Fracking through the great regulatory unknown

Fracking is a process where “you drill a five-inch-diameter hole down several thousand feet until you hit the gas shale, and then you turn 90 degrees and you drill horizontally through some more shale, until you’ve got all your pipes and rig in place. And then you hit that shale with a high-pressure blast of water and sand, creating millimeter-wide fractures through which the natural gas can escape… Not only is this happening more than a mile beneath the surface, it’s also happening at a level that is separated from the closest points of the aquifer by a layer of impermeable rock three or four or five Empire State Buildings deep.” Some estimates put the amount of natural gas available through this process at 15 years worth of US energy use. A resource like that could provide enough time and tax dollars for Obama to fund about 10 more failed solar energy companies like Solyndra. Unfortunately, as Reuters reports, that’s all too good for liberals to allow to be true: 

Analysis: Insurers find it tough to price fracking risk

(Reuters) – From water worries to well blowouts, the inherent risks of oil and gas extraction are often played down by those in the business. But another group of profit-seekers has every reason to keep a close eye on dangers for drillers: their insurers.

The rest of the article doesn’t refer to politicians as “power-seekers” or environmentalists as “anti-humanitarians”, so why the derisive “profit-seekers” to describe oil extractors and their insurers? And as we’ll see, this intro paragraph completely misleads as to what this story is all about. The tension is not between greedy insurers and the deceptive oil business. A huge financial incentive exists for the first insurers who can properly capture the inherent risk of fracking. Which is good, because insurance companies are experts at assessing risk. However, what they are not expert at (because how could anyone be), is guessing how the anti-humanitarians collaborating with the EPA will arbitrarily define safety and liability. Furthermore, don’t expect federal legislators to be of any help in developing a legal framework for such questions, which would open them up to an accountability our power-seekers are trained to avoid.

Amid litigation and federal probes, insurance companies are left scratching their heads over how to price the risk of the oil and gas production technique now better known as fracking.

The lawsuits and tests so far provide little help. One much-cited case involved Cabot Oil & Gas Co, which settled in late 2010 for $4.1 million with residents of the small Pennsylvania town of Dimock over methane found in their water.

Then on Friday, the Environmental Protection Agency said it had completed testing water at 61 homes in Dimock and found the drinking water was safe to consume.

Not surprising that insurers might be spooked when a company pays $4.1 million for tainted water that was actually safe to consume. Arbitrary dictates are the same reason that many businesses are scared to hire new employees before Commissar Sebelius fills out the Mad Libs book known as the Affordable Care Act. Even if it was a sound stimulus theory that the administration used to throw billions of dollars at “shovel-ready jobs” that were as real as Elizabeth Warren’s Indian heritage, when regulatory unknowns are so great that entire business models are threatened, growth is bound to stagnate.

Environmentalists say it can also pollute if fracking fluids seep out of wells. An EPA study showed fracking chemicals were likely present in a Wyoming aquifer near the town of Pavillion, but then it agreed in March to retest the water.

“Environmentalists say it can also pollute…” I’ve never heard a less persuasive opening to a sentence. Perhaps “President Ahmadinejad says Iran’s nuclear development is for peaceful purposes…” (For those keeping track at home; yes, I just compared environmentalists to Iranian president Mahmoud Ahmadinejad. The only difference I see is a matter of degree. Ahmadinejad would prefer no non-Muslim babies be born, while environmentalists prefer no babies whatsoever.)

“From an insurance standpoint, it’s really hard to underwrite something with a lot of uncertainty,” Jeffrey Hanneman, the Texas-based director of environmental practice at insurance broker Aon Risk Solutions, said of fracking, “an area that now preoccupies a lot of my time.”

Traditional forms of insurance for the oil and gas industry suddenly appeared inadequate once the shale boom was in full swing and water-contamination lawsuits cropped up, he said…

…Plus, regulation varies between states and against federal standards. “Sometimes they’re in conflict with each other,” said Hanneman. “How do you decide which way this is going to go?”

Again, don’t expect politicians to exert any of the leadership they tout in campaign ads unless there is an obvious crisis where they can swoop in as heroes.

Fracking may pose environmental risks for which stringent safety standards need to be developed. But let’s ground this discussion in a cost/benefit/freedom framework that takes into consideration both the outsized influence that oil wealth provides to Middle East madmen and the energy our economy needs to operate. Like anything in life, it’s a tradeoff. And as we’ve recently seen, the environmentalists preferred approach to energy has some awkward tradeoffs of its own:

The U.S. Fish and Wildlife Service, a division of the Interior Department, is considering loosening regulations on the killing of bald eagles, the national bird of the United States, to accommodate the development of wind energy sources.

A draft regulation first filed in April would allow businesses to apply for 30-year permits allowing them to kill bald eagles in the course of other legal activities…

The USFWS explains at

We have reviewed applications from proponents of renewable energy projects, such as wind and solar power facilities, for programmatic permits to authorize eagle take that may result from both the construction and ongoing operations of renewable energy projects.

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