Applying Policy to Maximize Social Good: Hydro Fracturing in Maryland (abridged)

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This deck was put together for the 2012 Collegiate Ethics Case Competition at the Eller School of Business in Tucson, Arizona

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Applying Policy to Maximize Social Good: Hydro Fracturing in Maryland (abridged)

  1. 1. APPLYING POLICY TO MAXIMIZE SOCIALGOOD: HYDRO FRACTURING INMARYLAND David Koke, Alex Radu October 26, 2012
  2. 2. CONTEXTThe seemingly-wondrous economic benefits of hydro fracturing must beweighed against its impact on Marylanders and the environment  Pennsylvania on the forefront of fracturing  1% of Marcellus Shale Deposits in Maryland  No permits for high volume slick hydro fracturing to date  Bigger-picture issues  Importance of fresh water  Energy independence for the United States 2 Context Problem Stakeholder Analysis Alternatives Recommendations
  3. 3. PROBLEM STATEMENT The State Government of Maryland is tasked with deciding if the allowance of drilling in the Marcellus Shale Play is an ethically sound course of action, given the contributions that hydro fracturing could make to a thriving, cleaner, energy- independent Maryland. 3 Context Problem Stakeholder Analysis Alternatives Recommendations
  4. 4. RECOMMENDATIONSA SNAPSHOTThe economic benefits from allowing hydro fracturing are too great toignore, but should be supplemented with rigorous environmental policies Permit hydro fracturing of Marcellus Shale  Up to $1.6B in added economic value from 2015-2045  Mitigate risks through 5 “must have” public policies Review and research to better understand impacts Slow economic recovery 4 Context Problem Stakeholder Analysis Alternatives Recommendations
  5. 5. STAKEHOLDER ANALYSISFive stakeholder groups are strongly affected by the Government ofMaryland’s decisions regarding hydro fracturing in the state Primary Stakeholders Interest • The Public • Future Generations • Maryland State Government • Energy Companies Ethical Stakes Financial • Non-Energy Companies Secondary Stakeholders • Interest Groups Legal • Other Governments 5 Context Problem Stakeholder Analysis Alternatives Recommendations
  6. 6. EVALUATION OF STAKESThe public of Maryland should be kept at the forefront in all decisions Strength Legitimacy Power Urgency of Stake The Public Future Generation StateGovernment Energy Companies Non-Energy Companies 6 Context Problem Stakeholder Analysis Alternatives Recommendations
  7. 7. ALTERNATIVESApplying ethical theory to evaluate the “good” generated by threealternatives along an environment to economy gradient Moratorium on Hydro Fracturing + Environment  No additional economic impact  Minimizes negative externalities Regulated Hydro Fracturing  $1.7Bn added to the economy  Medium to high impact on agriculture Widespread Hydro Fracturing  $1.6Bn added to the economy  Low to medium impact on agriculture + Economy 7 Context Problem Stakeholder Analysis Alternatives Recommendations
  8. 8. RECOMMENDATIONSPolicy needs to be utilized in a manner that maximizes economic benefit toMarylanders, while minimizing the impact of externalities Meets needs of strongest stakeholders, others have Policy “must haves” potential to gain  Severance tax + Environment Continuous feedback  Waste treatment and disposal regulations  Monitor research progress  Water quality  Solicit feedback from monitoring stakeholders  Scheduled integrity  Work with industry to testing of wells ensure widespread use of  Tiered performance best practices bonds + Economy  Monitor Pennsylvania 8 Context Problem Stakeholder Analysis Alternatives Recommendations
  9. 9. LONG TERM IMPLEMENTATIONIn the long term, the focus should be on clarifying environmental andeconomic impacts, refining best practices, and an ongoing review process Call for the formation of legislative committee Initiate study to guide policy design and develop evaluation metrics 2013 2014 2015Legislative Committee Develops BillsPublic and Corporate Input is SolicitedBills Pass Through General AssemblyBills Pass Through SenateWell Operations BeginDrilling Permit EvaluationSafe Drilling Initiative and EPA WaterReports Becomes AvailableMonitoring of Environmental ImpactsEnforcement of Regulations 9 Context Problem Stakeholder Analysis Alternatives Recommendations
  10. 10. RISKS & MITIGATIONNo drilling should be permitted without the “must have” policies. Ongoingmonitoring efforts will determine future action Policies inherently designed to mitigate risks + Environment  If “must have” policies are not passed, do not proceed Balanced Scorecard - key success metrics Contingency: If 2 thresholds are not met  Attempt to pass stricter regulations  Shift upwards on gradient as necessary until + Economy economic benefits approach zero 10 Context Problem Stakeholder Analysis Alternatives Recommendations
  11. 11. CONCLUSION Current economic livelihood is an ethical consideration that is sometimes overlooked in favour of environmental protection Global Water Needs Regulated Hydro Fracturing Economic Energy Crisis Independence 11 Context Problem Stakeholder Analysis Alternatives Recommendations
  12. 12. APPENDICIES 12
  13. 13. CONTEXTThe seemingly-wondrous economic benefits of hydro fracturing must beweighed against its impact on Marylanders and the environment New technology  New resources Fracturing process risks Pennsylvania on the forefront of fracturing Parallels drawn with Canadian Oil Sands Growing international water access concerns 13 Context Problem Stakeholder Analysis Alternatives Recommendations
  14. 14. HYDRO FRACTURING OVERVIEW General  Creates or enlarges fractures in an underground rock layer by using pressurized fluid, allowing more of what is in the rock to be released  Used for oil and gas wells since 1940s Process  Drill downwards 2,500-8,000 feet, then drill horizontally  Encase drill shaft in multiple layers of steel and cement  Starting at the end of the horizontal section, perforate a portion of the shaft walls, then pump fracturing fluid into the wellbore  Solute is ~90% water, 9% proppant, 0.5-1% chemicals  Pressures up to 13,500 PSI are applied  Plug off punctured section and repeat for entire horizontal branch  Collect flowback, accounting for 30-70% of original fracture fluid volume  Allow natural gas to make its way out of the shale and up the wellbore Impact  1 million gallons of water used per 1,000 feet of fracturing  3 to 5 million gallons of water used per well  Drill pad takes up 3-5 acres  Potential problems with seismic activity, methane release, and contamination of ground water due to chemicals used in the process 14
  15. 15. INGREDIENTS IN FRACTURING SOLUTE 15Source: Colorado Oil & Gas Association (2011)
  16. 16. MARYLAND’S CURRENT DRILLING PROCESS AND REQUIREMENTS  Location  1,000 feet from lands that are not leased from gas drilling purposes, schools, churches, occupied dwellings  Well must have local approval  Drilling  Operator must submit drilling and casing plan which outlines how they will protect water supplies: sediment and stormwater control  Must submit containment and disposal plans for wastewater and other flowback waste  Plan emergency response in case of accident or injury  Identify source of fresh water supply for drilling process  Post-drilling  Site restoration including reclamation of disturbed lands  Cuttings disposal plan for removed rock/soil material  Production procedures to outline requirements for operations  Product transport plan to include routes and storage areas  Bond and Insurance  Performance bond up to $100,000 per well or blanket to $500,000 for site reclamation activities if a permitee defaults on a project  Insurance at $5,000,000 per occurrence or accident 16Source: Maryland Department of the Environment (2010)
  17. 17. THE PUBLICMost Marylanders have numerous positive financial stakes based inhydraulic fracturing, but some risk a decreased quality of life Interest • Aversion to noise and visual pollution Financial • Increased property values for some, diminished for others • New employment opportunities • Potential annual household energy savings of $926 • Could benefit from increased government tax base Legal • Right to clean drinking water and a certain quality of life Ethical • Some see themselves as stewards for the environment 17 Context Problem Stakeholder Analysis Alternatives Recommendations
  18. 18. FUTURE GENERATIONSFuture generations could suffer from environmental degradation, but couldgain from the economic benefits of hydro fracturing Interest • Desire a clean, safe, and even beautiful world to live in Financial • 1,800 direct jobs created for Marylanders from 2015-2045 • Ripple effect leading to more jobs and purchasing power Legal • Access to clean drinking water – both quality and quantity could be affected by hydro fracturing 18 Context Problem Stakeholder Analysis Alternatives Recommendations
  19. 19. MARYLAND STATE GOVERNMENTPoliticians must act in the best interests of their constituents while ensuringa financially stable state, all while maintaining voter support Interest • Politicians want to protect their political futures • Existing focus on clean energy, energy independence Financial • Tax Revenues to support budget • Additional resources for environmental protection Legal • Water protection regulations – 1.5B gal of water to be used • Smart, Green and Growing legislation – focus on sustainable development Ethical • Moral obligation to protect and represent constituents 19 Context Problem Stakeholder Analysis Alternatives Recommendations
  20. 20. ENERGY COMPANIESEnergy companies’ stakes are primarily financial in nature Interest • Desire to be viewed as leaders in emerging energy sector Financial • New source of revenue while others are being depleted • Expected higher profits Ethical • Duty to use safe, sustainable energy production methods 20 Context Problem Stakeholder Analysis Alternatives Recommendations
  21. 21. NON-ENERGY COMPANIESCompanies that depend on natural resources have a stake in protectingthose resources, while others may benefit from the economic boom Financial • Could ensure cleaner, stable energy supply • Ripple effect creates jobs and boosts sales for companies in many sectors of the economy • Potential negative impact on operations for those relying on natural resources Legal • Right to protection of assets and natural resources which are used as inputs 21 Context Problem Stakeholder Analysis Alternatives Recommendations
  22. 22. DETAILED STAKEHOLDER EVALUATION MATRIX Legitimacy Power Urgency They are the subjects Ability to influence of government government Relatively low, but The Public decisions and will be decisions through people are suffering most exposed to elections, public from unemployment consequences interest groups The state of the Low since they can’t Environmental crisis isFuture Generations environment will speak for themselves very much happening impact their livelihoods Should be acting in the Under lots of external interests of As lawmakers they State Government pressure to make constituents, not have very high power decisions personal interest Their stake is primarily Relatively high Eager to startEnergy Companies financial lobbying power development Operations relying on Mild lobbying Non-Energy natural resources Not a time sensitive abilities, not as strong 22 Companies could be negatively issue as energy sector impacted
  23. 23. ETHICAL THEORYThe Government of Maryland should utilize a utilitarian approach indecision making to ensure the greatest amount of good for Marylanders Teleological • Utilitarianism – creating the most Approach good for the most people • Considers the consequences of(consequences) actions Deontological • Focuses on the intent or motive Approach behind the behavior • Doesn’t consider the consequences (principles) of actions 23 Context Problem Stakeholder Analysis Alternatives Recommendations
  24. 24. MORATORIUM ON HYDROFRACTURINGA moratorium on hydro fracturing would reduce environmental risks, but donothing to improve Marylanders’ lives or the State’s economy No economic impact Protects agricultural businesses, the environment and the health of Marylanders Inhibits ability to be energy independent Nobody’s life is explicitly better or worse 24 Context Problem Stakeholder Analysis Alternatives Recommendations
  25. 25. WIDESPREAD HYDRO FRACTURINGPermitting widespread hydro fracturing would lead to strong economicbenefits, while compromising the safety of the environment Allows all stakeholders to reap economic benefits 5% probability of contamination of nearby natural resources Negative impact on agricultural industries (valued at $2.4B in Western Maryland) unknown Economic Impact of Hydro Fracking in Maryland (2015 – 2045) – Limited Control Scenario Number of Wells 365 Direct Economic Impact/Well $4M Externality Costs/Well $0.9M Ripple Effect Multiplier 1.5x Net Economic Impact $1.7B 25 Context Problem Stakeholder Analysis Alternatives Recommendations
  26. 26. REGULATED HYDRO FRACTURINGRegulated hydro fracturing will allow for the realization of economicbenefits, while actively protecting the environment and Marylanders Curbs the impact of negative externalities through policy Reduces probability of contamination to 3% and greatly reduces impact on agricultural industries ($2.4B) Economic Impact of Hydro Fracking in Maryland (2015 – 2045) – Regulatory Scenario Number of Wells 300 Direct Economic Impact/Well $4M Externality Costs/Well $0.5M Incremental Regulatory $0.1M Costs/Well Ripple Effect Multiplier 1.5x Net Economic Impact $1.6B 26 Context Problem Stakeholder Analysis Alternatives Recommendations
  27. 27. WIDESPREAD HYDRO FRACTURING ANALYSIS  Critiques:  Does not consider health and safety impact on human quality of life  Water contamination costs appear understated 27  Does not consider impact on natural resource-based industries from risk of environmental degradationSource: The Potential Economic & Fiscal Impacts of Natural Gas Production in Western Maryland (2012)
  28. 28. WIDESPREAD HYDRO FRACTURING ANALYSIS Estimating the effects on the health and quality of life of humans Externality Costs Without No Regulation (Per Well) Affected 500 feet 1000 feet 2500 feet 5000 feet distanceMeasurement Allegany Garrett Decrease in quality of lifeValue of a human life $7,900,000 5.0% $ 116,890 $ 233,780 $ 467,561 $ 974,085Median age 39.1 38.0 10.0% $ 233,780 $ 467,561 $ 935,121 $ 1,948,169 38.8 25.0% $ 584,451 $ 1,168,902 $ 2,337,803 $ 4,870,423 50.0% $ 1,168,902 $ 2,337,803 $ 4,675,607 $ 9,740,847Life expectancy 78.09Average remaining $3,976,278 Externality Costs With Regulation (Per Well)value of a human life Affected 500 feet 1000 feet 2500 feet 5000 feetPopulation 105184 distance Decrease inArea (square mi) 1073.42 quality of lifePopulation density 97.99 5.0% $ 70,134 $ 140,268 $ 280,536 $ 584,451 10.0% $ 140,268 $ 280,536 $ 561,073 $ 1,168,902 25.0% $ 350,670 $ 701,341 $ 1,402,682 $ 2,922,254 50.0% $ 701,341 $ 1,402,682 $ 2,805,364 $ 5,844,508  Uses EPA value of human life  Assumes 5% probability of contamination negatively affecting humans 28  Assumes proper regulation can decrease probability of contamination by 40%Source: U.S. Census Bureau (2011)
  29. 29. WIDESPREAD HYDRO FRACTURING ANALYSIS Considering costs to provide water to a community of 1,000 with an average daily demand of 100,000 gallons per day in case of contamination Costs to provide $10,000,000 water to 1,000 1/10th Population $1,000,000 density factor Probability of contamination 5% without regulation Externality $50,000 cost/well Probability of contamination 3% with regulatoin Externality $30,000 cost/well 29Source: Marcellus Shale Safe Drilling Initiative Study, Part 1 (2011)
  30. 30. WIDESPREAD HYDRO FRACTURING ANALYSIS Looking at the value of other industries in Western Maryland that could be impacted via environmental contamination from hydraulic fracturing Affected: 10% of the value of affected natural resource- based industries being lost due to contamination equals $292M in costs 30
  31. 31. WIDESPREAD HYDRO FRACTURING ANALYSIS Comparing economic benefit numbers to a secondary source 31Source: Marcellus Shale Safe Drilling Initiative Study, Part 1 (2011)
  32. 32. RELEVANT POLICY INSTRUMENTS Policy Category Example Requirements Severance taxes 0.5-14.8% of market/gross value. Fee based on average natural gas price in previous year, Impact fees capped at $355,000 over 15 years. Well set-back distance 0.5 – 10 miles from water sources/supply infrastructure. Waste treatment and disposal Disclose amount and disposition of flowback fluid. Public disclosure of chemical Disclosure/certification of chemicals, volume, concentrations composition (Federal: FRAC Act). Require integrity testing prior to drilling, development and use of Casing integrity testing industry “best practices” for casing. Wastewater transportation Require vehicle placards, prohibit entry from out-of-state. Record amount and source of water used. Permit requirements Water withdrawal monitoring for extraction over 5,000 gallons. Baseline samples, then 1st, 3rd, and 6th anniversaries after Water quality monitoring drilling. Presumption of liability for contamination. Performance bonds Guarantees that damage to roads, site, etc. will be repaired. Guarantee that direct jobs go primarily to Marylanders by 32 Local labour requirements mandating labour composition percentagesSource: P. Jacquelyn. The Fracking Debate: A Policymaker’s Guide (2012)  Indicates “must have” policy
  33. 33. NEXT STEPSIn the short term, the focus should be on policy design while opening upcommunications with key stakeholders This Week • Communicate recommendations to State Legislators • Call for the formation of a Legislative Committee This Month • Make recommendations public in “Town Hall” setting and begin solicitation of feedback • Initiate study to guide policy design and metrics This Year • Utilize December 2012 preliminary EPA report on water to validate recommendations 33 Context Problem Stakeholder Analysis Alternatives Recommendations
  34. 34. BALANCED SCORECARD REVIEW PROCESS Proposed key success metrics and thresholds  Direct GDP contribution/well (min $3M)  Direct jobs created/well (min 4)  Regulatory costs/well (max $0.25M)  Volume of freshwater used/well (max 5M gallons)  Percent of wastewater recycled within a year (min 30%)  Frequency of water contamination (max 4 in 100 wells)  Public response (qualitative) Further research and policy design is required to refine threshold amounts 34

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