How fracking fuels stable and sustainable supply chains

By Kevin O'Marah | January 17, 2014 | 0 Comments

Supply ChainBeyond Supply Chain

Heated debate on “fracking” has surfaced in Britain again this week, as opposing sides jostle for advantage in an argument that has already played out in the United States. Fracking, or hydrofracturing of deep shale formations holding deposits of natural gas, has transformed US energy markets and had a significant impact on the economy as a whole.

The impact has been so large, in fact, that US monthly trade deficit figures are at their lowest in four years and economic growth for the fourth quarter of 2013 looks to have been as high as 3.5%. Some in the UK want what the US has: cheaper, lower-carbon energy that is sourced domestically. This makes sense.

Fracking downsides: not so bad

The counter argument is all about environmental worries – mainly contamination of ground water or surface ecosystems. I am no geologist and recognise that extractive industries have a track record that demands close scrutiny, but to my mind fracking deserves no more, and probably less, worry than coal mining or offshore oil drilling, let alone conflict minerals.

The technology boils down to proven drilling techniques, plus the injection of huge amounts of water, sand and special chemicals to open cracks in the rock that allow gas to flow to the surface.

One academic from the University of Warwick summed up the environmental concerns neatly with the observation that most of what can go wrong depends on surface operations and how waste water is handled. Regulation and oversight is indeed required, but nothing more complex or unwieldy than that used to govern agriculture, air travel or most other industries serving human needs.

Having seen first-hand the development of natural gas in the Marcellus Shale formation under New York State over the past 10 years, and comparing it to the terrible Deepwater Horizon spill in the Gulf of Mexico, I’d say the downside of fracking is not so bad.

Fracking upsides: cost, reliability, lower emissions

The upside, however, is huge. From a regional supply chain perspective, abundant natural gas in the US has meant lower energy costs and, perhaps more importantly, less volatile energy prices. This was flagged by Ric Deverell, Head of Commodities Research for Credit Suisse in a live SCM World webinar broadcast last January, in which he predicted that oil prices would be “range bound” for the foreseeable future.

Supply network modelling, which depends on forecasting total landed costs years into the future, is much easier if oil doesn’t swing wildly as it has for most of the OPEC era. And of course, if you’re operating in North America you get the double win of lower costs and relative price stability.

Our manufacturing study last year revealed lots of planned investment in the US. A big part of the reason was lower risk. Fracking probably deserves much of the credit for this.

Beyond energy cost considerations, however, is the less visible but also essential petrochemical supply chain that feeds most consumer industries. Nearly a decade ago, at the urging of Procter & Gamble, I conducted a study of US chemical manufacturing infrastructure that pointed to a shortage of production capacity.

The issue, especially in consumer packaged goods, is that plastics for bottles and bags, which are largely made from natural gas, shouldn’t have to be shipped from the Middle East to plants that make food or personal care products for regional distribution in North America.

Raw material costs and reliability of supply are vital to the economics of the typical CPG factory, and cheap, abundant polyethylene is most definitely a good thing.

Supply chain planners also win an option to rebalance their carbon footprint accounts away from coal to much cleaner burning natural gas. Comprehensive carbon accounting includes tracking grid electricity sources to the fuel used for generation. In an area like Pennsylvania, which for decades was the heart of US coal mining, the switch to shale gas has been a big help in lowering carbon emissions.

To paraphrase the enigmatic American oilman T. Boone Pickens on natural gas: it’s cheap, it’s clean and it’s ours. The UK can say this too.

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