Balkinization: It's Fracking, Complicated!

It's Fracking, Complicated!

Guest Blogger

John M. Golden & Hannah J. Wiseman

For the conference on Innovation Law Beyond IP at Yale Law School

The early twenty-first century has witnessed a revolution in oil and gas development that promises to turn the United States into a new form of “petrostate,” a high-tech superpower whose newfound ability to exploit previously unexploited or unexploitable energy resources could shake national economies and geopolitical calculi for decades. This revolution represents the sort of disruptive innovation that makes innovation-policy mavens salivate. What public policies, if any, helped bring about this revolution, and how can the story behind it inform innovation policy going forward? These are questions that we explore in a draft paper, “The Fracking Revolution: A Case Study in Policy Levers to Promote Innovation” (draft available by request), that we will present at the “Innovation Law Beyond IP” conference to be hosted by the Yale Law School Information Society Project later this month.

Credit for the U.S. boom in unconventional natural gas production commonly focuses on an enterprising individual, George Mitchell, who persisted in seeking to “crack the code” of Texas’ Barnett Shale for more than a decade before making key breakthroughs with hydraulic fracturing (“fracking”) in the late 1990s. Notably, Mitchell and his independent production company achieved this success without obtaining patent protection in their critical discoveries. Thus, the facial story of the fracking revolution can seem one of a heroic individual entrepreneur largely unaided even by the sort of

minimalist government intervention embodied by the U.S. patent system.

Although Mitchell and the entrepreneurial spirit he represents deserve great credit, the overall story of the shale gas boom is more complicated. Infrastructural developments and a large number of technological innovations—not only in hydraulic fracturing and horizontal drilling, but also in new forms of drill bits, downhole motors and measurements, seismic imaging, and flexible tubing—combined to provide vital foundations for the boom. The resulting, more complex backstory features multiple significant roles for government action. Through government-funded R&D, tax and regulatory relief, and a FERC-sanctioned surcharge on interstate gas that financed the private Gas Research Institute, federal and state governments provided substantial—at times critical—support for an unconventional gas industry that was historically dominated by independent companies with limited R&D budgets. The federal government also paved the way for an independent-producer-led boom by requiring, encouraging, or otherwise enabling “open access” interstate pipelines and lucrative interstate markets for the transport and sale of unconventional gas.

Somewhat ironically in light of Edmund Kitch’s analogy to resource-extraction rights as a basis for his “prospect theory” for patents, patents appear to have played an only relatively modest, background role in the story behind the shale gas boom. There is a decades-long history of patenting in a number of the technologies that ultimately converged to produce the boom. But it appears true that Mitchell and his production company did not pursue patents on their key innovations. Indeed, as chronicled by Zhongmin Wang and Alan Krupnick , Mitchell and other independent producers apparently relied primarily on other forms of property rights—land leases and mineral rights themselves—to appropriate value from their innovations. Once such a producer assembled the right mix of technologies to “crack the code” for a particular shale formation, its already purchased land and mineral rights would shoot up in value, a phenomenon that enabled Mitchell Energy & Development to sell itself for $3.5 billion in 2002. Thus, the story of the fracking revolution is in substantial part a story of how complementary assets can substitute for strong patent rights as a means for promoting technological progress.

Of course, one can wonder whether a goal of technological progress has been pursued with too much zeal. Current environmental concerns with fracking—some relating directly to regulatory exemptions that helped speed fracking’s development and diffusion, others relating to worry that unconventional gas development has diverted effort from renewable energies—emphasize this point.

But assuming a goal of promoting development of a particular technology, the story of the fracking revolution provides a number of lessons that can inform policies in other areas, such as those involving solar or wind energy. These lessons, having been derived from a single case study, cannot be expected to be in the nature of definitive, universal truths about the precise levers that best foster innovation. But the lessons do include reaffirmations of government’s capacity to use—and potential wisdom in using—a diverse mix of policies to support productive innovation ecosystems: policies that nurture needed infrastructure, that promote information sharing, that supplement and complement private research, and that increase the prospective profitability of innovation through intellectual property, tax, regulatory, or even traditional tangible-property mechanisms. The relatively modest role of patents in the story behind the shale gas boom suggests that, under appropriate circumstances, a mix of alternative policy levers can substitute for the benefits often thought to be supplied by patents. Consistent with the calls of other authors to consider how and to what extent policymakers should seek to promote innovation, we hope our study can inform the use of such policy levers in the future.

John M. Golden is the Loomer Family Professor in Law at UT Austin. He can be reached at jgolden at law.texas.edu

Hannah J. Wiseman is an assistant professor of law at Florida State. She can be reached at hwiseman at law.fsu.edu

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