Jan 25 2012

Brit Frac Fantasy

Fracing Contaminates Ground Water; but Drill Anyway,

Says Brit at Adam Smith Institute;

Uninformed Discussion of Mineral Rights, Geology from

Advocate of Libertarian & Free Markets;

Ignores Domestic (NIMBY) Energy Cartel

A Brit writing in Forbes magazine says that fracing does contaminate ground water, but we should drill regardless.

Writer Tim Worstall is a Fellow at the Adam Smith Institute, a “libertarian and free market” think tank headquartered in London.  He also writes a column for Forbes.1

His premise is that, as long as we understand the risks, we can choose to make a trade off for the benefits – such as an abundant supply of natural gas that is preferable to burning coal.

Worstall says, “We simply have to weigh up the costs and benefits of various courses of action and thus, if we’re to be rational at least, pick those that provide the most benefits as against the least costs.”

Trading risks for benefits is something we do in life.  So it can be a reasonable starting point for discussion.  Except the Worstall World, unfortunately, is not on Planet Earth.

Frac Fantasy World

The Worstall World is neatly bounded by what he considers to be logic, economic tenets and “Coasean bargains.”2  Complex issues such as mineral rights, property rights, geology and contamination are simple – or simplistic – in this fantasy world.

According to Worstall (emphasis added):  “And those who own the land above the shale that is frakked also own the gas (matters are very different in Europe where it is mostly the government which owns fossil fuels).  So when they receive royalties for the gas that is frakked they are being compensated for that pollution.  If they think that the royalties on offer are not sufficient to so compensate them then they are entirely free to refuse permission to drill. As indeed some do.”

He declares, “Everyone gets what they want ….”  Really?

For example (emphasis added):  “Those who prefer money to clean water will allow drilling, those who don’t will not.  Royalty rates and quite probably the natural gas price will change to reflect those individual decisions.”

In other words, if one property owner chooses to permit drilling on his property he makes his bet and lives with the consequences whether it’s a stream of royalty payments or contaminated water.  If his neighbor chooses not to permit drilling, that is his bet and he will keep his clean water but get no royalties.

Where to begin with our British colleague?  This charming exercise illustrates the difference between theory and skin-in-the-game reality.

Mineral Rights

Let’s start with mineral rights.  In Europe, Worstall suggests, governments rather than private property owners generally own the fossil fuels.  In the U.S., he believes, private property owners possess the mineral rights.  Even if they do – and not all do – there is nothing simple about mineral rights.

I can’t speak about European mineral and property rights; but as a former gas leaseholder in Pennsylvania, I ended up fighting a two-year eminent domain legal battle launched by Spectra Energy of Houston, Texas, which was backed in its “taking” of property rights by the Federal Energy Regulatory Commission (FERC).  (Eminent domain in the U.S. can only take place under the authority of government.)

We and about 150 other property owners had the mineral rights; but Spectra Energy took them in order to construct a 12 billion cubic feet underground natural gas storage reservoir (with pipelines, 5,000 hp compressor station and 13 injection/withdrawal wells).

Even though Pennsylvania has more underground nat gas storage reservoirs than any state in the continental U.S., FERC, a federal judge and Spectra Energy declared this project “vital” to public interest.

In fact, it was vital to Spectra Energy’s business model because the company wants to cash in on what it views as the Marcellus Shale ‘gold rush.’

This isn’t free market capitalism, this is an energy cartel comprised of corporations and government, because the power of eminent domain allows corporations – backed by government – to control pricing and competition (i.e., “just compensation,” what constitutes “public interest,” and what you might prefer to do with your property asset).

There is no energy related eminent domain “taking” action that I am aware of where the private property owner can just say ‘no thank you.’

There is no “Coasean bargain” here.  No free choice.  No free market.

By the way, in the U.S., some states like New York can compel property owners to be integrated into a drilling unit even if they choose not to participate in drilling.  It is called compulsory integration, and it is another form of eminent domain.

Then there is geology.

Geology

Contrary to what Worstall seems to think, the earth is not solid rock, nor are layers below the surface hermetically sealed.

Paul Hetzler, a former Environmental Engineering Technician with New York’s Department of Environmental Conservation (DEC), says it succinctly: “… all geologic strata leak to some extent.  The fact that a less-transmissive layer lies between the drill zone and a well does not protect the well from contamination.”3

“A drinking water well is never in ‘solid’ rock.  If it were, it would be a dry hole in the ground,” Hetzler notes.  “As water moves through joints, fissures and bedding planes into a well, so do contaminants.  In fractured media such as shale, water follows preferential pathways, moving fast and far, miles per week in some cases.”

Even global energy giants like Schlumberger have published textbooks and technical papers that acknowledge such significant risks of shale gas extraction as aquifer contamination and earthquakes.  From one Schlumberger textbook (emphasis added):

“Despite recent advances in the cementing of oil and gas wells, many of today’s wells are at risk. … The environmental impact of contaminating a single fresh water aquifer is extremely serious.”4

One might have hoped that Mr. Worstall at the Adam Smith Institute in London would bring more thought to a serious issue.

He could, for example, look at leadership benchmarks among shale gas executives.  How many, he might ask, have chosen shale gas drilling on their own property?

Gas Exec NIMBYs 

Libertarians and free market advocates might be surprised to learn that today’s shale gas executives are the new NIMBYs (Not In My Back Yard).  Despite queries to energy companies and industry associations, I have been unable to identify ANY executives who have such operations on THEIR property.

So we have a free market world where gas execs want these operations on your property, not their property.  Wonder why?

And please – theorists should refrain from arguing that execs live in the cities and drilling is in the country.  Is it possible that anyone still believes that?  Shale gas companies drill everywhere – from school yards to grave yards to front yards. High-volume hydraulic fracturing takes place in rural, suburban and urban locations (e.g., Fort Worth to name just one location).  

Mr. Worstall’s logic fails to grasp this.  In fact, he is rather flippant on this subject (emphasis added):  “Myself I tend to thinking that [alternatives to fracing are] worse than having to truck drinking water into a few sparsely populated rural areas: but I agree that this is an opinion, not a fact.”

Perhaps Mr. Worstall’s own website offers an explanation.  It states: “Tim Worstall is an Englishman who has failed at many things.”5  

Links & Resources

1 Fracking Does Contaminate Groundwater:  Carry on Drilling Regardless, by Contributor Tim Worstall,  Forbes magazine, December 10, 2011 –   http://www.forbes.com/sites/timworstall/2011/12/10/fracking-does-contaminate-groundwater-carry-on-drilling-regardless/3/#

2 “Coasean bargain” is a term that takes its name from British-born Ronald Coase who received the Alfred Nobel Memorial Prize in Economic Sciences in 1991.  Professor Coase is the research advisor to the Ronald Coase Institute; and he celebrated his 101st birthday in December 2011.  According to the Institute’s website, its mission is (emphasis added):  “To better understand how real economic systems work, so that individuals and societies have greater opportunities to improve their well being.”

http://www.coase.org/aboutronaldcoase.htm          http://www.coase.org/abouttheinstitute.htm

http://www.econlib.org/library/Enc/bios/Coase.html

  • According to a Wiki entry, “The [Coase] theorem states that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasian bargaining.”  Link: http://en.wikipedia.org/wiki/Coase_theorem

3 Fracing WILL Contaminate NY’s Acquifers – Former DEC Environmental Engineering Technician – Comments from Paul Hetzler, former Environmental Engineering Technician with New York’s Department of Environmental Conservation (DEC) at this link: http://www.accountability-central.com/nc/single-view-default/article/voices-from-the-shale-fracing-will-contaminate-nys-acquifers-former-dec-environmental-engineer/

4 Does Cement Crack? – Part 2:  Contains Schlumberger textbook reference & source – http://www.accountability-central.com/nc/single-view-default/article/voices-from-the-shale-does-cement-crack-part-1/

5 Tim Worstall Websitehttp://timworstall.com/about/

NOTE:  This article is cross-posted on the Accountability Central website at this link: http://www.accountability-central.com/nc/single-view-default/article/voices-from-the-shale-fracing-contaminates-ground-water-but-drill-anyway-says-brit-at-adam-smi/   Accountability Central is part of the Governance & Accountability Institute, Inc.

 

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