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

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The Shale Oil and Gas Revolution, Hydraulic Fracturing, and Water Contamination: a Regulatory Strategy Article The Shale Oil and Gas Revolution, Hydraulic Fracturing, and Water Contamination: A Regulatory Strategy Thomas W. Merrill & David M. Schizer† Introduction ................................................................................ 147 I. Hydraulic Fracturing: A Technological Leap in Drilling for Shale Oil and Gas ............................................................ 152 II. Economic, National Security, and Environmental Benefits from Fracturing ..................................................... 157 A. Economic Growth ...................................................... 157 B. Energy Independence and National Security ......... 161 C. Environmental Benefits: Air Quality and Climate Change ........................................................ 164 1. Cleaner Air from Using Gas Instead of Coal .... 164 2. Climate Change: Reduced Greenhouse Gas Emissions from Burning Gas Instead of Coal ... 165 3. Climate Change: Offsetting Effects of Fugitive Methane Emissions .............................. 166 III. Familiar Risks That Are Not Unique to Fracturing ........ 170 A. Economic Competition for Solar, Wind, and Other Renewables ..................................................... 170 B. Air Pollution .............................................................. 172 C. Congestion and Pressure on Local Communities ... 176 D. Water Usage .............................................................. 177 † The authors are, respectively, Charles Evans Hughes Professor, Co- lumbia Law School, and Dean and the Lucy G. Moses Professor of Law, and Harvey R. Miller Professor of Law and Economics, Columbia Law School. We are grateful for comments at workshops presented at Brooklyn and Columbia Law Schools, and from Alan Bernstein, Jason Bordoff, Travis Bradford, Al Cinelli, Colin Davies, Robert Ferguson, Joey Fishkin, Mark Geistfeld, Kent Greenawalt, Michael Gerrard, Suzanne Goldberg, Geoff Heale, Susan Kraham, Brian Lee, Minor Myers, Ben Liebman, Ed Lloyd, Irv Rotter, Chuck Sabel, Fred Schauer, Peter Schuck, Cathy Sharkey, Charles Stanley, Peter Strauss, David Trice, Hannah Wiseman, Daniel Yergin, and Ben Zipursky. Copyright © 2013 by Thomas W. Merrill and David M. Schizer. 145 146 MINNESOTA LAW REVIEW [98:145 E. Induced Tremors and Earthquakes ......................... 179 IV. Novel Risks of Water Contamination ................................ 180 A. First Risk: Fracturing Fluid .................................... 181 1. First Fracturing Fluid Risk: Migration Through Subsurface Cracks ............................... 182 2. Second Fracturing Fluid Risk: Surface Spills ... 184 3. Third Fracturing Fluid Risk: Flow-Back and Produced Water ................................................... 185 4. Fourth Fracturing Fluid Risk: Cracked Well Casings ................................................................. 185 5. Fifth Fracturing Fluid Risk: Blowouts .............. 186 6. Studies on the Magnitude of These Fracking- Fluid Risks ........................................................... 187 B. Second Risk: Contamination of Water Wells with Methane ..................................................................... 192 C. Third Risk: Disturbance of Sludge or Other Residues in Wells Due to Fracturing ...................... 194 D. Fourth Risk: Fracturing Waste and Produced Water—Injection Wells and Sewage Facilities ....... 195 E. The Existing Regulatory Regime ............................. 197 1. State and Local Law ........................................... 197 2. Federal Law ......................................................... 200 V. Choosing a Regulatory Strategy for Water Contamination ...................................................................... 201 A. The Danger of Regulatory Overkill ......................... 202 1. Public Anxiety and Love Canal .......................... 202 2. Precautionary Principle ...................................... 204 B. Five Possible Regulatory Strategies ........................ 206 1. Prohibitions ......................................................... 206 2. Command and Control Regulation .................... 206 3. Disclosure ............................................................. 208 4. Liability Rules ..................................................... 209 5. Coasean Bargains ................................................ 210 C. Four Factors Influencing the Choice of Regulatory Strategy .................................................. 211 1. Heterogeneity of Risk .......................................... 213 2. Magnitude of Expected Harm ............................ 214 3. “Settlement” Costs of Ex Post Judgments ......... 214 4. Novelty of Risk .................................................... 215 D . Applying these Factors to the Risk of Water Pollution from Fracturing ........................................ 216 1. Heterogeneity of Risk .......................................... 216 2. Magnitude of Expected Harm ............................ 219 3. Settlement Costs ................................................. 221 2013] FRACKING AND WATER CONTAMINATION 147 4. Novelty of Risk .................................................... 221 E. The Regulatory Strategy for Water Contamination from Fracturing .............................. 222 1. The Need for Both Best Practices Regulation and Liability ........................................................ 222 2. Three Rules to Coordinate Liability with Best Practices Regulation ........................................... 224 3. The Supporting Role of Prohibitions, Disclosure, and Coasean Bargains ..................... 224 VI. Designing a Regulatory Regime for Water Contamination ....................................................................... 228 A. Causation................................................................... 228 1. Contamination Injury ......................................... 228 2. Pathway of Causation ......................................... 235 3. The Scope of the Harm ........................................ 236 B. Standard of Care ....................................................... 238 1. Our Hybrid Proposal ........................................... 239 2. Comparison of Strict Liability, Negligence, and Our Hybrid Proposal: Five Factors............. 239 C. Plaintiff Fault and Releases from Liability ............ 246 D. Measure of Damages ................................................ 247 E. Attorney’s Fees .......................................................... 248 F. Insolvency Risk ......................................................... 249 VII. Implementation Options ................................................... 250 A. Jurisdictional Scope .................................................. 251 1. Historical Practice ............................................... 251 2. Policy Justifications for State Regulation ......... 253 B. Implementing Body .................................................. 257 Conclusion................................................................................... 262 INTRODUCTION The United States has surpassed Russia as the world’s top natural gas producer,1 and according to the world’s most re- spected energy forecaster, the U.S. will also overtake Saudi 2 Arabia as the largest oil producer by 2020. This surge in U.S. 1. BP, STATISTICAL REVIEW OF WORLD ENERGY, JUNE 2013 22 (2013), available at http://www.bp.com/content/dam/bp/pdf/statistical-review/ statistical_review_of_world_energy_2013.pdf (U.S. production in 2012 was 681.4 billion cubic meters, compared with 592.3 for Russia). 2. INT’L ENERGY AGENCY, WORLD ENERGY OUTLOOK 2012 23, 138 (2012) [hereinafter IEA, WORLD ENERGY OUTLOOK 2012], available at http:// iea.org/publications/freepublications/publication/English.pdf; see also LEONARDO MAUGERI, BELFER CTR. FOR SCI. & INT’L AFFAIRS, HARVARD 148 MINNESOTA LAW REVIEW [98:145 oil and gas production would have seemed wildly improbable a decade ago. It flows from a revolution in U.S. oil and gas pro- duction. Energy companies have learned to tap previously inac- cessible oil and gas in shale and other impermeable (or “tight”) rock formations.3 To do so, they use “hydraulic fracturing” (“fracturing” or “fracking”), pumping fluid into shale at high pressure to crack the rock and release gas and oil trapped in- side. This “shale revolution” has created high-paying drilling jobs, revived the petrochemicals industry as well as other do- mestic manufacturing, improved our balance of payments, and increased the competitiveness of the United States in the global economy. It has also reduced our reliance on energy imports and enhanced our energy security. In addition, the shale revo- lution has enabled the United States to reduce greenhouse gas emissions over the past seven years—the largest reduction an- ywhere—by substituting natural gas for coal. Fracturing is controversial. By reducing the price of natu- ral gas, it may undercut the fledgling renewable energy indus- try, at least in the near term. The fracturing boom may also ex- acerbate air pollution, traffic and congestion. The technology uses significant amounts of water, and some aspects of fractur- ing operations may induce tremors and minor earthquakes. In all these regards, fracturing is not unique, since each of these risks arises in conventional oil and gas drilling and, for that matter, in other economic activity as well. The most unique risk associated with fracturing, which has 4 generated widespread public apprehension, is the potential KENNEDY SCH.,
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