In May 2010, the state of Michigan raised $178 million through leases to extract minerals on public land, the majority of which was natural gas. This amount nearly totaled how much the state of Michigan raised in the previous 82 years. Given Michigan’s recent economic woes, it’s obvious why fracking is attractive. The main mechanism for extracting this gas is called hydraulic fracturing, colloquially known as “fracking”, which has revolutionized the natural gas industry in the US and has led some to refer to the US as the “Saudi Arabia of Natural Gas.” However, as hydraulic-fracturing has become more mainstream, environmental and health issues have surfaced in lay and scientific media, the most high profile of which was a documentary, Gasland. Michigan organizations, such as letsbanfracking.org, have decided to campaign for a ballot initiative to impose a moratorium on hydraulic-fracturing. Given the benefits of fracking, a moratorium is not the answer, but these concerns cannot be dismissed. Therefore, while fracking in Michigan has and will continue to have tremendous benefits on the local economy, the environmental and health concerns cannot be neglected.
As is detailed in Gregory Zuckerman’s excellent book, The Frackers, fracking is the synthesis of two drilling processes: horizontal drilling and hydraulic fracturing. Horizontal drilling allows drilling companies to reach natural gas wells in shallow beds of rock far below the ground. Hydraulic fracturing involves injecting wells with a “mixture of water, sand and some chemicals” to fracture rock. This allows for the ability to extract natural gas from several smaller wells along the bed of shale rock. Both of these techniques have been used in isolation for decades. Over the past 10 years, these two processes have been combined to create what is now known as “fracking”, a technique, which has revolutionized US domestic natural gas production.
As recently as 2006, Cheniere Energy, predicting that the US was running out of natural gas, made a $1.5 billion bet on a natural gas import terminal. However, over the past 7 years, production in the US has increased by nearly 30% and the price has plunged from $5.84 per million BTUs in October 2006 to $3.59 per million BTUs in 2013. The company has since reversed course and is building a terminal at great expense to export natural gas. Additionally, in 2009, Exxon Mobil acquired XTO Energy, one of the largest natural gas producers at the time, for $31 billion. Clearly, major players see a lot of potential in this industry. After the bankruptcy of Detroit and the major auto companies, Michigan is looking to cash in.
Fracking benefits the Michigan economy through three main channels – jobs and investment in Michigan, royalty payments to landowners, and royalties, fees and taxes to the state government. According to the a report by the Graham Sustainability Initiative, natural gas production and servicing employs approximately 2,000 people in Michigan. These jobs tend to be higher skilled jobs paying above-average salaries. The majority of the firms that frack in Michigan are Michigan-based and tend to buy many of their inputs, particularly those who are servicing wells, in Michigan.
In exchange for the right to drill on an individual’s property, natural gas firms are required to pay lease fees and royalties to the private landowner. While it is not broken out explicitly for natural gas, in 2010, royalty and lease payments to private landowners for all mineral rights were $81.5 million. Finally, the state of Michigan receives money through royalties, which are “one-sixth of revenue on gas sales,” fees and rent for leases on wells that are on private property, and a 5% tax on drilling on private leases. The most lucrative year on record for the Michigan government was 2010, during which time these brought in over $270 million for all natural resource extraction.
Despite these benefits, people worry about the costs of fracking, which generally include the environmental and health-related costs. Some of the environmental costs include contamination of drinking water and methane emissions. The documentary Gasland shows evidence of people who are able to light their tap water on fire, which the documentary claims is due to fracking. In this case, the water is not safe to drink, and individuals are required to drink bottled water. However, there still is not definitive evidence of whether this is caused by fracking. In addition, people worry about the potential of the chemical compound, often referred to as the “cocktail” in fracking to pollute groundwater. There is not much evidence that this is happening on a widespread basis, however it remains a concern.
Methane emission is a more concerning byproduct of fracking. While natural gas has half of the carbon emissions of coal and a third of the carbon emissions of oil, leaks of natural gas, methane, are 25 times as damaging as carbon. These leaks are primarily due to old piping infrastructure that hasn’t been properly maintained and the excess natural gas that firms aren’t able to use that they can’t burn off or “flare”, particularly given the current low price of natural gas. According to a recent report by the Environmental Protection Agency, natural gas is still better for the environment than coal, however the evidence is not conclusive.
Fracking will continue to have a transformative effect on the Michigan and American economy. While there are clear benefits to fracking in terms of jobs and money, the costs need to be taken seriously. Thus, while prices remain low and until there is concrete evidence that the benefits of a dramatic surge in fracking in Michigan clearly outweigh the costs, growth in fracking should be limited. There is no rush.