An institutional theory of hydraulic fracturing policy

a r t i c l e i n f o The use of high-volume horizontal hydraulic fracturing (fracking) has increased substantially over the past five years in the United States. Use of this drilling technology to extract natural gas from hitherto impermeable shale is expected to increase even more in coming decades. Two institutions, integration contracts and well spacing requirements, evolved to mitigate the common-pool economic wastes associated with conventional oil and gas drilling. U.S. regulators have applied these institutions to fracking. However, shale plays differ geologically from conventional plays and are subject to different extractive technologies. We theorize that the point-source pollution characteristics of conventional drilling allowed integration contracts and well space requirements to minimize local negative environmental externalities as an unintended byproduct of minimizing common-pool economic wastes. The non-point source pollution characteristics of fracking, however, make these institutions insufficient to minimize negative environmental externalities associated with drilling in shale plays, because the economic waste problem is different. If policymakers understand the crucial differences between conventional oil and gas plays and shale plays and the drilling technologies applied to them, they should be better equipped to craft fracking regulatory policies that internalize problematic externalities. The use of unconventional production techniques such as high-volume horizontal hydraulic fracturing (fracking) to extract oil and gas from previously difficult-to-access shale formations has rapidly increased over the past decade in the United States. This increase in unconventional production comes amidst controversy surrounding the perceived environmental impacts of new fracking techniques, as well as the perceived infringement by industry actors on the property rights of landowners unwilling to lease their mineral rights (Davis, 2012). Scholars of ecological economics and politics have jumped at the opportunity to study this nascent technology and have begun publishing works that examine the likely environmental (Clark et al. consequences of this rapidly emerging industry. 1 Noticeably absent from much of this literature, however, is the development of institutional and political-economic theory. In this paper, we develop an institutional theory concerning oil and gas production in the United States to demonstrate that institutions designed to address the wastes associated with conventional drilling technologies are inadequate to address similar wastes associated with fracking technologies. First, we examine the evolution of two institutions, integration contracts and well spacing requirements, which are frequently used in the United States to regulate oil and gas production. The geological conditions under which conventional drilling takes place …