Part I. Hydraulic Fracking
The term Hydraulic Fracking (or Fracking for short) is a method of extracting natural gas from layers of rock shale . Shale rock is one of the most abundant types of sedimentary rock. It is formed from when silt and clay-sized minerals are compressed, earning the term “mud stones”. Shale is made up of many think layers and when the rock splits, it splits into think pieces along these layers . An unconventional oil deposit, shale rock can contain organic kerogen materials (up to 1/3 of the rock’s mass). This material can produce liquid and/or gaseous hydrocarbons but the shale must be heated or treated with solvents first for these hydrocarbons to be escape. The process of freeing up the hydrocarbons from shale is inefficient compared with conventional oil extracting process (i.e. drilling into oil or gas fields). The whole processes produce emissions and waste products .
Figure 1 Hydraulic Fracking
While the process is inefficient, it is a process that oil and gas companies are currently exploring. This is made possible because of advancements in drilling technologies that made previously inaccessible shale layers reachable. The hydraulic fracking process is fairly simple. A vertical well is made by drilling through the Earth. Then a horizontal drill creates an insertion into the shale laminations. This horizontal section of the well allows fracking fluids to be forcefully injected, freeing up the natural gas stored in the shale rock. The normal depth of the well is about a mile and normally takes up to a month of drilling time. These wells are encased in cement and extract natural gas at supposedly higher extraction rates than traditional methods .
The promise of hydraulic fracking is no laughing matter. According to the International Energy Agency, fracking can recover a good portion of the 208 trillion cubic meters of natural gas and 47 trillion cubic meters of methane that has remained inaccessible prior to hydraulic fracking technologies . The fragility of the rock formations that encase natural gases makes it improbable to extract them, until the advancement of economically-viable hydraulic fracking techniques. Hydraulic fracking is already practiced in the United States and other countries are closely following suit .
An estimate from the National Petroleum Council says that the potential for hydraulic fracking is tremendous. According to the council, about 70% of natural gas extraction in North America can be carried out using this technique. Added to this is the savings on natural gas production by the United States which would be lost without the use of hydraulic fracking. As such, fracking is an economic activity that has a multiplier effect. It creates jobs and expands local communities, while helping stabilize and sustain the national economy .
However despite the many benefits of fracking, it is facing very strong opposition from many groups. Fracking is believed to be dangerous to the environment, as fracking would require anywhere from 7.5 million to 19 million liters of water for extraction, while a traditional well will require only about 200,000 liters. The reagents used to mobilize the natural gases trapped in shale rocks are known to contaminate drinking water resources thus potentially causing more harmful effects to local communities. The dangers are real and palpable and have cause the Council of Canadians to call a stoppage to all fracking operations in all of Canada. According to The Council of Canadian’s national water campaigner Emma Lui “there's not enough known about the long term effects of fracking fluids on water sources and its impact on climate change" . These statements have created a lot of detractors of hydraulic fracking and as such have become a controversial issue worldwide.
The issues about hydraulic fracking are a concern for many stakeholders. Like many other organizations and economic activities around the world, hydraulic fracking has its share of stakeholders . When a person or group within or outside the organization has a specific interest in an organization, they are called “stakeholders”. They are concerned with the organization because of one or a combination of a couple of things – the organization can affect them directly through its actions, affect them indirectly through their policies, or affect them and others because of the organization’s objectives. Stakeholders can be shareholders of an organization (those that have ownership of the organization such as a corporation), government agencies, directors of the organization, employees, creditors and debtors, suppliers, workers unions, customers and communities where the organization is situated in, etc. Because of the variety of stakeholders and their involvement in the organization, not all stakeholders are equal. There are many kinds of stakeholders and conventional wisdom classifies them according to the following characteristics:
- Interest in the organization
- Involvement in the organization
- Effect of the organization to their overall well-being
- Position relative to the organization
- Level of involvement within the organization
In this case, the stakeholders include the following:
- Shareholders of the company that are undertaking natural gas extraction through hydraulic fracking – the company’s owners or shareholders are after the maximization or optimization of their ownership. They are affected by the organization’s policies and activities but are often non participants in the organization’s activities. Shareholders voice their opinions through directors of the organization.
- Directors, manager, employees of those private corporations – are direct stakeholders of the organization. Their involvement is very high level and as such directs the policies of the organization. Management and employees are direct stakeholders of the organization as well. Their involvement is high because they implement the policies and programs of the organization and are responsible for the day-to-day management of the organization’s business.
- Customers of those private corporations – are indirect stakeholders of the organization. They are affected by the outcome of the organization’s policies and programs but have no involvement with how the organization is managed.
- Government officials and agencies – are indirect stakeholders of the organization but have a high degree of involvement in the way the organization is managed due to the policies set by government officials and agencies.
- Communities those private corporate operate – are indirect secondary stakeholders of the organization. They could be supporters or opponents of the organization. They have no direct involvement in the management of the organization but may voice out their concerns through government agencies or through their own vigilance.
Figure 2 Stakeholders of Hydraulic Fracking
Part 2
The concept of elasticity is a cornerstone in modern economic theory. Elasticity measures the changes in consumer demand with respect to the changes in the price of a particular good or service. The general rule is that an elasticity having a value that is greater than one (1) means that the demand for a particular good or service is affected by the price of that commodity and if the value is less than one (1) people will consume that product or service regardless of the change in price .
Because energy supply is finite, the aggregate demand (total demand) is stable over a given period however; there will be fluctuations on the demand for energy given the factors affecting the price of energy. Factors that affect the price of energy include the cost of fuels, the construction and operating costs of power plants, the construction and operating costs of transmission and distribution lines, weather conditions, and government regulations.
When energy prices go up because of any of these factors, some sectors of society are affected. These sectors are those that could not bear the cost of increasing fuel, making it difficult for them to acquire the same amount of energy.
Figure 3 Energy Elasticity
The graph above shows that the supply of energy has a steep curve. This is due to the limitations on the supply of energy. Despite increasing energy prices, the resources required for its supply are either finite or would take longer periods to develop and operationalize. On the other hand, countries have energy users that have different demand curves. Demand 1 would be the typical demand curve for say residential users while Demand 2 would be the typical demand curve for industrial users. When prices of energy increases, the industrial users of energy, needing it for economic activities, would be willing to pay higher prices despite the increase while residential users will opt to consume less of energy to fit their budgets. This explains why some sector of economy suffers when energy prices fluctuate. The overall elasticity of energy for a given country is thus an important aspect that explains economic growth and proper regulation.
Energy elasticity is an important aspect of energy security. In modern economic theory, the price elasticity of demand is a measurement of the responsiveness of the amount of goods and services demanded with respect to price changes of that particular good or service. Price elasticity of demand is perfectly inelastic if the rate is zero (0), it is inelastic if the ratio is between zero and one (1), unit elastic if it is equal to one and perfectly elastic if the ratio is greater than one . Related to this, energy elasticity is a term that compares the change in energy consumption for every one percent change in the Gross Domestic Product of a country .
Energy elasticity is an important benchmark of development. For example, India’s energy elasticity in 2005 was computed at 0.80. This was the country’s energy elasticity as it incurred a GDP growth rate of 7 – 8 percent. In 2007, India reported that its GDP growth rate was at a high of 8 percent and that is energy consumption growth is only 3.7% which meant that it was able to make more efficient use of its energy resources . On the other hand, China’s energy elasticity is about 1.5 from the years 2003 to 2004 and many economists see that China’s elasticity is beyond 1.5 currently .
Part 3
Energy companies are concerned with the improvement corporate social responsibility. There is no single best definition of corporate social responsibility since so many corporations employ social responsibility strategies in many different ways. However, it can be defined as a form of self-regulation that a business integrates into its business model which focuses on what the organization wants as an impact to its stakeholders rather than its overall effect on the organization itself . As such, the organization implements, monitors and regulates is corporate social responsibilities to effect what they organization believes will do the community good by taking actions that are beyond what the law requires or the interests the organization protects. The concept is not new, corporate social responsibility has been a business buzz word since the 1960s in response to the use of the word “stakeholder” which was used to describe the individuals or groups that the organization impacts (Panjabikesan, 2011). However there are many different opinions about corporate social responsibility. On one hand, experts say that these additional tasks distracts organizations from pursuing their purely profit motivated strategies and thus sacrifices the efficiency of the organization in the long-run. On the other hand, some critics believe that having corporate social responsibilities balances out the sensibilities of corporations. A study conducted by leading researchers McWilliam and Siegal indicated that there is no financial impact of corporate social responsibility to firms .
Carroll’s model for Corporate Social Responsibility (CSR) is shown below.
Figure 3 Carroll's Corporate Social Responsibility Model
The model shows that energy companies are complying with economic and legal responsibility. Even companies that have caused environmental disruption, such as British Petroleum is complying with its legal responsibility. On April 20 2010, an exploratory offshore drilling rig known as the British Petroleum Deepwater Horizon exploded in the Gulf of Mexico just 40 miles off the coast of Louisiana. The explosion killed eleven workers and injured 17 others. On April 22, 2010 the oil rig BP Deepwater Horizon sank and the appearance of a 1 by 5 mile oil slick was discovered by the US Coast Guard. The explosion of the BP Deepwater Horizon and the massive oil spill that happened as a result of the accident is the most recent of the environmental woes of British Petroleum, the third largest oil and gas producer in the world .
Energy companies are trying to comply with its ethical responsibilities as well but are facing negative bias. Oil companies are partly to blame. The oil industry has its share of questionable competition strategies despite the fact that it has enjoyed profitable margins due to the inelasticity of price that the product commands. Oil is very much like the tobacco industry in the United States, it faces dangers of its own doing. It has enjoyed a very privileged status but this status has been riddled with controversy including charges of bribery, political maneuvering, questionable corporate governance and some high-profile lawsuits. The bribery scandal that is most prominent is the battle for oil contracts in Kazakhstan in the 1990s. The case involved a potential US$ 78 million in bribes paid out to government officials through a string of European banks. Other parties have been identified as either a party of the bribery scandal, participating with the American oil companies or acting in their own accord to protect their own interests. All the people that were identified are part of major oil industry players .
Energy companies however have been on the front pages of philanthropic activities. In 2012, Chevron Corporation gave $262,430,000 cash, or 0.6% of its 2011 pre-tax profits according to Forbes magazine . The Wall Street Journal reports the same, with a report from various research agencies saying that in this year alone, energy companies have announced the sale of assets for the funding of energy-related research and philanthropic activities . This involvement in philanthropy, while not entirely new, is a laudable act by energy companies and heralds the evolutionary changes of these business organizations, into more complete, socially responsible entities as originally described by Carroll.
Reflection
The UK Government involvement impacts on the supply and price of energy to business through its regulatory actions. The UK Government’s intention is to ensure the energy security of the country. This translates to consumers having access to energy at prices that are needed to sustain a healthy economic position. Thankfully, the UK has a very strong base for energy markets that have contributed to energy security. The UK is also blessed with extensive energy resources from the North Sea and regulations that are firm, equitable and enforceable.
However, the UK’s energy system still exists with risks coming from many internal and external factors. While it is laudable that the UK Government is striving to mitigate these risks, it is quite impossible to avoid each and every one of them. The most impending challenge is that of the country’s continuous dependence on fossil fuels, its low-carbon emission responsibilities and renewable energy generation. The UK Government’s response is the strengthening of its energy policies. For example, the government seeks to attract investments in energy infrastructure through the energy market reforms, improving the planning system for new entrants in the technology sector thus expanding the generating capacity of the country, improving energy efficiency and preparing for possible emergency situations.
I feel that the UK is in an advanced stage of energy planning and securitization. The policies that have been installed are sufficient to protect the country from possible shocks due to energy related issues and have taken huge steps in securing new energy sources. While it is not leading the race like other countries in terms of energy generation, it is not lagging very far behind. The country has reiterated its commitments to global change, including that of better energy utilization and distribution, that benefits the British people immensely.
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