Friday, December 2, 2011

As a "Backyard" Industry Fuels an Economic Transition, Who's Watching?

The Wall Street Journal reported this week that for the first time in sixty-two years, America may be a net exporter of fossil fuels.  Much of this astounding transition--although partly resulting from our economic woes, which reduce our own fuel consumption--has been driven by drilling that occurs, almost literally, in individuals' backyards. Energy companies approach mineral owners, enter into leases, and begin drilling.  (Note, though, that many states require minimum setbacks between wells and dwellings and that many wells are still in rural areas.) The oil and gas industry always has operated this way, but its uniqueness becomes increasingly apparent as technologies like hydraulic fracturing have enabled recent fossil fuel booms.  As more wells emerge, from the Fort Worth suburbs to Pennsylvania farms, some of the old English nuisance cases come to mind.  Brick kilns in the middle of residential neighborhoods, such as the kiln built by a defendant constructing his house (Bamford v. Turnley (1862)), seem to be outdated anecdotes.  But oil and gas extraction is, inherently, a backyard industrial activity.  Although it is conducted by sophisticated companies, the industry is comprised of millions of  industrial operations--some tiny, some larger (think BP)--and this leads to unique environmental and social challenges. 

A front-page article in The New York Times today reminds us of one of these complications:  the lease.  The Times has conducted a survey of surprising magnitude, which addresses more than 111,000 oil and gas leases from Texas, Pennsylvania, and a few other states. The Times notes that this is, still, a small sample, as there are millions of leases in total.  From the 111,000+ leases reviewed, it concludes that "[f]ewer than half the leases require companies to compensate landowners for water contamination after drilling begins," for example, and that "[i]n the leases, drilling companies rarely describe to landowners the potential environmental and other risks" of production.  Electronic versions of the leases are available here.  The article then suggests, based on several interviews with mineral owners, that many people may not know exactly what they're getting into when signing an oil or gas lease.  The article concedes that state law does protect lessors (and surface owners) against some potential risks.  Pennsylvania, for example, has a rebuttable presumption that water well contamination within 1,000 feet of a wellhead within six months of drilling or completing the well is caused by an oil or gas operator and requires the operator to replace contaminated supplies.  As the Times points out, though, replacement requirements may not cover some costs, such as heating the water tank to prevent it from freezing.  The Times also reports that at least one lessor was surprised to learn that oil and gas operators could simply fill in surface pits that had contained drilling wastes and then seed over them.  (State regulations for storage and disposal of drilling wastes vary significantly.  Disposal of some wastes may occur on site through burial, but states often require soil testing first, and certain wastes must be transported off site.  Regulations for site remediation also vary, and some states, as the Times briefly notes, have surface damages acts that give surface owners more control over drilling activities and their location and effects.  The common law, too, also has some protections for surface owners.) 

Beyond protections for lessors and surface owners in both leases and law, this "backyard" industrial boom also raises the question of externalities. Some lease provisions that protect the lessor may benefit neighbors, too.  A requirement that the surface be restored after drilling might protect neighbors against unsightly views, for example.  But a number of externalities--from air pollution from drilling and fracturing to potential off-site migration of surface chemical spills--may not be controlled within the lease, causing many to question whether federal and state regulations have picked up the slack.  As I've mentioned in earlier posts, the EPA is evaluating potential water quality impacts of fracturing (particularly in shales), and New York has conducted an extensive environmental review to identify restrictive conditions that will be placed on drilling and fracturing.  The Ground Water Protection Council--an association of state regulators--has argued that regulation of drilling and fracturing is adequate, while environmental groups and others support more controls.  (The GWPC, although defending existing state regulation, has contributed to new voluntary initiatives, such as, which discloses chemicals used at well sites.) 

Much of the debate can be reduced to one simple fact:  We have a growing number of oil and gas wells, in some cases in areas that have not previously experienced heavy drilling.  As with any other activity, the more drilling activity there is, the more potential for effects--both for mineral and landowners and the public at large.  This may not mean that we should immediately jump to more regulation, necessarily, but we should certainly reconsider the adequacy of regulation and the areas in which it needs rapid modification.  A useful analogy might be found in other activities, which, individually considered, may have low risks.  Take driving, for example.  With one car or truck on the road, we might not be very concerned; with 254 million, we move toward increasingly detailed controls on safety and emissions. 

-Hannah Wiseman

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