising result based on the inherent risk of the respective businesses. It behooves the managements of small companies in the oil and gas extraction industry to be more diligent about their safety efforts.
In the last part of The New York Times article the focus shifted to the oil and gas industry's fight against the tightening standards for highway truckers and their application to the industry. The Department of Transportation (DOT), the Federal Motor Carrier Safety Administration (FMCSA) and the Pipeline and Hazardous Materials Safety Administration have implemented new work rules limiting the hours an over-the-road truck driver can work and his use of communications equipment. Now, truckers will no longer be able to use hands-free cell phones. This restriction comes as the DOT works hard to implement rules to address distractions while driving that is believed to be the cause of vehicle accidents. Additionally, there has been a modification in the working hours of highway truckers. The proposed rule calls for total hours to be cut back from 82 hours to 70 in a seven-day period. Drivers must also observe 30 minutes of rest within every 8-hour work period, although they can rest at any time during the time span. Drivers are also limited to an 11-hour work day. The biggest change is the 70-hour week as drivers now must observe a 34-hour rest period (two full nights of rest) before starting their next week. The American Trucking Association has filed a suit in the U.S. Circuit Court of Appeals for the District of Columbia requesting that the court review the FMCSA rules in light of them being arbitrary and overly burdensome on the industry. These work rule changes will force companies to hire additional drivers and will cause industry operating costs to rise sharply. These rule changes, and other potential regulatory changes will impact the oil and gas industry, boosting costs and reducing operating flexibility. While rule changes won't stop drilling and fracturing operations, they could, and likely will, boost costs making more prospects uneconomic until commodity prices rise. The oil and gas industry needs to understand it is under attack. The attacks will come from many directions, and maybe not all anticipated, but they will continue to come.
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Managing Director, PPHB LP