The Fracking Revolution: Shale Gas as a Case Study in Innovation Policy

• Jurisdiction: United States,Federal
• Publication year: 2015
• Citation: Vol. 64 No. 4

The Fracking Revolution: Shale Gas as a Case Study in Innovation Policy

John M. Golden

Hannah J. Wiseman

THE FRACKING REVOLUTION: SHALE GAS AS A CASE STUDY IN INNOVATION POLICY

John M. Golden^* Hannah J. Wiseman^**

ABSTRACT

The early twenty-first century has witnessed a boom in oil and natural gas production that promises to turn the United States into a new form of petrostate. This boom raises various questions that scholars have begun to explore, including questions of risk governance, federalism, and export policy. Relatively neglected, however, have been questions of why the technological revolution behind the boom occurred and what this revolution teaches about innovation theory and policy. The boom in U.S. shale gas production reflected long-gestating infrastructure developments, a convergence of technological advances, government-sponsored research and development, the presence or absence of intellectual property rights, rights in tangible assets such as land and minerals, and tax and regulatory relief. Consequently, the story behind the boom reaches far beyond the risk-taking and persistence of George Mitchell, whose independent production company achieved pioneering success with hydraulic fracturing (fracking) in Texas' Barnett Shale. Indeed, the broader story demonstrates how a blend of distinct policy levers, reasonably adjusted over time, can combine to foster a diverse innovation ecosystem that provides a robust platform for game-changing innovation. As exemplified by this story, the centrality of other policy levers can mean that patents play only a modest role, even in spurring technological development by profit-driven private

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players. Other lessons drawn from this case study include "negative lessons" about the possibility and even likelihood of downsides of a technological boom or the policies used to promote it—for example, environmental damage that more careful regulation of a developing technology such as fracking might have avoided. Anticipatory and continuing attention to such potential downsides can help prevent innovation-promoting policies from becoming "sticky" in a way that undercuts innovation's promise and popular appeal. Such lessons can helpfully inform efforts either to extend the United States' "fracking revolution" abroad or to develop other potentially revolutionary technologies such as those associated with renewable energy.

Introduction..............................................................................................957

I. The Shale Gas Boom and Technologies Behind It ...................964

A. Boom in U.S. Production of Natural Gas .................................. 964
B. The Web of Technologies Behind the Boom .............................. 968

II. Infrastructure and Markets Beyond the Wellhead.............974

A. Pipelines and "Pipeline Neutrality" ......................................... 976
B. Oil and Gas Markets ................................................................. 981

III. Government Support.....................................................................983

A. Publicly Funded Research and Public-Private Partnerships ... 983
B. Tax Relief................................................................................... 989
C. Regulatory Relief....................................................................... 995

IV. Intellectual Property, Complementary Assets, and Sharing...........................................................................................1000

A. Complementary Assets, Financing, and the "No Patents" Story ......................................................................................... 1000
B. Information Sharing ................................................................ 1003
C. Secrecy and Non-Kitchian Patents .......................................... 1010

V. Learning from the Case Study..................................................1017

A. Lessons for Innovation Policy and Theory.............................. 1018

1. Patience and Stable Reward Mechanisms......................... 1018
2. A Diverse Innovation Ecosystem ....................................... 1019
3. Government and Infrastructure ......................................... 1020
4. Mixed Information Strategies and Non-Kitchian Patents . 1021
5. Innovation in Governance ................................................. 1023

B. Applications Abroad and to Other Technologies .................... 1027

1. International Transfer ....................................................... 1028
2. Renewable Energy ............................................................. 1031

Conclusion................................................................................................1037

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Introduction

Innovations in hydraulic fracturing and horizontal drilling (often collectively referred to as "fracking")¹ have produced a technological revolution in natural gas and oil extraction. The United States, the world leader in these technologies' development and exploitation, has suddenly returned to the role of energy-producing superpower.² Cheaper and more stably priced natural gas, commonly derived from underground shale formations, has promised to provide a long-lasting boost to a flagging U.S. economy,³ even aiding in a revival of U.S.-based manufacturing.⁴ Both positive and negative spillover effects associated with the boom in use of new extraction technologies—spillovers that range from the economic to the environmental or political⁵ —promise to reach not only across the United States' continental

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breadth but around the globe.⁶

The technological revolution that preceded this U.S.-centered oil and gas boom represents a massive burst of innovation that could hold lessons for further technological development, including additional energy transformations. The revolution reflects a classic disruptive innovation, potentially the very kind of innovation that government policy should most look to foster. Yet few scholars have explored why this innovation occurred, or how the story behind the fracking revolution comports with or departs from dominant innovation theory. This Article examines the public policies, economic forces, and private initiatives that helped produce the fracking revolution, focusing on the development of shale gas extraction in particular. The Article primarily concentrates on developments leading to the revolution, including decades of work that preceded late-twentieth century breakthroughs. But the Article also gives some attention to the post-breakthrough diffusion of new extraction technologies and difficulties encountered as use of those technologies has become widespread.

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Studying innovation through a case study of the fracking revolution is apt in light of current levels of understanding. Limits on our knowledge of the mechanics of innovation often renders generalized theorizing and narrow econometric studies of relatively little use for drawing practical, policy-oriented conclusions. In this context, case studies of specific innovation trajectories can inform the intuitions that necessarily guide much present policymaking, and case studies can support and guide later theoretical and econometric efforts. Such focused observational studies have substantial limits. But we suspect that the physicist Richard Feynman had reason for listing observation first in describing "[o]bservation, reason, and experiment [as] mak[ing] up what we call the scientific method."⁷ As with careful recording of celestial motions in the early stages of the Scientific Revolution, careful observation of specific innovation trajectories might be among the best ways to advance understandings of innovation and innovation policy.⁸

Why study fracking as a foundation for more nuanced innovation theory? Pharmaceutical, biotechnology, communications, and computer-related technologies have commonly provided the basis for modern debates about how innovation works.⁹ Given the social and political salience of these technologies, the attention devoted to these areas is understandable. But energy technologies seem a more than worthy addition to this common grouping. The energy sector has a long history of cutting-edge innovation, and innovations in energy technology have long undergirded innovation in much of the rest of the economy. The Industrial Revolution motored forward on the basis of, first, new technologies for harnessing wind and water¹⁰ and, second, even newer,

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interconnected technologies for extracting coal and harnessing steam.¹¹ The modern Information Revolution has relied on later advances in the production and harnessing of electrical energy.¹²

In short, energy technologies are vitally important, and fracking has proven remarkably so. It also happens to have a fascinating origin story. A common quasi-myth is that fracking's commercial development is largely the tale of a single oil-industry entrepreneur, George Mitchell, who bucked conventional wisdom, risked millions, and persisted for years in efforts to make unconventional gas reserves commercially exploitable.¹³ Indeed, Mitchell deserves great credit both for unusual persistence and for his company's ultimate development of a formula for combining horizontal drilling and "slickwater" fracturing in a way that industry adapted with awesome rapidity to shale and other formations around the United States.¹⁴

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But even a Mitchell-centric view of fracking's development acknowledges that there were other factors that contributed critically to the technological revolution behind commercially viable shale gas extraction and the associated boom in oil and gas production more generally. A great number of these related to physical, legal, and economic infrastructure including pipelines, natural gas markets, and property systems for land and mineral rights, which provided a foundation upon which unconventional natural gas...