Tuesday, December 23, 2014

New York’s Fracking Failure

Environmental groups and other opponents of high-volume hydraulic fracturing (also known as fracking) for oil and natural gas have roundly applauded Governor Cuomo’s decision to ban the process in the state of New York. The ban, which confirms New York’s more than five-year moratorium on the process, has been lauded as an environmental success and a model for other states.   The ban is neither. 

Oil and natural gas prices are at their lowest prices in years. Interest in expanding drilling in the Marcellus Shale, which is the geologic formation holding natural gas deposits under New York, Pennsylvania, and West Virginia, is correspondingly low.  That makes the fracking ban an easy decision because there is relatively limited interest in drilling in state.

There are those with interest in drilling in New York, of course, but as long as prices are low and there are other places to drill (like Pennsylvania and West Virginia), that interest will remain modest.  The ban also raises the value of Pennsylvania and West Virginia mineral rights by reducing competition, so companies with interests in the entire region have little reason to weigh in forcefully.

In this environment, then, an outright ban was easier to put in place than real and stringent regulations to help ensure the fracking process is done with minimal risk and maximum gain. An outright ban is the easy road because it minimizes the potential fight. Companies engaging in hydraulic fracturing around the country would object to new regulations in New York, even if they don’t have interest in drilling in the state because they are afraid the states where they drill would follow New York’s lead.  But no one will fight about a ban in a state where they don’t want to drill. 

When natural gas prices rebound – and they will rebound – money will flow into the state to overturn the ban and allow access to the natural gas.  The economic pressure will be enormous and when the financial potential reaches the point that large and diverse groups in the state see the possibility of significant gain, it’s highly likely the ban will be reversed through legislative or other political action.  At that point, the debate will not be about the quality of regulations or enforcement – it will be about whether the state will allow fracking or not. 

Done properly, the risks of hydraulic fracturing are comparable to traditional oil and gas exploration and to other common extractive and industrial processes.  The better course of action now would have been to put in place stringent safeguards that would made New York the leader in environmental protection in hydraulic fracturing. Such rules could have banned the process in areas that could put New York City’s water supply at risk, and allowed in the southwestern part of the state, as was proposed in 2012 for Broome, Chemung, Chenango, Steuben and Tioga Counties.  The rules could have required significant recycling and cradle-to-grave tracking of waste water created by the process, added the highest level well casing standards, and enacted stringent air and water quality standards.

Such a set of rules would be expensive for those seeking to drill in the state and would have served as a model for other states (and nations around the world) in how best to regulate hydraulic fracturing.  The rules would be expensive enough for exploration companies that few, if any, would start drilling in the state.  But when prices reach the level where the cost of compliance becomes economic, the state would have been ready with strong and enforceable rules.

Creating stringent rules would also have forced companies to seek to rollback specific environmental protections, which would mean discussing and explaining specific risks.   Instead, the governor has taken the easy path, and in doing so he pushed the real debate down the road.  Rather than talking about the risks inherent in this and any industrial process, and seeking to address those risks, the ban reduces the discourse to a simple “yes” or “no.” A “no” answer is easy when prices are low, but “yes” is likely to follow when prices are high. 

The governor had a chance to be a leader on this issue, and instead chose to score easy political points.  That’s his and his administration’s prerogative, but time will show that the outright ban was a mistake because it was a missed opportunity in New York and beyond. 

https://lawprofessors.typepad.com/business_law/2014/12/new-yorks-fracking-failure-.html

Current Affairs, Financial Markets, International Business, Joshua P. Fershee, Law and Economics | Permalink

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