Shale Oil and Gas Revolution

[Merrill]

The Shale Oil and Gas Revolution, Hydraulic Fracturing, and Water Contamination: A Regulatory Strategy

Thomas W. Merrill

Columbia University - Law School

David Schizer

Columbia University - Law School

February 19, 2013

Columbia Law and Economics Working Paper No. 440

Abstract:
The United States is expected to become the world’s largest oil producer by 2020, overtaking Saudi Arabia, and the world’s top natural gas producer by 2015, surpassing Russia. In the past decade, energy companies have learned to tap previously inaccessible oil and gas in shale with “hydraulic fracturing” (“fracturing” or “fracking”), pumping fluid at high pressure to crack the shale and release gas and oil trapped inside. This “shale revolution” has created millions of jobs, enhanced our energy independence, and reduced U.S. greenhouse gas emissions by substituting natural gas for coal.

Even so, fracturing is controversial. It may undercut the renewable energy industry, exacerbate air pollution and congestion, and use significant amounts of water. The most unique risk, which is the focus of this Article, is the potential contamination of groundwater. The fluid used in fracturing contains toxic chemicals. There is little evidence so far that subterranean fracturing can directly contaminate groundwater, and this risk may never materialize. The layer of shale that is fractured is usually thousands of feet below the water table, with a buffer of dense rock or clay in between. But there are other ways in which fracturing might contaminate groundwater, including surface spills of fracturing fluid, improper handling of waste, and the migration of natural gas into water wells. Some of these risks are familiar from decades of conventional oil and gas production, while others are new.

In response, this Article proposes a strategy for regulating water contamination from fracturing. For issues that are already well understood, we would rely on best practices regulations. For issues that are unique to fracturing and are not yet well understood, we would rely on liability rules – and, specifically, a hybrid of strict liability and a regulatory compliance defense – to motivate industry to take precautions, develop risk-reducing innovations, and cooperate in the development of best practices regulations. To facilitate more accurate determinations of causation, we recommend information-forcing rules (e.g., requiring energy companies to test water quality before they begin fracturing). We also suggest other design features for the liability system, such as one-way fee shifting and provisions to ensure that defendants will not be judgment proof. To ensure that the regulatory regime draws on existing regulatory expertise and is both dynamic and tailored to local conditions, we recommend keeping the regulatory center of gravity in the states, instead of fashioning a new federal regime.

papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2221025_code139407.pdf?abstractid=2221025&mirid=1