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Shale Gas: Regulatory Pressure Points
GUEST EDITORIAL
Alan Krupnick
Shale Gas: Regulatory Pressure Points
T
he shale gas revolution in the United States is changing the face of our energy future, particularly in the electricity sector. Natural gas prices are at least $2 per MMBtu lower now than expected less than a decade ago. For the electric power sector, this has meant building on existing excess gas-fired capacity to substitute gas-fired generation
Alan Krupnick is Director of Resources for the Future’s Center for Energy Economics and Policy (CEEP) and a Senior Fellow at RFF. His own research focuses on analyzing environmental and energy issues, in particular, the benefits, costs and design of pollution and energy policies, both in the U.S. and developing countries. He was lead author for the study titled Toward a New National Energy Policy: Assessing the Options, examining the costs and cost-effectiveness of a range of federal energy policy choices in both the transportation and electricity sectors. He also co-chaired an advisory committee that counseled the U.S. Environmental Protection Agency on new ozone and particulate standards, and served as senior economist on the President’s Council of Economic Advisers, advising the Clinton administration on environmental and natural resource policy issues.
July 2014,
Vol. 27, Issue 6
for coal. Indeed, for the first time ever, in April 2012, natural gas made up an equal share of electricity generation as coal. In other sectors, forecasts of massive reliance on natural gas imports made less than a decade ago have now been replaced by the repurposing of liquefied natural gas (LNG) import terminals for export. The portion of the manufacturing sector reliant on natural gas feedstock is experiencing something of a rebirth, with massive new investments in fertilizer production and at least one European petrochemical manufacturer building a new plant in the United States instead of Europe. Even the moribund local gas distribution companies and the nearly 100 percent dieseldominated trucking sector are experiencing change, with many new trash trucks fueled by LNG. With all this development, it is fairly obvious that whatever our economic and environmental policy is for natural gas, it is not stifling production. Indeed, prices for natural gas have, at times, fallen so low due to ‘‘over’’ production that the companies themselves have found it more profitable to move rigs to oil plays and, to a
lesser extent, to gas plays with liquids, the price of which follows the oil market, rather than the natural gas market. Beyond this broad brush conclusion, what are the regulatory pressure points? First, a little background. Energy policy is basically about three things. First, environmental protection and sustainability. Second, energy security. Third, addressing the public (and private) cost of depleting resources. Without imports of natural gas in our future, and holding economic regulation for another day, environmental concerns justify the policy intervention discussed here. Environmental policy toward natural gas development, certainly at the resource extraction stage, is primarily a state affair. Contrary to the image in the popular press, the 27 states with active natural gas extraction all have active and significant institutions in place for regulating these activities. Nevertheless, in a Resources for the Future report, The State of State Shale Gas Regulation, my colleagues and I show that some regulations have not been updated for the special activities associated with fracking, although the states are busy correcting this gap.
1040-6190/# 2014 Published by Elsevier Inc., http://dx.doi.org/10.1016/j.tej.2014.06.002
95
I
n addition, the states exhibit a huge amount of heterogeneity in how broadly and how stringently they regulate, variation that is not easily explained by the states’ mantra that ‘‘each state is different, so requires unique regulations.’’ What is needed here is significantly improved information upon which regulations should be based, the design and implementation of processes from which states can more efficiently learn from one another, and also a bolstering of state regulatory capacity (even if this means raising severance or other taxes to pay for it). How costly will all the implied additional regulation be? No one knows. What we do know is that local governments are on the leading edge of experiencing both the benefits and the damages associated with shale gas development. The benefits in terms of jobs, added government revenues, and economic growth are real, if often exaggerated. And the revenues (both through state largess, local taxation authority, and higher sales and real estate collection) are in some boomtowns far less than is needed to undergird the kind of infrastructure growth foisted on local government. The ‘‘policy’’ of many has been to figure out how to get their fair share of the severance taxes collected by the state governments or work to bolster revenues elsewhere. Few localities develop funds or other measures to protect themselves during the bust.
96
Further, local government policies to address the negative externalities associated with shale gas development are not numerous. Zoning policies are one instrument, but with limited bite. Indeed, Pennsylvania and other states have worked to actively preempt local governments from taking environmental policy into their own hands (while the Pennsylvania Supreme Court overturned the attempt, leaving the
What is needed here is significantly improved information upon which regulations should be based. governments in limbo). Colorado is attempting to give locals more of a say, however. se restrictions to address local road damages are another avenue sometimes utilized. But the primary tool is either dialoguing with industry to minimize local impacts or, much more rarely, to ban the activity altogether. Such bans are subject to challenges (and lawsuits from landowners denied their mineral rights are in the offing) and are a blunt instrument for environmental protection that, in the end, may only result in more dense development elsewhere.
U
1040-6190/# 2014 Published by Elsevier Inc., http://dx.doi.org/10.1016/j.tej.2014.06.002
On the federal level, there are three basic policy tracks. One is the management of oil and gas activity taking place on federal lands. For on-shore gas development, the Bureau of Land Management (BLM) has jurisdiction. With BLM planning to update its rules after a long hiatus, there was hope in some quarters that the agency would take this opportunity to set model rules for states planning their own updates. Unfortunately, this did not happen, and the proposed rules have gotten weaker and more disjointed as they have gone through the review process. And, recent revelations about BLM’s lack of inspections, shows that its funding has not kept pace with the burst of development. The second track is through the U.S. Environmental Protection Agency’s (EPA’s) jurisdiction over certain types of polluting activities. In some cases, oil and gas activities have been intentionally exempted from EPA purview (e.g. the infamous Halliburton loophole). In other cases, interpretations by EPA or the courts have blocked regulations, such as the treatment of flowback and produced water as non-hazardous wastes. In this case, classifying them as hazardous would have kicked in a variety of statutory authorities, including greater scrutiny of deep injection wells for induced seismicity risks and disposal to landfills. Nevertheless, EPA does have authority to regulate air pollution emissions, and has recently passed rules for ‘‘green completions,’’ which reduce volatile organic The Electricity Journal
compounds (VOCs, a criteria pollutant) and also fugitive methane emissions—a potent greenhouse gas. The agency now contemplates further rulemaking to reduce methane emissions. The last policy leg is information provision. EPA is conducting a major study on water risks from fracking and the Department of Energy is supporting Frac Focus, a voluntary repository for data on fracturing fluids used at well sites. Two river basin commissions (RBCs) have regulatory authority, both over shale gas development in the Marcellus (the Susquehanna RBC, or SRBC, and the Delaware RBC). The SRBC issues permits for freshwater withdrawals used to frack a well. Interestingly, the permit requests are subjected to analysis using an ecosystem model and the commission may require changes to the permit request as to time, place, and quantity of withdrawals to protect wildlife. Even in Pennsylvania, withdrawals during low-flow conditions and from small streams can impact aquatic life. iven the myriad and largely uncoordinated rulemaking activities across the three (main) levels of government, as well as the controversial nature of fracking, it is not surprising that there have been calls for a realignment of these activities across the board. The NGO community, in general, distrusts state governments, arguing that they are too easily captured by powerful economic interests. So they argue for a
G
July 2014,
Vol. 27, Issue 6
greater federal role. Some local governments argue that they should have far more authority than they do, both over regulations and revenues. State–local interactions are the most active area of debate on this topic. Economists offer their own prescription for an optimal allocation of authorities across governments—one that internalizes externalities across
In the future, interested parties should watch for movement from EPA on regulating methane emissions, continuing debates on appropriate distribution of authority between state and local governments, and creation of what is termed a ‘regulatory exchange.’ space. Such an allocation would put air pollution and methane emissions (which contribute to global warming) at the federal level, and regulating pollution and withdrawals from major rivers at the level of river basin commissions (or if such an institution is absent, at the federal level). Very localized effects would therefore be optimally regulated at the local level, other things equal, recognizing that subjecting operators to hundreds of different regulatory regimes in a given state is likely to impose large administrative costs. Then, the
state governments would be responsible for everything else. Such an arrangement is not indicative of the actual allocation of authority, as noted above, where states have the lion’s share. In summary, environmental policy is certainly not stringent enough to put serious constraints on shale gas development, except in states with moratoria and bans. Beyond this, the regulation of shale gas development is a multi-level government affair, largely uncoordinated, and very heterogeneous across the states. Nevertheless, there is a significant body of regulations in place and every month more updating occurs. In the future, interested parties should watch for movement from EPA on regulating methane emissions, continuing debates on appropriate distribution of authority between state and local governments, and the creation of what is termed a ‘‘regulatory exchange’’ to help states share information and lessons learned on the regulation of fracking. For the moment, the shale gas revolution continues, probably irrespective of whether a more protective regulatory regime develops. For the power sector, the long-term path of natural gas prices, the degree to which renewables grow and reliability constraints bind and require natural gas to fill in, and the future of policies to address carbon dioxide emissions are just some of the factors keeping senior management up at night.&
1040-6190/# 2014 Published by Elsevier Inc., http://dx.doi.org/10.1016/j.tej.2014.06.002
97
Alan Krupnick
Shale Gas: Regulatory Pressure Points
T
he shale gas revolution in the United States is changing the face of our energy future, particularly in the electricity sector. Natural gas prices are at least $2 per MMBtu lower now than expected less than a decade ago. For the electric power sector, this has meant building on existing excess gas-fired capacity to substitute gas-fired generation
Alan Krupnick is Director of Resources for the Future’s Center for Energy Economics and Policy (CEEP) and a Senior Fellow at RFF. His own research focuses on analyzing environmental and energy issues, in particular, the benefits, costs and design of pollution and energy policies, both in the U.S. and developing countries. He was lead author for the study titled Toward a New National Energy Policy: Assessing the Options, examining the costs and cost-effectiveness of a range of federal energy policy choices in both the transportation and electricity sectors. He also co-chaired an advisory committee that counseled the U.S. Environmental Protection Agency on new ozone and particulate standards, and served as senior economist on the President’s Council of Economic Advisers, advising the Clinton administration on environmental and natural resource policy issues.
July 2014,
Vol. 27, Issue 6
for coal. Indeed, for the first time ever, in April 2012, natural gas made up an equal share of electricity generation as coal. In other sectors, forecasts of massive reliance on natural gas imports made less than a decade ago have now been replaced by the repurposing of liquefied natural gas (LNG) import terminals for export. The portion of the manufacturing sector reliant on natural gas feedstock is experiencing something of a rebirth, with massive new investments in fertilizer production and at least one European petrochemical manufacturer building a new plant in the United States instead of Europe. Even the moribund local gas distribution companies and the nearly 100 percent dieseldominated trucking sector are experiencing change, with many new trash trucks fueled by LNG. With all this development, it is fairly obvious that whatever our economic and environmental policy is for natural gas, it is not stifling production. Indeed, prices for natural gas have, at times, fallen so low due to ‘‘over’’ production that the companies themselves have found it more profitable to move rigs to oil plays and, to a
lesser extent, to gas plays with liquids, the price of which follows the oil market, rather than the natural gas market. Beyond this broad brush conclusion, what are the regulatory pressure points? First, a little background. Energy policy is basically about three things. First, environmental protection and sustainability. Second, energy security. Third, addressing the public (and private) cost of depleting resources. Without imports of natural gas in our future, and holding economic regulation for another day, environmental concerns justify the policy intervention discussed here. Environmental policy toward natural gas development, certainly at the resource extraction stage, is primarily a state affair. Contrary to the image in the popular press, the 27 states with active natural gas extraction all have active and significant institutions in place for regulating these activities. Nevertheless, in a Resources for the Future report, The State of State Shale Gas Regulation, my colleagues and I show that some regulations have not been updated for the special activities associated with fracking, although the states are busy correcting this gap.
1040-6190/# 2014 Published by Elsevier Inc., http://dx.doi.org/10.1016/j.tej.2014.06.002
95
I
n addition, the states exhibit a huge amount of heterogeneity in how broadly and how stringently they regulate, variation that is not easily explained by the states’ mantra that ‘‘each state is different, so requires unique regulations.’’ What is needed here is significantly improved information upon which regulations should be based, the design and implementation of processes from which states can more efficiently learn from one another, and also a bolstering of state regulatory capacity (even if this means raising severance or other taxes to pay for it). How costly will all the implied additional regulation be? No one knows. What we do know is that local governments are on the leading edge of experiencing both the benefits and the damages associated with shale gas development. The benefits in terms of jobs, added government revenues, and economic growth are real, if often exaggerated. And the revenues (both through state largess, local taxation authority, and higher sales and real estate collection) are in some boomtowns far less than is needed to undergird the kind of infrastructure growth foisted on local government. The ‘‘policy’’ of many has been to figure out how to get their fair share of the severance taxes collected by the state governments or work to bolster revenues elsewhere. Few localities develop funds or other measures to protect themselves during the bust.
96
Further, local government policies to address the negative externalities associated with shale gas development are not numerous. Zoning policies are one instrument, but with limited bite. Indeed, Pennsylvania and other states have worked to actively preempt local governments from taking environmental policy into their own hands (while the Pennsylvania Supreme Court overturned the attempt, leaving the
What is needed here is significantly improved information upon which regulations should be based. governments in limbo). Colorado is attempting to give locals more of a say, however. se restrictions to address local road damages are another avenue sometimes utilized. But the primary tool is either dialoguing with industry to minimize local impacts or, much more rarely, to ban the activity altogether. Such bans are subject to challenges (and lawsuits from landowners denied their mineral rights are in the offing) and are a blunt instrument for environmental protection that, in the end, may only result in more dense development elsewhere.
U
1040-6190/# 2014 Published by Elsevier Inc., http://dx.doi.org/10.1016/j.tej.2014.06.002
On the federal level, there are three basic policy tracks. One is the management of oil and gas activity taking place on federal lands. For on-shore gas development, the Bureau of Land Management (BLM) has jurisdiction. With BLM planning to update its rules after a long hiatus, there was hope in some quarters that the agency would take this opportunity to set model rules for states planning their own updates. Unfortunately, this did not happen, and the proposed rules have gotten weaker and more disjointed as they have gone through the review process. And, recent revelations about BLM’s lack of inspections, shows that its funding has not kept pace with the burst of development. The second track is through the U.S. Environmental Protection Agency’s (EPA’s) jurisdiction over certain types of polluting activities. In some cases, oil and gas activities have been intentionally exempted from EPA purview (e.g. the infamous Halliburton loophole). In other cases, interpretations by EPA or the courts have blocked regulations, such as the treatment of flowback and produced water as non-hazardous wastes. In this case, classifying them as hazardous would have kicked in a variety of statutory authorities, including greater scrutiny of deep injection wells for induced seismicity risks and disposal to landfills. Nevertheless, EPA does have authority to regulate air pollution emissions, and has recently passed rules for ‘‘green completions,’’ which reduce volatile organic The Electricity Journal
compounds (VOCs, a criteria pollutant) and also fugitive methane emissions—a potent greenhouse gas. The agency now contemplates further rulemaking to reduce methane emissions. The last policy leg is information provision. EPA is conducting a major study on water risks from fracking and the Department of Energy is supporting Frac Focus, a voluntary repository for data on fracturing fluids used at well sites. Two river basin commissions (RBCs) have regulatory authority, both over shale gas development in the Marcellus (the Susquehanna RBC, or SRBC, and the Delaware RBC). The SRBC issues permits for freshwater withdrawals used to frack a well. Interestingly, the permit requests are subjected to analysis using an ecosystem model and the commission may require changes to the permit request as to time, place, and quantity of withdrawals to protect wildlife. Even in Pennsylvania, withdrawals during low-flow conditions and from small streams can impact aquatic life. iven the myriad and largely uncoordinated rulemaking activities across the three (main) levels of government, as well as the controversial nature of fracking, it is not surprising that there have been calls for a realignment of these activities across the board. The NGO community, in general, distrusts state governments, arguing that they are too easily captured by powerful economic interests. So they argue for a
G
July 2014,
Vol. 27, Issue 6
greater federal role. Some local governments argue that they should have far more authority than they do, both over regulations and revenues. State–local interactions are the most active area of debate on this topic. Economists offer their own prescription for an optimal allocation of authorities across governments—one that internalizes externalities across
In the future, interested parties should watch for movement from EPA on regulating methane emissions, continuing debates on appropriate distribution of authority between state and local governments, and creation of what is termed a ‘regulatory exchange.’ space. Such an allocation would put air pollution and methane emissions (which contribute to global warming) at the federal level, and regulating pollution and withdrawals from major rivers at the level of river basin commissions (or if such an institution is absent, at the federal level). Very localized effects would therefore be optimally regulated at the local level, other things equal, recognizing that subjecting operators to hundreds of different regulatory regimes in a given state is likely to impose large administrative costs. Then, the
state governments would be responsible for everything else. Such an arrangement is not indicative of the actual allocation of authority, as noted above, where states have the lion’s share. In summary, environmental policy is certainly not stringent enough to put serious constraints on shale gas development, except in states with moratoria and bans. Beyond this, the regulation of shale gas development is a multi-level government affair, largely uncoordinated, and very heterogeneous across the states. Nevertheless, there is a significant body of regulations in place and every month more updating occurs. In the future, interested parties should watch for movement from EPA on regulating methane emissions, continuing debates on appropriate distribution of authority between state and local governments, and the creation of what is termed a ‘‘regulatory exchange’’ to help states share information and lessons learned on the regulation of fracking. For the moment, the shale gas revolution continues, probably irrespective of whether a more protective regulatory regime develops. For the power sector, the long-term path of natural gas prices, the degree to which renewables grow and reliability constraints bind and require natural gas to fill in, and the future of policies to address carbon dioxide emissions are just some of the factors keeping senior management up at night.&
1040-6190/# 2014 Published by Elsevier Inc., http://dx.doi.org/10.1016/j.tej.2014.06.002
97