Source: https://www.researchgate.net/publication/280840457_The_Fracking_Revolution_Shale_Gas_as_a_Case_Study_in_Innovation_Policy
Timestamp: 2019-04-19 11:02:23+00:00

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The early twenty-first century has witnessed a boom in oil and natural gas production that promises to turn the United States into a new form of petrostate. This boom raises various questions that scholars have begun to explore, including questions of risk governance, federalism, and export policy. Relatively neglected, however, have been questions of why the technological revolution behind the boom occurred and what this revolution teaches about innovation theory and policy. The boom in U.S. shale gas production reflected long-gestating infrastructure developments, a convergence of technological advances, government-sponsored research and development, the presence or absence of intellectual property rights, rights in tangible assets such as land and minerals, and tax and regulatory relief. Consequently, the story behind the boom reaches far beyond the risk-taking and persistence of George Mitchell, whose independent production company achieved pioneering success with hydraulic fracturing (fracking) in Texas’ Barnett Shale. Indeed, the broader story demonstrates how a blend of distinct policy levers, reasonably adjusted over time, can combine to foster a diverse innovation ecosystem that provides a robust platform for game-changing innovation. As exemplified by this story, the centrality of other policy levers can mean that patents play only a modest role, even in spurring technological development by profit-driven private players. Other lessons drawn from this case study include “negative lessons” about the possibility and even likelihood of downsides of a technological boom or the policies used to promote it—for example, environmental damage that more careful regulation of a developing technology such as fracking might have avoided. Anticipatory and continuing attention to such potential downsides can help prevent innovation-promoting policies from becoming “sticky” in a way that undercuts innovation’s promise and popular appeal. Such lessons can helpfully inform efforts either to extend the United States’ “fracking revolution” abroad or to develop other potentially revolutionary technologies such as those associated with renewable energy.
explore, including questions of risk governance, federalism, and export policy.
∗ Loomer Family Professor in Law, The University of Texas at Austin.
“sticky” in a way that undercuts innovation’s promise and popular appeal.
technologies such as those associated with renewable energy.
2 See U.S. Expected to Be Largest Producer of Petroleum and Natural Gas Hydrocarbons in 2013, U.S.
ENERGY INFO. ADMIN. (Oct. 4, 2013), http://www.eia.gov/todayinenergy/detail.cfm?id=13251.
revolution, focusing on the development of shale gas extraction in particular.
including decades of work that preceded late-twentieth century breakthroughs.
endangered in a final rule issued by the Department of the Interior’s Fish and Wildlife Service); TIMOTHY W.
ShaleGas-07192011.pdf (describing many positive economic and security-based impacts); WILLISTON ECON.
econometric efforts. Such focused observational studies have substantial limits.
Why study fracking as a foundation for more nuanced innovation theory?
TEACHER 24 (Robert B. Leighton & Matthew Sands eds., 1995) (emphasis omitted).
“pharmaceutical, biotechnology, and chemical companies” on the other).
(1990) (noting medieval advances in harnessing energy from wind and water).
14 See infra text accompanying notes 84–91; see also MICHAEL RATNER & MARY TIEMANN , CONG.
gas prices increased in the mid-2000s.”).
America’s home-grown oil industry,” and “the liberalisation of access to existing pipelines by third parties”).
16 See infra notes 62–80 and accompanying text.
all energy R&D, see WANG & KRUPNICK, supra note 13, at 7–8.
entrepreneurship” but that “some of the key technologies . . . were largely developed by the oil industry”); id.
and Appalachian Basins in the 1970s when “US gas producers were small”).
Barnett Shale . . . .”).
credit for unconventional gas between 1980 and 2002”).
decisions, the federal government’s leadership in fracking regulation has been paralyzed.”).
23 Cf. Daniel J. Hemel & Lisa Larrimore Ouellette, Beyond the Patents–Prizes Debate, 92 TEX. L. REV.
affect a would-be innovator’s incentives).
to Tom Richmond, Mont. Bd. of Oil & Gas Conservation (June 5, 2011, 11:52 AM), available at http://bogc.
chemicals used in hydraulic fracturing).
Information-Containment Tools in Shale Drilling, 19 MICH. TELECOMM. & TECH. L. REV. 279, 291 (2013).
28 See infra notes 262–66 and accompanying text.
29 See infra notes 268–70 and accompanying text.
development in general. A concluding section follows.
developments that lies behind it.
30 YERGIN, supra note 13, at 326.
lakes (lacustrine), or in associated swamps and mires along the margins of lakes or seas”).
33 See, e.g., Monthly Coal- and Natural Gas-Fired Generation Equal for First Time in April 2012, U.S.
revive a domestic gas province in decline.”).
assessment), is now providing major volumes of annual gas supplies.” Id. at 80.
41 NAT’L RESEARCH COUNCIL, supra note 34, at 201.
42 U.S. Natural Gas Withdrawals from Shale Gas (Million Cubic Feet), U.S. ENERGY INFO. ADMIN.
43 See supra text accompanying note 38.
(“Exponential growth is growth at a constant percentage rate.” (emphasis omitted)).
45 Compare supra text accompanying note 36, with supra text accompanying note 42.
46 U.S. Natural Gas Withdrawals, supra note 42.
47 See supra text accompanying note 37.
48 YERGIN, supra note 13, at 329.
52 YERGIN, supra note 13, at 329 (internal quotation marks omitted).
combined contributions of unconventional fossil fuel resources to U.S. economic figures).
54 BURWEN & FLEGAL, supra note 50, at 7.
chemistrytoenergy.com/files/ACC-Shale-Report.pdf; Merrill & Schizer, supra note 53, at 159.
Outlook, YOUTUBE (Feb. 20, 2014), https://www.youtube.com/watch?v=WcVNrWZ9rwU (noting that U.S.
continue to be very important).
technologies have yielded results that are qualitatively new.
in Fractured Appalachia, 21 VILL. ENVTL. L.J. 229, 231–32 (2010).
61 BURWEN & FLEGAL, supra note 50, at 3.
process in 1947 to stimulate flow of natural gas from the Hugoton field in Kansas”).
used to “create as much contact with the reservoir as possible”).
to flow back to the well”).
66 Montgomery & Smith, supra note 62, at 26–27.
68 Id. (internal quotation marks omitted).
companies adjust the proportion of frac fluid additives to the unique conditions of each well.”); JOHN H.
ET AL., supra note 64, at 1 (“[T]he selection of the fluid and additives [is] based upon the mineralogy.”).
freshwater and sand and a mere 0.5% additives.”).
note 64 (describing the additives and their purposes); supra note 73.
76 Montgomery & Smith, supra note 62, at 28.
is an ongoing aspect of deep research in frac tech.”).
79 Montgomery & Smith, supra note 62, at 31–32.
hole, the rock below, the skill and function of the men and equipment—and a goodly dose of luck.”).
relatively short vertical scales” that are “often much less than one meter”).
through this same rock formation.”).
overcome the problem of fracing out of zone”).
southwestern France and offshore from Italy.91 Later in the decade, U.S.
permitting much greater recovery of gas (or oil) from a reservoir.”).
well costs to be “1.5 to 2.5 times more than a vertical well”).
horizontals would have about three times the [estimated ultimate recovery] for twice the well cost”).
88 Lynn Helms, Horizontal Drilling, DMR NEWSL. (N.D. Dept. of Mineral Res., Bismarck, N.D.), Jan.
work” (internal quotation marks omitted)).
89 ANDREWS ET AL., supra note 72, at 19.
90 Pratt, supra note 87.
92 U.S. ENERGY INFO. ADMIN., supra note 84, at vii.
93 ANDREWS ET AL., supra note 72, at 19.
operators to avoid various drilling failures and thus reduce costs).
95 The Petrostate of America, supra note 51, at 10.
Reservoirs Require Unconventional Approach to Integrate, Interpret Data, AM. OIL & GAS REPORTER (Sept.
with Decades of Government Investment, HUFFINGTON POST (Nov. 23, 2012, 5:12 AM EST), http://www.
a 3-D picture of shale deposits and track exactly where a drill bit was, thousands of feet underground.”).
98 WANG & KRUPNICK, supra note 13, at 14.
101 BURWEN & FLEGAL, supra note 50, at 6.
102 Pratt, supra note 87.
FOR SLICKWATER FRAC APPLICATIONS (2011) (discussing new friction reducers that enable better production).
GAS REP. (July 2010), http://www.oilandgasbmps.org/docs/GEN170-reducedrillingfootprint.pdf.
began in 1981 with the drilling of the Mitchell Energy C.W. Slay #1.”).
a leasing and drilling boom in southwest Denton and northwest Tarrant counties”).
107 YERGIN, supra note 13, at 327.
economically possible had to be placed in the Barnett” and “un-gelled water can carry very little” proppant).
somewhat better than [with] the crosslinked jobs, but stimulation costs were reduced by approximately 65%”).
the right combination of horizontal drilling, pressure, and proppants to get the gas flowing out of shale.”).
being active in the Barnett Shale at all.
111 YERGIN, supra note 13, at 328.
drove the recent expansion in use of Mitchell’s techniques).
113 See infra text accompanying notes 114–15.
but not as high of a price as other types of unconventional gas could receive).
siting and eminent domain authority121 to ease the process of construction.
http://www.eia.gov/todayinenergy/detail.cfm?id=12131 (noting that half of the crude oil received by U.S.
refineries flows through pipelines, although transport by barge, truck, and rail is growing).
120 See infra note 133 and accompanying text.
121 See infra notes 133–34 and accompanying text.
122 See infra note 143 and accompanying text.
124 Klass & Meinhardt, supra note 118 (manuscript at 36).
125 Missouri v. Kan. Natural Gas Co., 265 U.S. 298 (1924).
126 Klass & Meinhardt, supra note 118 (manuscript at 36).
potential was immense, but no major pipelines existed to bring gas to that populous region”).
128 See id. (manuscript at 37) (discussing regulation arising in the aftermath of Kansas Natural Gas Co.).
129 See Pierce, supra note 116, at 4–6.
130 Klass & Meinhardt, supra note 118 (manuscript at 37).
132 Natural Gas Act, ch. 556, 52 Stat. 821 (1938) (codified as amended at 15 U.S.C. §§ 717–717z (2012)).
133 Id. § 4(a), 52 Stat. at 822.
134 Id. § 7(c), 52 Stat. at 825.
135 Id. § 7(a), 52 Stat. at 824.
gas transportation systems developed, all over 200 miles long.”).
Congress and the FERC had created artificially pipeline monopoly power . . . .”).
5 ENERGY L.J. 1, 5 (1984).
pipelines purchased it at the wellhead and, passing on the purchase price, resold it to distributors.”); Richard J.
provided the sole market outlet for a number of competing producers”).
Interstate Natural Gas Market, 47 U. PITT. L. REV. 843, 849 (1986) (describing the order).
also McNulty, supra note 140, at 850 (describing the order).
Transportation; and Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, 57 Fed. Reg.
unbundled from firm and interruptible sales”).
to using a certain amount of pipeline space—to “release unwanted capacity to those desiring capacity”).
to its marketing affiliate” in “operational provisions”).
information through the use of electronic bulletin boards”).
freedom to operate . . . and therefore require substantial commons in resources.”).
149 Interview by Michael Shellenberger with Dan Steward, Former Mitchell Energy Vice President, (Dec.
commercial viability by 2000 and that financial markets ultimately recognized this in 2002).
‘new gas,’ or gas produced from wells drilled later, to preserve exploration incentives.”).
(discussing the Supreme Court decision and FERC’s previous interpretation of its authority).
United States from 1969 through 1978.”).
required ongoing company-by-company cost determinations”).
155 Pierce, supra note 139, at 68.
gas from riskier, more expensive exploration”).
158 § 2(b), 103 Stat. at 158.
159 Id. § 2(a), 103 Stat. at 157–58 (providing that “maximum lawful prices” of gas should cease to apply).
policies on pricing—were in place.
discusses such mechanisms and their roles in fostering the shale gas boom.
financial mechanisms for government support).
Development Administration . . . to launch the Unconventional Gas Research (UGR) program.”).
165 NAT’L RESEARCH COUNCIL, supra note 34, at 1.
underl[ying] extensive areas of the eastern United States”).
169 Leo A. Schrider & Robert L. Wise, Potential New Sources of Natural Gas, 32 J. PETROLEUM TECH.
INC., CORING AND LOGGING PLAN: EASTERN GAS SHALES PROJECT (1977), available at http://www.netl.doe.
172 Schrider & Wise, supra note 169, at 709.
173 BURWEN & FLEGAL, supra note 50, at 3.
expended between 1978 and 1982.” (citation omitted)).
federal government expended $91.5 billion (2000 dollars) on energy R&D, mostly through DOE programs.
This direct federal investment constituted about a third of the nation’s total energy R&D expenditure . . . .”).
solid assessment of the resource base.”).
began to decrease their research and development spending . . . .”).
180 BURWEN & FLEGAL, supra note 50, at 2.
public–private partnership in this area.
1990s, when Mitchell made his critical breakthrough with slickwater hydraulic fracturing.
183 Schrider & Wise, supra note 169, at 704.
industries, most notably electric and gas utilities, historically have underinvested in R&D.”).
185 BURWEN & FLEGAL, supra note 50, at 4.
186 See supra text accompanying notes 173–74.
187 MIT STUDY, supra note 175, app. 8A, at 5.
while the GRI program focused on commercialization and deployment of technologies for industry.”).
190 MIT STUDY, supra note 175, app. 8A, at 5.
“sometimes provid[ed] substantial industry match into the smaller DOE programs”).
of the larger GRI program and the prevailing view that oil and gas RD&D could be left to industry.”).
193 BURWEN & FLEGAL, supra note 50, at 5.
“re-fracks of shale wells”); supra note 20.
approach with wide-ranging advisory input to develop its annual five-year plan.” (citation omitted)).
197 MIT STUDY, supra note 175, app. 8A, at 5.
198 BURWEN & FLEGAL, supra note 50, at 4–5.
199 See supra text accompanying notes 188–95.
200 See supra text accompanying note 100.
telemetry had their “roots in DOE research from the 1980s and 90s.”).
techniques has included a variety of tax incentives and regulatory exemptions.
203 GALLAHER ET AL., supra note 100, at 97.
overall market success of PDC drill bits”).
was supposed to do—it stimulated activity that would otherwise not have taken place.”).
207 BURWEN & FLEGAL, supra note 50, at 2.
208 Begos, supra note 97.
209 MIT STUDY, supra note 175, at app. 8A, at 5.
210 See supra text accompanying notes 173–74, 185–86.
technologies,217 they too contributed to the shale gas boom.
211 BURWEN & FLEGAL, supra note 50, at 7.
212 Steffy, supra note 181.
and Timber Production, 15 LEWIS & CLARK L. REV. 323, 324 (2011).
allowance, and the domestic manufacturing deduction”—are applied to an investment); see also GILBERT E.
effective tax rates of negative 13.5% for independent production companies and 15.2% for “integrated firms”).
oil and gas via the tax system.”).
Obama Administration proposed to eliminate various fossil fuel benefits).
218 Johnson, supra note 214, at 581.
219 See supra text accompanying note 161.
but also decreased the allowances for independent producers).
221 Bogdanski, supra note 213, at 325.
rates of negative 13.5% for independent production companies and 15.2% for “integrated firms”).
deducted immediately, rather than capitalized and recovered over time, at the election of the taxpayer.”).
226 SHERLOCK, supra note 225, at 3.
227 Hymel, supra note 217, at 49.
229 Bogdanski, supra note 213, at 326 (footnote omitted).
230 CONG. BUDGET OFFICE, supra note 223, at 3.
alliance (last visited Mar. 5, 2015).
before those for repeal of other tax preferences, such as the percentage depletion allowance).
wells in production during periods of low prices for those fuels.” PIROG, supra note 216, at 3.
235 PIROG, supra note 216, at 4.
237 Bogdanski, supra note 213, at 326.
their taxable income considerably.” Bogdanski, supra note 213, at 328 (footnotes omitted).
of 9% in 2010,” but with a cap of 6% on the rate for oil and gas production).
240 Bogdanski, supra note 213, at 327.
exempt or by providing a deduction for the cost of such investments”).
the time and place of severance” with temporary suspension of the tax for horizontally-drilled wells); MISS.
production” and 1.3% for oil from horizontally drilled wells for a limited time period); N.M. STAT. ANN.
prior fiscal year.”); supra note 242.
244 COMBS, supra note 243, at 68, 378.
regulatory compliance rises, of course, through annual accretion.
risk discouraging development to a degree that policymakers find intolerable.
246 58 PA. CONS. STAT. ANN. §§ 2301–2318 (West, Westlaw current through 2014 Reg. Sess.).
ONLY,” and view final page of the resulting report) (last visited Mar. 5, 2015).
(Dec. 14, 2013), available at http://www.pabulletin.com/secure/data/vol43/43-50/2362.html.
$6.5 million and $9 million.”).
Waste Exemption as to Certain Hazardous Oilfield Exploration and Production Wastes, 14 VILL. ENVTL. L.J.
1, 2–7 (2003) (providing a history of the exemption and explaining the exemption’s scope).
252 53 Fed. Reg. at 25,446.
wastes from geothermal energy wells. Id. at 25,448.
255 42 U.S.C. §§ 6921(b)(2)(A)–(B); 6982(m)(1) (2012); 53 Fed. Reg. 25,446.
1990, Oil Pollution Act liability for onshore spills. 40 C.F.R. § 112.1 (1990).
will be relatively small and isolated.
activity but instead feeding an already gathering boom.
naturalizing a foreign industry, in itself perfectly suitable to the circumstances of the country.”).
258 Warner & Shapiro, supra note 24, at 479–80.
to reduce soil erosion. 33 U.S.C. § 1362(24) (2012). But the effectiveness of this exemption has been unclear.
implement the statutory exemption); Regulation of Oil and Gas Construction Activities, U.S. ENVTL.
Gas-Construction-Activities.cfm (attempting to clarify relevant regulations).
closed . . . .”).
1999, followed by a pronounced upward kink in the growth trajectory from 1999 to 2000).
Remedying Regulatory Diseconomies of Scale, 94 B.U. L. REV. 235 (2014).
Contaminated New Mexico’s Groundwater, N.M. OIL CONSERVATION DIV. (Sept. 12, 2008), http://www.
(reporting contamination by fracking fluids of farmland and a creek tributary).
emissions of volatile organic compounds (including methane). 40 C.F.R. § 60.5375 (2014).
rights, secrecy, and information sharing.
and physical health of states’ residents).
need for “water, sewer, and road infrastructure for workforce housing and industry facility needs”).
Drugs Follow Eagle Ford Energy Boom, AUSTIN AM. STATESMAN (June 22, 2014), http://projects.statesman.
has been an increase in arrests, criminal activity and vehicle crashes.”).
REP. (Cornell Univ. Cmty. & Reg’l Dev. Inst., Ithaca, N.Y.), Sept. 1, 2011, at 4, available at http://www.
271 See infra text accompanying notes 406–24.
early investments . . . .”).
275 See infra text accompanying notes 276–78.
(alteration in original) (citation omitted)).
278 See supra text accompanying note 111.
279 Silver, supra note 13.
280 Cahoy et al., supra note 26, at 287 (quoting Silver, supra note 13).
281 Silver, supra note 13.
form of property rights or other access limitations”).
property rights or some other exclusionary mechanism of functional equivalence”).
284 Cf. John D. Sterman, System Dynamics Modeling: Tools for Learning in a Complex World, CAL.
develop means of profitable exploitation within a quite limited span of time.
the value of its lease rights in the Barnett Shale. Why did it not seek to do so?
285 JOHN S. LOWE ET AL., CASES AND MATERIALS ON OIL AND GAS LAW 336 (5th ed. 2008).
five years are more typical in states with established oil and gas production.”).
various additives were tried to improve its performance.”).
291 See infra Part IV.C.
292 WANG & KRUPNICK, supra note 13, at 16–17.
293 See supra text accompanying notes 114, 195.
294 U.S. Patent No. 4,742,873 (filed Mar. 11, 1987) (issued May 10, 1988) (listing Mitchell Energy Corp.
1981) (listing Mitchell Energy Corp. of Houston, Texas, as the assignee).
296 See supra note 106 and accompanying text.
continued through the end of 2001.”).
invention at any time more than one year after the invention’s “secret commercialization”).
only pennies on the dollar.” (footnote omitted)).
processes of fracturing or directional drilling as unlikely to have great value.
301 See supra text accompanying notes 195–98.
302 Cf. Lior Jacob Strahilevitz, Social Norms from Close-Knit Groups to Loose-Knit Groups, 70 U. CHI. L.
norms of cooperation to “non-close-knit groups”).
303 See supra text accompanying note 78.
Ted Sichelman & Stuart J.H. Graham, Patenting by Entrepreneurs: An Empirical Study, 17 MICH. TELECOMM.
difficult to litigate, because of problems proving infringement.”).
enforcing patent rights could well have outweighed the expected benefits.
305 See supra notes 78–80 and accompanying text.
306 See supra text accompanying notes 275–78.
307 See infra text accompanying notes 313, 319.
308 STEWARD, supra note 106, at 175–76.
309 Id. at 178–79 (“Following the symposium Mitchell Energy received numerous inquiries about the play.
Soon afterwards Devon approached Mitchell concerning a merger.”).
the techniques’ potential in the Barnett.”).
given geological responsibility for the Barnett play.”).
313 BURWEN & FLEGAL, supra note 50, at 5.
314 See supra text accompanying notes 193–94.
315 BURWEN & FLEGAL, supra note 50, at 5.
to sell exclusive licenses for their use.”).
their way into a winning play.
“hinder rather than accelerate biomedical research”).
318 Id. (describing a “frenzy of proprietary claiming” by universities under the Bayh-Dole Act).
319 Montgomery & Smith, supra note 62, at 36.
321 See supra text accompanying notes 275–78.
http://www.slb.com/services/completions/stimulation/reservoir/contact.aspx (last visited Mar. 5, 2015).
technology space as an “IP-free” or “negative IP” zone325 would be mistaken.
“began leasing in areas adjoining Mitchell Energy’s leased land”).
moved freely to new companies”).
and for which trademark provides only very limited propertization”).
326 See supra notes 299–302 and accompanying text.
327 See supra text accompanying notes 308–18.
328 BURWEN & FLEGAL, supra note 50, at 5.
obtain and interpret seismic and other geologic data”).
330 See supra note 24 and accompanying text.
(“[F]racturing fluids are the apparent reason for the increase in patent activity in the gas extraction industry.”).
undergird the shale gas boom.
332 Montgomery & Smith, supra note 62, at 27.
Wells, U.S. Patent No. 2,596,843 (filed Dec. 31, 1949) (issued May 13, 1952) (reissued as U.S. Patent Re.
23,733 on Nov. 10, 1953).
334 Montgomery & Smith, supra note 62, at 27.
335 Cahoy et al., supra note 26, at 289.

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