Monday, February 24, 2014

Fracking, Horizontal Drilling, and Private Property Rights

Great presentation at the Workshop today by Gwen Arnold (one of Lin Ostrom's former students, now a Prof. at UC, Davis) about very interesting work she is doing with Ron Holahan (another "Workshopper," now a Prof. a Binghamton) on the "nature" of fracking shale as a good, property systems, and regulations. The video of her presentation will be posted on the Workshop website (here) soon.

She argued convincingly that, unlike convention oil and gas, which usually appears in (archetypal) common pools (rivarlrous in consumption but with high costs of exclusion), shale gas is more in the nature of a private good (rivalrous in consumption and low-cost of exclusion) because it is found in small pockets within shale formations. This argument is borne out by the industry's need to engage in horizontal drilling across property boundaries to make fracking economically viable. They cannot simply drill straight down on a piece of land and get enough gas out to make it worthwhile.

Horizontal (or diagonal) drilling is not lawful for ordinary oil and gas extraction from common pools; it would constitute an actionable trespass. But the ordinary trespass rule does not apply in the vast majority of states where fracking has become a major industry. Those states have passed laws for "compulsory pooling" or "compulsory integration" (see, e.g., here) that prevents landowners from "holding out" (that is, enforcing their rights to exclude) by granting fracking companies the state's power of eminent domain to engage in horizontal drilling. In other words, landowners have their rights to exclude taken away from them (presumably with "just compensation").

These "compulsory pooling" rules create an interesting constitutional issue under the "public use" requirement of the Fifth Amendment's Taking Clause. States have a long history of allocating their eminent domain power to favored industries, including mining and agriculture. But the relation of those industrial exercises to the "public use" requirement remains murky at best.

A quick Lexis search revealed, surprisingly, not a single reported state or federal case challenging "compulsory pooling" or "compulsory integration" as an invalid exercise of eminent domain under the "public use" clause. The lack of any such cases is particularly surprising in light of the massive public outcry over the "abuse" of "public use" in the wake of the Supreme Court's Kelo decision back in 2005. That case involved a city's use of eminent domain to engage in municipal redevelopment of an "economically distressed" area. Arguably, the taking of property rights to facilitate hydraulic fracturing has an even more tenuous relation to any conceivable "public use." Even more than in a case like Kelo, we have a taking of property from one set of identifiable private owners (the surface owners) for the private benefit of another set of identifiable private owners (the fracking companies). I have to wonder why the Institute for Justice, the Pacific Legal Foundation, and other private property-rights advocacy organizations are not filing lawsuits in every jurisdiction that has enacted "compulsory pooling" or "compulsory integration" legislation.

On the other hand, if "compulsory pooling" meets the public use requirement for fracking, then it clearly would satisfy the public use requirement for carbon capture and sequestration. That would resolve a sticky property rights issue relating to the use of underground pore space for the storage of carbon emissions that otherwise might contribute to climate change.

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