Four questions about fracking.

Author:Merrill, Thomas W.
Position:The Law and Policy of Hydraulic Fracturing: Addressing the Issues of the Natural Gas Boom
 
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CONTENTS INTRODUCTION I. WHY DID THE FRACKING REVOLUTION HAPPEN HERE? II. DOES FRACKING PRESENT ANY NOVEL RISKS? III. HOW SHOULD WE ADDRESS NOVEL FRACKING RISKS? IV. HOW WILL FRACKING IMPACT CLIMATE CHANGE? INTRODUCTION

It is difficult to think of a more timely or important topic than horizontal hydraulic fracturing and its impact on the environment. It is especially useful to have an exchange of views on this subject now, before the statutes, regulations, and court decisions start to roll in. Law professors--I cannot speak for anyone else--have a strong proclivity for backward-looking analysis, dissecting what should have been done after the basic direction of the law is set and the courts have spoken. It is much more useful to weigh the pros and cons of different approaches at an early stage in the evolution of an issue, although admittedly, it is also more risky. So I congratulate the Law Review on organizing today's conference.

Before I begin, it is appropriate to say a few words by way of background about horizontal hyrdrofracturing, of "fracking" for short. This will be familiar to many of you, but there may be others in the audience who are relatively unversed in the subject, and some context may help in following the debates on the various panels to come.

What exactly is fracking and why is it different from ordinary oil and gas field production? I am not a petroleum engineer. But let me offer my understanding, expressed in lay terms, for what it is worth.

Traditional production of oil and gas involves drilling a vertical pipe from the surface to an oil of gas reservoir in the ground. (1) Because of the weight of the rock and soil above it, the oil of gas is under great pressure. Once the pipe penetrates the reservoir, that pressure causes the oil and gas to rise through the pipe to the surface, where it can be gathered for commercial use. Reservoir is a bit of a misnomer here. Sometimes there is literally a pool of oil or gas trapped in a hollow space between sedimentary layers of rock in the ground. But often conventional oil and gas deposits are embedded in permeable rock. In order to extraer it, however, the rock must be sufficiently permeable that oil and gas will flow through it, into the pipe and up to the surface, once the deposit is penetrated by the pipe.

Petroleum engineers have long known that there is a great deal of oil and gas in the ground that is trapped in rock that is not permeable, and hence cannot be extracted by simple drilling of a vertical pipe. (2) In the parlance of the industry, the fissures that contain the valuable material are too "tight" to flow. These engineers have long sought a way to open up these fissures to let the trapped oil and gas flow out.

One technology for doing this, known as hydraulic fracturing, has been around for about sixty years and is now routinely used to enhance the production from conventional oil and gas wells. (3) Hydraulic fracturing involves pumping a fluid, sometimes called "slick water," down into the well under great pressure. The fluid is mostly water mixed with some proppant like sand or small ceramic balls plus a small amount of lubricating chemicals. (4) The pressure from the water fractures the rock, and the sand props the fractures open. The fracturing fluid, or most of it at any rate, is then pumped out, and if all goes well the oil or gas flows out behind it.

The recent innovation, which is responsible for all the stir, consists of combining hydraulic fracturing with a relatively new technology, horizontal drilling. This consists, as the name suggests, of drilling down vertically and then, at some point, turning the drill bit and moving horizontally through a seam of rock. (5) Much of the oil and gas in the ground that is trapped in nonpermeable rock is found in relatively thin seams of coal or shale. A couple dozen years ago, a number of independent gas producers started fiddling around with the idea that you could combine horizontal drilling with hydraulic fracturing, and this might be a way to extract gas from these thin seams of coal or shale. They would drill down to the seam, turn the pipe horizontally and thread it through the seam, and then inject the seam with fracturing fluid. After a long period of trial and error, an independent gas producer named George Mitchell, working in the Barnett Shale field near Fort Worth, Texas, figured out the right combination of horizontal drilling, pressure, and proppants to get the gas flowing out of shale. (6) Mitchell's breakthrough carne in 1998. His success was observed by other producers, and they quickly emulated his methods.

What was the impact of Mr. Mitchell's successful innovation? It now appears that it means nothing less than an enormous expansion of the reserves off oil and gas in the United States. No one knows for sure by how much. (7) To some extent it depends on prices going forward. It could mean a doubling of reserves; it could mean more.

The impact of this sudden surge in reserves is somewhat different for gas and oil. (8) Gas is transported primarily by pipeline, which means the relevant market is regional or national. Gas, if you will, is a closed market. An expansion of U.S. reserves of gas means a reduction in the price of gas nationally.

Oil is bought and sold on a world market, so the impact is different. A surge in oil reserves in the United States will yield some stabilization of the price of oil in the United States, but not very much. An expansion of reserves basically means more wealth for the United States and less for the countries from which we currently import oil. For both commodities, the sudden expansion of reserves means more jobs in the oil and gas extraction industries. Exactly how many more jobs is guesswork. President Obama, in his 2012 State of the Union address, said 600,000 additional jobs. (9) That is a big deal in a soft employment economy. The unemployment rate in North Dakota, where oil production using fracking technology is booming, is 3.7 percent, less than half the national average. (10) Workers on oil rigs in North Dakota can make $70,000 in five months. (11) Supervisors earn $320,000 a year. Landowners in North Dakota who are lucky enough to own two square miles of land in the Bakken shale area get $1 million up front and $500,000 a year in royalties, estimated to last two decades. (12)

For gas there are other dramatic effects, because the closed market means a fall in natural gas prices. (13) This has lots of benefits. Home heating bills go down. Electric bills are either stable or go down. Chemical and fertilizer plants that consume lots of natural gas or gas byproducts begin to move back to the United States. Some heavy industry may move back or stay because of lower energy costs.

Other impacts of falling gas prices are of more ambiguous import. I suspect that the fracking revolution probably means the end of the nuclear power industry in the United States. (14) Nuclear power cannot compete against cheap gas as a source of combustion for power generation. The fracking revolution also has the coal industry on the ropes. The coal producers like to blame the Obama Administration for launching a "war on coal," but a bigger problem is that under longstanding environmental regulations coal is less attractive as a source of power generation than cheap gas. Perhaps more problematically, lots of cheap gas also means the solar power industry and the wind power industry will need continuing government subsidies if they are to stay afloat. (15) If budgetary stringencies mean those subsidies are curtailed, they too could be done in by cheap gas.

On the oil front, the surge in domestic reserves will have less impact, because the price of oil is fixed by supply and demand in the world market, and the price will likely remain relatively high due to rising demand in Asia and the developing world. But there will still be big effects. U.S. imports of oil are way down, from 60 percent of total oil consumption to about 40 percent. The recession and improvements in fuel efficiency are partly responsible. (16) But the surge in domestic production, especially from North Dakota, is perhaps the biggest factor. North Dakota, almost overnight, now produces more oil than Alaska and is second only to Texas among U.S. states, all due to fracking technology. (17) The impact on the balance of payments is enormous roughly $100 billion a year is now going to those lucky workers and landowners in North Dakota rather than to Saudi princes. The International Energy Agency in Paris estimates the U.S. will be the largest producer of oil in the world by 2020, surpassing Saudi Arabia. (18) Energy independence, which every President since Nixon has claimed to be a top national priority, suddenly is beginning to look like less of a pipe dream.

So that is a capsule summary of fracking and why it is a very big deal; a "game changer" to use the current cliche. To say that this has come as a surprise to energy experts, politicians, and economists would be an understatement. No one saw this coming.

As a startling and unforeseen development, the fracking revolution presents a number of interesting questions. I will address four. These are not the only significant questions presented by this surprise. But they are ones that resonate particularly with me, a property and environmental law teacher. Here, in brief summary, are the four questions.

First, why did fracking technology, perhaps the most important innovation in energy technology in a generation, emerge in the United States rather than somewhere else? Answering this question may provide some clues about the conditions that promote innovation in developing new sources of energy more generally.

Second, are there any novel environmental risks presented by fracking? Fracking undoubtedly poses environmental risks, but we need to ascertain whether they are the kinds of risks that can be addressed by ratcheting up...

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