The document discusses Maryland's consideration of whether to allow hydraulic fracturing for natural gas extraction from the Marcellus Shale. It analyzes stakeholders, environmental and economic impacts, and recommends a regulated approach to fracturing that permits it with strict environmental policies to maximize economic benefits while minimizing risks to the environment and public health. The analysis finds regulated fracturing could generate $1.6 billion for Maryland's economy from 2015-2045 while reducing environmental risks compared to unregulated fracturing.

1. APPLYING POLICY TO MAXIMIZE SOCIAL
GOOD: HYDRO FRACTURING IN
MARYLAND
David Koke, Alex Radu
October 26, 2012

2. CONTEXT
The seemingly-wondrous economic benefits of hydro fracturing must be
weighed 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. 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.
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Context Problem Stakeholder Analysis Alternatives Recommendations

4. RECOMMENDATIONS
A SNAPSHOT
The economic benefits from allowing hydro fracturing are too great to
ignore, 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. STAKEHOLDER ANALYSIS
Five stakeholder groups are strongly affected by the Government of
Maryland’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
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Context Problem Stakeholder Analysis Alternatives Recommendations

6. EVALUATION OF STAKES
The public of Maryland should be kept at the forefront in all decisions
Strength
Legitimacy Power Urgency
of Stake
The Public
Future
Generation
State
Government
Energy
Companies
Non-Energy
Companies
6
Context Problem Stakeholder Analysis Alternatives Recommendations

7. ALTERNATIVES
Applying ethical theory to evaluate the “good” generated by three
alternatives 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. RECOMMENDATIONS
Policy needs to be utilized in a manner that maximizes economic benefit to
Marylanders, 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
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9. LONG TERM IMPLEMENTATION
In the long term, the focus should be on clarifying environmental and
economic 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 2015
Legislative Committee Develops Bills
Public and Corporate Input is Solicited
Bills Pass Through General Assembly
Bills Pass Through Senate
Well Operations Begin
Drilling Permit Evaluation
Safe Drilling Initiative and EPA Water
Reports Becomes Available
Monitoring of Environmental Impacts
Enforcement of Regulations
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Context Problem Stakeholder Analysis Alternatives Recommendations

10. RISKS & MITIGATION
No drilling should be permitted without the “must have” policies. Ongoing
monitoring 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
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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
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12. APPENDICIES
12

13. CONTEXT
The seemingly-wondrous economic benefits of hydro fracturing must be
weighed 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. 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. INGREDIENTS IN FRACTURING SOLUTE
15
Source: Colorado Oil & Gas Association (2011)

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 16
Source: Maryland Department of the Environment (2010)

17. THE PUBLIC
Most Marylanders have numerous positive financial stakes based in
hydraulic 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. FUTURE GENERATIONS
Future generations could suffer from environmental degradation, but could
gain 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
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19. MARYLAND STATE GOVERNMENT
Politicians must act in the best interests of their constituents while ensuring
a 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
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20. ENERGY COMPANIES
Energy 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. NON-ENERGY COMPANIES
Companies that depend on natural resources have a stake in protecting
those 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
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Context Problem Stakeholder Analysis Alternatives Recommendations

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 is
Future 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 start
Energy 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. ETHICAL THEORY
The Government of Maryland should utilize a utilitarian approach in
decision 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
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24. MORATORIUM ON HYDRO
FRACTURING
A moratorium on hydro fracturing would reduce environmental risks, but do
nothing 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
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25. WIDESPREAD HYDRO FRACTURING
Permitting widespread hydro fracturing would lead to strong economic
benefits, 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. REGULATED HYDRO FRACTURING
Regulated hydro fracturing will allow for the realization of economic
benefits, 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. 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 degradation
Source: The Potential Economic & Fiscal Impacts of Natural Gas Production in Western Maryland (2012)

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
distance
Measurement Allegany Garrett Decrease in
quality of life
Value of a human life $7,900,000
5.0% $ 116,890 $ 233,780 $ 467,561 $ 974,085
Median 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 $ 9,740,847
Life expectancy 78.09
Average remaining
$3,976,278 Externality Costs With Regulation (Per Well)
value of a human life
Affected
500 feet 1000 feet 2500 feet 5000 feet
Population 105184 distance
Decrease in
Area (square mi) 1073.42 quality of life
Population 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. 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
29
Source: Marcellus Shale Safe Drilling Initiative Study, Part 1 (2011)

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. WIDESPREAD HYDRO FRACTURING ANALYSIS
Comparing economic benefit numbers to a secondary source
31
Source: Marcellus Shale Safe Drilling Initiative Study, Part 1 (2011)

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 percentages
Source: P. Jacquelyn. The Fracking Debate: A Policymaker’s Guide (2012)  Indicates “must have” policy

33. NEXT STEPS
In the short term, the focus should be on policy design while opening up
communications 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. 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