A Market Approach to Regulating the Energy Revolution: Assurance Bonds, Insurance, and the Certain and Uncertain Risks of Hydraulic Fracturing

• Date: 01 August 2015

45 ELR 10746 ENVIRONMENTAL LAW REPORTER 8-2015

A R T I C L E

A Market Approach to Regulating

the Energy Revolution: Assurance

Bonds, Insurance, and the

Certain and Uncertain Risks

of Hydraulic Fracturing

by David A. Dana and Hannah J. Wiseman

David A. Dana is the Kirkland & Ellis Professor of Law, Northwestern University Law School. Hannah

J. Wiseman is the Attorneys’ Title Professor, Florida State University College of Law.

In the industrial revolution of the nineteenth century,

the United States was transformed from a largely agrar-

ian nation of farmers to a major center of manufactur-

ing. With industrialization came new risks to public welfare

and, ultimately, changes in law to address those. e United

States is now undergoing another revolution, an energy

revolution that has the potential to transform the United

States from a net energy importer into the next Saudi Ara-

bia.1 Like the industrial revolution, this energy revolution

entails new risk s and, by necessity, will produce new lega l

responses to those risks. It has fomented one of the greatest

environmental regulatory challenges of our time, and c alls

for an eective solution that must be rapidly implemented.

is Article addresses a set of important legal responses that

so far have received sca nt attention from academic com-

mentators and lawmakers—market-based requirements for

enhanced bonding and, more importantly, environmental

liability insurance for wells.

e key to the current energy revolution is innovation

in the techniques that allow extraction of natural ga s from

underground rock formations. Advances in horizontal drill-

ing and hydraulic fracturing (or “ fracking”) have opened

up massive natural gas deposits in severa l regions of the

1. I’ E A, W E O 2012: E

S 1 (2012), available at http://www.worldenergyoutlook.org/

publications/weo-2012/.

United States.2 ese technologies have driven this revo-

lution by enabling unconventional well development—the

production of oil and gas from formations once deemed

inaccessible—which we describe as “unconventional devel-

opment” or “unconventional oil and gas.”3 Unconventional

development has begun, and will continue, to change the

landscape of this country. Wells already dot the surface of

many counties,4 and this is only the beginning. is devel-

opment will continue, with tremendous intensity, very

likely for several decades at a minimum.

Just as t he industrial re volution gave r ise to new risks,

such as risks from industrial air pollution and factory res,

unconventional development has generated new risks to

public welfare. ese risks are not, individua lly, as mas-

sive as those seen in the industrial revolution; public per-

ceptions and environmenta l protec tions have changed.

But cumulatively, they are likely to be substantial. Some

of these risks are relatively certain: we know from past

2. See Shale Gas Production, U.S. E I. A. (Aug. 1, 2013), http://

www.eia.gov/dnav/ng/ng_prod_shalegas_s1_a.htm.

3. We focus on unconventional wells because, rst, unconventional wells

pose more risks by adding more stages to the well-development process.

Although horizontal drilling of unconventional wells might cause some

risks to decline by lowering the surface footprint, on net the risks might

be higher. See Hannah J. Wiseman, Risk and Response in Fracturing Policy,

84 U. C. L. R. 729 (2013) [hereinafter Wiseman, Risk and Response].

Second, unconventional well development will be the most common form

of well development in the United States moving forward. See U.S. E

I. A., U.S. D’  E, A E O 2013

W P  2040 76-79 (2013), available at http://www.eia.

gov/forecasts/aeo/pdf/0383(2013).pdf.

4. For example, in Fort Worth, Texas, alone there are 2,095 producing wells

with 32 permitted. See Applications and Permits, C  F W,

http://fortworthtexas.gov/gaswells/default.aspx?id=50608 (last visited Mar.

12, 2015). Well numbers have also rapidly expanded in Pennsylvania, Colo-

rado, North Dakota (shale oil), and other states. See Wiseman, Risk and

Response, supra note 3, at 735-36.

e full version of this Article was originally published as: David A.

Dana & Hannah J. Wiseman, A Market Approach to Regulating

the Energy Revolution: Assurance Bonds, Insurance, and the Certain

and Uncertain Risks of Hydraulic Fracturing, 99 I L. R.

1523 (2014). It has been excerpted and updated with permission

of Iowa Law Review and David A. Dana & Hannah J. Wiseman.

Please see the full article for footnotes and sources.

Copyright © 2015 Environmental Law Institute®, Washington, DC. Reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.