A Market Approach to Regulating the Energy Revolution: Assurance Bonds, Insurance, and the Certain and Uncertain Risks of Hydraulic Fracturing

INTRODUCTIONIn the Industrial Revolution of the nineteenth century, the United States was transformed from a largely agrarian nation of farmers to a major center of manufacturing. With industrialization came new risks to public welfare and, ultimately, changes in law to address those. The United States is now undergoing another revolution, an energy revolution that has the potential to transform the United States from a net energy importer into the next Saudi Arabia.1 And like the Industrial Revolution, this energy revolution entails new risks and, by necessity, will produce new legal responses to those risks. It has fomented one of the greatest environmental regulatory challenges of our time, and it calls for an effective solution that must be rapidly implemented. This Article addresses a set of important legal responses that so far have received scant attention from academic commentators and lawmakers-market-based requirements for enhanced bonding and, more importantly, environmental liability insurance for wells.The key to the current energy revolution is innovation in the techniques that allow extraction of natural gas from underground rock formations. Advances in horizontal drilling and hydraulic fracturing- fracing, or, more commonly, fracking-have opened up massive natural gas deposits in several regions of the United States.2 These technologies have driven this revolution by enabling unconventional well development-the production of oil and gas from formations once deemed inaccessible- which we describe as "unconventional development" or "unconventional oil and gas."3 Unconventional development has begun, and will continue, to change the landscape of this country. Wells already dot the surface of many counties4 and this is only the beginning. This development will continue, with tremendous intensity, very likely for several decades at a minimum.5Just as the Industrial Revolution gave rise to new risks, such as risks from industrial air pollution and factory fires, unconventional development has generated new risks to public welfare and will continue to do so.6 These risks are not, individually, as massive as those seen in the Industrial Revolution; public perceptions and environmental protections have changed. But cumulatively, they are likely to be substantial. Some of these risks are relatively certain: We know from past experiences with drilling and mining that there is a large risk that certain well operators-the individuals and companies responsible for well development-will simply abandon wells when they are no longer productive, and that they sometimes will not make the investments necessary to ensure that the wells are safely closed and sites adequately restored and will not become a source of pollution.7 While the rates of abandonment will likely be lower than in the past due to improved state well-plugging regulations, constraints on state enforcement of regulations8 and the sheer number of new wells being developed suggest that abandonment still will occur, as will, perhaps more commonly, inadequate site restoration and clean-up. There is also the relatively near- term risk that while the wells and their associated disposal facilities are operating, there will be major accidents and associated pollutant releases.9 And then there is the long-term risk, a highly uncertain risk-often referred to as "the long-tail risk"-that once all the unconventional development is done, we will discover that this activity degraded the environment and endangered public health in ways that cannot be linked to specific, identified accidents at active well operations.To date, the debate over how to address these various near-term and long-term risks has focused on who should govern, or more specifically, whether state legislators and regulators should be responsible for addressing unconventional oil and gas risks rather than federal legislators and regulators. Various commentators have offered different perspectives and answers to this state or federal question. …