Tuesday, June 26, 2012

After the Fracking Is Done

In the late 1990s, in Texas, the energy industry developed new techniques to release gas and oil from underground rock formations by injecting pressurized streams of water and chemicals into the ground. The hydrofracturing -- or "fracking" -- gold rush ensued, and now it is not limited to traditional energy-producing states, but rather reaches from the Great Plains to New England. The scale of this energy revolution in the United States can hardly be over-stated. There are now wells being developed in more than a dozen states, with projections that the United States will become the Saudi Arabia of natural gas. Whether you are from Illinois or New York, Maryland or Pennsylvania, you already are, or soon will be, living in a state literally covered with hydraulic fracturing operations.

A great many people want to stop this fracking gold rush. One fear about fracking is that it will result in natural gas and toxic chemicals seeping into groundwater that is used for drinking water. HBO's documentary Gasland famously highlighted this concern with a scene of water from a kitchen sink exploding into flames. The energy industry claims that the Gasland documentary is completely misleading, and the concerns about fracking are hysterically overblown. Regarding fracking, at least one thing is indisputable: fracking is going to continue to expand in the United States. There is simply too much money to be made -- and too strong a desire for a new domestic energy source -- for the federal or state governments to stop fracking. Even New York State, the state that has taken the most cautious approach to fracking, appears poised to permit fracking on a significant scale. Fracking, whether you like it or not, is here to stay.

But not foreover. One day, all the shale gas and oil will be depleted. The operators will leave. Depletion is just a reality of a non-renewable energy source. And if the history of the revolution in industrial production following World War II or the history of mining is any guide, fracking will not leave a pristine environment behind. Soils will have been contaminated, surface waters will have been contaminated, groundwater will have been contaminated. Some of the contamination will be due to inadequate regulation, some to inadequate regulatory enforcement, some just to accidents. Given the vast scope of fracking we will see, and the fact that fracking involves the release of toxic chemicals and generates potentially hazardous wastes, we must assume that there will be sites and natural resources in need of remediation (even if most fracking operations leave a reasonably clean landscape). And so the question inevitably will arise -- who will pay to clean up the mess?

Who indeed. The fracking operators almost certainly will cease to exist as legal entities after the fracking is done. American law makes it almost impossible to pierce the corporate veil and seek money from the individuals and corporations who invested in and owned defunct or dissolved corporate entities. The farmers and others who own the land where fracking occurred will lack the resources needed for remediation, and they will have a good argument that in fairness they should not have to pay for remediation. Of course the federal and state government could pay, but, with massive deficits and massive public needs, that seems very unlikely.

There is a straightforward answer: require that operators buy adequate remediation insurance as a condition of receiving a drilling permit. Neither proposed federal fracturing rules for federal lands nor the various state fracturing regulations require that operators buy and maintain insurance. However, there are precedents, such as nuclear energy, for mandating that private operators carry insurance. Operators will oppose being asked to bear the cost of insurance but there is no reason to think that they could not absorb this cost. Federal and state regulators have not pushed hard for insurance requirements because their focus has been on the technical issues of how to regulate fracking right now - issues like how thick the well pad should be. Regulators are being myopic in not attending to the likely long-term consequences of fracking, and hence the need for a source of clean-up funds after the fracking is done.

Insurance has another important upside: insurance companies can help encourage the safest practices by operators. Insurers are only going to want to insure fracking operations that use the best known safety practices. Operators will have to provide verification to their insurers that best practices are consistently followed. There is a currently a heated debate as to whether the regulation of fracking should be primarily a matter for the state governments or instead for the federal government. But neither the state governments nor the federal government may be able to keep track of changing fracking technologies and practices. Bringing insurers in as de facto regulators will make the fracking gold rush safer and also will provide a source of financing for those instances where fracking leaves behind a fractured natural environment.

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