called “fracking,” poses a risk to the
production side of the ledger and has
gained some traction at the national
level. The process has for years drawn
concerns about potential contamination
of groundwater, and the drilling indus-
try has come under increased scrutiny
in recent months as a succession of
fracking-related accidents and the
release of several controversial studies
have brought the practice back into the
public’s attention.
In May, U.S. Secretary of Energy
Steven Chu appointed a panel of
experts representing environmental
organizations, industry and state gov-
ernment to review environmental and
public safety concerns associated with
the use of hydraulic fracturing to
extract natural gas from shale deposits.
The committee will develop recommen-
dations on immediate actions to improve
the safety and environmental perfor-
mance of fracking, while producing
before the end of the year consensus
advice for regulatory agencies on best
practices for hydraulic fracturing.
Further, the EPA is expected to make
public by the end of 2012 the initial
results of a detailed study of fracking.
The EPA also introduced this sum-
mer a proposal for the first-ever federal
regulations aimed at emissions of haz-
ardous air pollutants and volatile organ-
ic compounds (VOCs) from natural gas
hydraulic fracturing activities. Existing
EPA regulations on VOCs were last
revised in 1985 and apply only to natu-
ral gas processing facilities, whereas the
proposed regulations would apply to
various segments of the industry, includ-
ing production wells, storage tanks and
compressor stations. The new emissions
regulations on fracking are to be final-
ized by February 2012.
As the impetus grows for the
national energy mix to shift away from
coal and toward a cleaner and more
diversified group of fuels, the role of
natural gas – and the contribution of
shale gas resources – is likely to become
increasingly important and ever more
scrutinized. Any limitations placed on
the use of hydraulic fracturing or addi-
tional costs incurred by producers to
continue to drill in shale formations
Figure 3. Risk Management Process Flow.
>>>>>>>>>>>>>
Determine
Choose
>
> > > > > > > > > > > > > > > > > > > >
Risk
Tolerance
Instruments
Document
Procedures
Evaluate
& Adjust
>
>
>
>
>
>>>>>>>
Source: Fellon-McCord.
could significantly impact the domestic
production of natural gas.
The U.S. natural gas industry has
regularly been in a state of flux over the
last decade, and while consumers are
currently enjoying a low-priced environ-
ment with limited volatility, it should
not be assumed that these conditions
will be maintained indefinitely. As such,
an active approach to risk management
is as important now as it ever has been.
An active approach to risk
management is as important
now as it ever has been.
Best Practices in Risk
Management
An effective risk management strat-
egy can mitigate price risk, reduce vola-
tility, protect corporate profits, ensure
budget performance for nonprofits and
stabilize future cash flows. An active
approach to risk management allows for
the greatest likelihood of success in
energy procurement, even if the active
decision is to do nothing. Choosing to
accept the risks of the open market can
be just as effective as committing to a
fixed-price position, depending on the
goals and objectives of individual pur-
chasing programs.
In actively managing risk, natural
gas consumers should develop and main-
tain a clear strategy, including the deter-
mination of risk tolerance or appetite for
risk. It is important to institute formal
policies and procedures, educate deci-
sion makers and review the strategy reg-
ularly. It should never be assumed that
an existing strategy is applicable in every
kind of market. As market dynamics and
company goals change, risk management
strategies should adapt accordingly. (See
the process flow for reviewing and
adjusting strategies in figure 3.)
Jason Willan began his career in the nergy industry in 1999 and joined Fellon-McCord in October 2005. He currently serves as director of risk management and research, leading the team responsible for monitoring and analyzing energy commodity
markets as well as regulatory and legislative issues
impacting the price and reliability of energy. Willan is
a member of Fellon-McCord’s Market Committee and
the managing editor of Fellon-McCord publications.
He studied business and economics at Bellarmine
University and graduated with a bachelor of arts
degree. Willan can be reached at jwillan@
fellonmccord.com.
