Eureka

Sacramento Spotlight: A Cornucopia of Fracking Legislation

Thursday, April 4, 2013

California currently has about 50,000 producing oil and gas wells scattered throughout the state, of which about 750 (or 1.5%) use hydraulic fracturing – “fracking”, for short.   While fracking has been used in California for over 60 years, the state is just now getting around to proposing regulations and legislation to govern the controversial drilling practice.

Recently, fracking has become the favorite punching bag for environmental activists and liberal prognosticators.  However, based on recent polling, the public is effectively split on whether it favors or opposes the practice.  Over the next few months the California State Legislature must struggle with two seemingly dispirit agendas:

1) environmentalists, who wish to end fracking in California because of over-blown environmental and health concerns;

2) economic growth proponents, who see fracking as a way to unleash an economic renaissance the state desperately needs.

In the “Spotlight” are eight pieces of introduced legislation that run the gamut of taxation, strict moratoriums, arcane regulation, and permitting and disclosure surrounding the fracking issue.

  • Permitting and disclosure: SB 4 (introduced and amended by Democratic Senator Fran Pavley), AB 7 (Democratic Assemblyman Bob Wieckowski), AB 288 (Democratic Assemblyman Marc Levine),  AB 982 (Democratic Assemblyman Das Williams) would all allow the continued practice of fracking with a robust public disclosure and permitting process (with some variation).
  • Moratoriums: AB 649 (Democratic Assemblyman Adrin Nazarian), AB 1301 (Democratic Assemblyman Richard Bloom), and AB 1323 (Democratic Assemblywoman Holly Mitchell) would all institute an immediate moratorium on the procedure pending commissioned scientific studies.  While not an overt moratorium, the intent of Democratic Senator Hannah-Beth Jackson’s SB 395, which would broadly define “produced water” and classify it as a hazardous waste material, is to effectively ban the fracking process.
  • Taxation: Democratic Senator Noreen Evans’ SB 241 would impose a 9.9% oil severance tax on all oil extraction in California with the funds allocated to the UC, CSU, and Community Colleges systems as well as the Department of Parks and Recreation.

In addition to these pieces of legislation, California’s Department of Conservation/Division of Oil, Gas and Geothermal Resources has proposed a list of fracking regulations in 2012 that would institute “rules for storing and handling fracking fluids, well monitoring after fracking, and preventing water contamination,” as well as require the disclosure of the chemicals used in the fluid. The proposed regulations mimic closely Colorado’s fracking regulations, which were championed by Democratic Governor John Hickenlooper, the oil and natural gas industry, and environmentalists like Earthjustice.

Currently, the operators of the 750 wells using fracking are not required to report anything about their operations.  However, environmentalists find the proposed DOGGR regulations completely inadequate for a practice that has been linked to groundwater contamination in Pennsylvania, increased levels of ozone in Wyoming, health risks in Colorado, and possibly to induced seismic activity. Using these environmental and health degradation concerns, environmentalists have successfully lobbied for moratoriums in New York, New Jersey, Vermont, and North Carolina.  It is their hope to institute a clear and immediate moratorium on fracking in California despite any positive externality.

However, the environmental and health effects of fracking are not as clear cut as the environmentalists would have you believe.  Based on analysis by Susan Brantley of Pennsylvania State University and Anna Meyendorff of the University of Michigan, water quality in Pennsylvania was largely the same before and after the fracking of wells nearby. Hickenlooper has called attempts to vilify fracking as “all hyperbole and anxiety…and no science.” And a year-long independently-verified study of the Ingleside Oil Field near Los Angeles found no negative health, air quality, or seismic effects.

While the environmental and health impact is hotly debate, the second issue – economic growth – is anything but debatable.

At issue in California is the 15.4 billion barrels of shale oil reserves lying under the 1,752 sq. mile Monterey/Santos shale play.  Based on a geological study by the U.S. Energy Information Administration, this region of California represents 64% of all shale oil reserves in the nation. To put this in perspective, according to EIA data, California’s Monterey/Santos reserves alone could conceivably feed the American oil appetite for roughly 2.2 years.

Unleashing this vast amount of natural resources could yield an economic growth similar to the dot-com boom. According to a recent USC study, opening the Monterey/Santos shale play could boost per capita GDP by over $10,000 (an increase of 14.3% over the projected 2020 baseline). This economic boom would yield substantial employment growth – an additional 2.8 million jobs in California representing a 10% increase over the projected baseline. The additional employment coupled with increased GDP output would increase total personal income by about $220 billion – a 10% increase over the 2020 baseline.  And all of this economic growth means a boon to the state budget. By 2020, the oil production would add an additional $24.6 billion to the state, local, and county government coffers.

Contextually, during the dot-com boom, California non-farm employment increased by 1.4 million (9.7%), per capita GDP and total personal income grew by almost $6,700 (18.3%) and $248 billion (29%), respectively.  Even if only half of the additional $25 billion in government revenue went to Sacramento, it would equal around 125% of California’s 2011 collected corporate income tax receipts.

So while environmentalists would like Californians to believe that fracking would lead to an environmental apocalypse, scientific evidence is mixed and divergent.  On the other hand, economic impact studies are uniformly positive.  In a state plagued by chronically high unemployment and critically low GDP growth, it would be fiscally irresponsible to so blithely ignore potential economic motivators.

However, California should not blindly embrace fracking.  Like Colorado and Pennsylvania, which both engaged in transparent and streamlined fracking oversight under Democratic gubernatorial administrations, California would be wise to replicate such a system to protect against possible environmental and health hazards while fostering economic growth. The DOGGR proposed regulations as well as certain introduced legislation, like the amended SB 4, build on the success of other states, such as Colorado. A strict moratorium ignores the positive economic benefits and is unwarranted considering fracking’s limited use in the state and the fact that there have been no major incidents related to the procedure despite 60 years of unregulated activity. While public scientific studies should be conducted, using them as a method to stall further fracking development—like AB 649, AB 1301, AB 1323, and possibly, SB 4—irresponsibly prohibits regulated production that would produce significant economic gains.

Californians should be wary of creating too many layers of fracking bureaucracy.  While AB 982’s permitting process is similar to DOGGR’s and SB 4’s, it would add an additional layer of red tape by giving both the DOGGR and the Regional Water Quality Control Board responsibility for oversight.  DOGGR was created to oversee oil and natural gas exploration and production; therefore, additional layers of oversight would impose additional costs, unnecessarily slowing down the process and stymieing potential economic activity.  If DOGGR isn’t doing its job properly (and there is no evidence to suggest so), the appropriate method to fixing the regulatory process isn’t to add more layers, but rather to reform the division.

At the same time, Sacramento shouldn’t and doesn’t need to impose further taxes and fees on the industry.  Tax windfalls will occur without the need of further taxation.  Instead of greedily hording the additional funds for pet projects, California should a) prudently pay down its debt and unfunded liabilities to put itself on sounder fiscal footing and/or b) use the additional revenue to lower the taxation burden on businesses within the state to foster broader economic growth.

Despite his environmentalist background, Governor Jerry Brown has taken a much more pragmatic view of the oil industry in his current term and has expressed a moderate tone on the future of fracking in the Golden State.  Odds are: some sort of action will take place in 2013 on California fracking; the only real question is whether the process is hijacked by environmentalist fear-mongering or if the Legislature and Governor Brown take a measured approach accurately weighing both the procedures’ benefits and costs.

Check-out the previous “Sacramento Spotlight”: AB 1203/SB 209 – Retroactive Capital Gains Tax Increase Repeal

Follow Carson Bruno on Twitter: @CarsonJFBruno