Local Officials on the International Stage

“Frac sand” is a high-purity, durable, crush resistant sand used by the petroleum industry in the hydraulic fracturing process, known as “fracking”. Petroleum fluids such as oil, natural gas and natural gas liquids are trapped in rock that lacks adequate pore space for these fluids to flow to a well. A mixture of water, frac sand and other chemicals are pumped into the rock under extremely high pressure to fracture the rock. The sand infiltrates the cracks and prevents them from closing, thus allowing the release of the product. An alternative product is ceramic beads made from bauxite.

Many Wisconsin municipalities are struggling with the hot button issues related to frac sand mining. This is high stakes, important local politics in action. On one side are those that advocate for an increased tax base, employment opportunities and economic gain for some landowners and mining companies. On the other side are those that are dedicated to preserving the environment and their rural way of life. They want to avoid the noise, traffic, infrastructure damage, dangerous dust and pollution they predict will accompany the mining.

The issues, and the ideologies of the competing positions, are not restricted to only local issues. These decisions will have long-term state, national and even international consequences. To understand the economics and politics of frac sand mining (technically non-metallic mining), we have to put it in the context of its use for shale gas extraction.

The U.S. economy, indeed the economy of the world, has long been dependent on hydrocarbon fuels. We have abundant sources of coal for generations, but oil and liquid natural gas suitable for transportation use appears to be in limited supply, at least the known reserves that are easily recoverable at a reasonable cost. Although the U.S. has a significant supply of oil, we are still dependent on oil exporters, primarily Canada, but also Venezuela, the Middle East and other oil exporting countries. Oil imports have exacerbated our balance of payment deficits.

Many argue that our vast supplies of shale gas will change all of that, make us energy independent, turn the U.S. into a net energy exporter and assure our economic health for generations.

Others argue that we are destroying our future, polluting our lands, wasting our natural resources and failing to develop renewable resources while we risk irreparable damage to the health and lives of those who live near the recovery operations and that we are sacrificing our future for the economic benefit of a few landowners and mining companies.

To say that this is a global issue with consequences that could last for centuries is an understatement. Our Wisconsin local officials are on the front line of this battle. It’s a new frontier for Wisconsin, complete with the risks and promised riches of the unknown.

It will be helpful to analyze the separate components of the issue: the global geopolitical implications, the economics and the impact on local citizens, frac sand opponents and, finally, the dilemma of local officials.

Geopolitics of Shale Gas

The best analysis of the geopolitical significance of shale gas that I have found is a research paper, The Geopolitics of Shale, published by Stratfor. (Strategic Forecasting, Inc., is more commonly known as Stratfor.) It is a global intelligence company founded in 1996 in Austin, Texas by George Friedman. The report was authored by Robert Kaplan, Stratfor’s Chief Geopolitical Analyst. Stratfor describes itself as a global intelligence company that specializes in forecasting and worldwide analysis for its clients including Fortune 500 companies and international government agencies.) Stratfor argues that although the 20th century has shown us that ideologies–whether communism, fascism or humanism–matter and matter greatly, there is another truth. Apart from ideologies, large, impersonal forces like geography and the environment also help to determine the future of human events. The Persian Gulf sheikhdoms are fabulously wealthy not because of ideas or “isms” but because of oil.

Stratfor predicts that shale gas is one of those forces that will change the course of human events. It argues that countries with large shale gas deposits will be better placed in the 21st century competition between nation states, and those without such deposits will be worse off. Ideas will matter little in this regard. The United States has vast deposits of shale gas: in Texas, Louisiana, North Dakota, Pennsylvania, Ohio, and New York. Stratfor predicts that America is poised to be an energy giant of the 21st century regardless of the political choices it makes. Stratfor’s analysis predicts that this is troubling news for Russia, because Russia is currently the energy giant of Europe, exporting natural gas to Eastern and Central European countries. This currently gives Russia considerable political leverage in those areas; Poland is an example. However, because Russia’s reserves are mostly in Siberia, it makes them hard and expensive to exploit. Stratfor envisions a future where the United States exports shale gas to Europe at a competitive price. That will have the potential to change the entire political situation in Europe. Russia will be deprived of the political tool that natural gas has given them.

Although the immense deposits of oil and natural gas in the Middle East will keep Saudi Arabia, Iraq and Iran as major energy exporter for decades, the shale gas revolution will result in a decline in the Middle East’s importance.

Canada’s recent emergence as a major exporter of natural gas and oil will amplify this trend. Canada has immense shale oil and natural gas deposits in Alberta. Canadian oil exports to the U.S. are currently highlighted by the political and environmental disputes about the proposed Keystone pipeline. Soon, shale gas exports will be equally important on a global scale. A future pipeline to British Columbia and new gas liquefaction facilities would allow western Canada to export gas to East Asian countries. Across the continent, eastern Canada could be the beneficiary of new shale gas deposits that reach across the border into the northeastern United States binding Canada and the U.S. even closer and more powerful in the world energy markets.

Stratfor concludes that, “In general, the coming of shale gas will magnify the importance of geography. Which countries have shale underground and which don’t will help determine power relationships. And because shale gas can be transported across oceans in liquid form, states with coastlines will have the advantage. The world will be smaller because of unconventional gas extraction technology, but that only increases the preciousness of geography, rather than decreases it.”

Economics of Shale Gas

The global impact of shale gas on the future wealth of nations is amply described by the Stratfor article. The economics on an international commercial level are likely to look a lot like the current oil/gasoline model. The same international oil companies that dominate oil drilling and gasoline production will control the shale gas market. Their profits are enormous. Last year, Exxon Mobile profits were almost $16 billion on total revenues of $127 billion. BP’s net profits were “only” $11.6 billion. Obviously, those dollars came from those of us that purchase gasoline and other petroleum products. The political and economic muscle of giant petroleum and mining will control the profits of shale gas, too.

The economics of frac sand mining is likely to be somewhat different than for gas extraction. Locally in Wisconsin and Minnesota, land owners, and mining companies, along with real estate tax revenues, stand to reap the windfall.

The economic impact on the various states is beyond the scope of this article, but it is interesting to note that Alaska funds most of its state expenses by oil revenues and Texas also benefits handsomely. On the other hand, coal mining has left West Virginia as one of the poorest states in the nation. Traditionally, mining has not created a strong long-term local economy. Examples are West Virginia, Wyoming and Montana. No one knows if the current boom in North Dakota is permanent or just a bubble. Ultimately, the long-term economic impact on the states will depend on their tax structure and on whether the state or private owners hold the extraction rights.

Local Economics of Frac Sand

Western Wisconsin and Eastern Minnesota have some of the best frac sand in the nation. Frac sand prices depend on quality, transportation costs and supply. Last year, the price was generally $60 to $80 per ton, up to more than $300 per ton for processed sand delivered to the wellhead.

In just a few years, frac sand mining has lifted some local economies by providing well-paying jobs, raising household incomes and pumping revenue into area businesses. In west-central Wisconsin, farmers have been offered six-figure mineral rights fees, plus royalties of $1.50 to $3 per ton for their frac sand.

But, economic gains from frac sand mining don’t come without costs; mining activity can damage infrastructure and the natural environment, and compromise public health and safety. Many of these costs are borne by taxpayers, or by society at large in the form of extra personal expense or forgone benefits. Studies of gravel and coal mining in other parts of the country show that homes situated near a mine or major sand truck route lose value.

Truck hauling from sand mines exacts a heavy toll on rural roads and bridges. A Winona County, Minnesota, study found that daily truck traffic to and from two average-sized mines would wear out pavement at 10 times the rate of normal, mixed traffic.

Frac Sand Opponents

Frac sand opponents, although motivated by a wide variety of interests and ideologies, are more or less united in their goal to prevent mining. Some opponents are concerned about the big picture; our reliance on and waste of petroleum products that are a non-renewable resource. They point out that continued development fosters an ongoing dependence on fossil fuels at the expense of renewable energy sources like wind and solar. Those same opponents tend to worry about global warming and the related global disasters predicted from the long-term effect of increased carbon dioxide, CO2, in the atmosphere. They also point out that shale gas is primarily methane, that methane is a much more powerful greenhouse gas than CO2 and that leakage from gas wells and transmission lines is estimated to be between 2% and 9% of the total used. The opponents raise legitimate concerns, and there is a large body of scientific support for their views.

On a more local level, some opponents are motivated to fight against local environmental damage, devastation of the geology, polluted water, silica dust, noise, increased heavy truck traffic and a claimed reduction in property values. Many of those opponents have chosen a rural residence and lifestyle for the peace and solitude of their homes and fear that a nearby frac sand mine will destroy every reason they chose their rural lifestyle. Again, it is legitimate for individuals to strive to save their neighborhood and preserve their chosen lifestyle.

Finally, most municipalities have a faction of locals who are suspicious of almost all governmental actions, frequently misunderstand the issues and often are motivated by petty disputes and jealousies.

Dilemma of Local Officials

Local officials operate under the umbrella of state laws, or the lack thereof. In that regard, there is a marked difference between Wisconsin and Minnesota, with Wisconsin’s rules for frac sand mining being less stringent than Minnesota’s. There are many differences in laws and procedures but three examples are illustrative. Generally, Minnesota requires an environmental review and Wisconsin does not. Minnesota requires a permit pumping more than 10,000 gallons of water per day, whereas Wisconsin’s permit requirement is not triggered until 70 gallons per minute which could be more than 10 times the Minnesota trigger. Wisconsin is more stringent with respect to reclamation. It requires a reclamation plan, but Minnesota does not. The current political climate in the two states leads us to anticipate that these differences will continue and probably expand.

Nothing in recent history has prepared local officials to deal with frac sand issues. They serve their communities for little compensation and do their best to improve their area and protect their citizens. Traditionally, they have focused on local issues that have little or no state or national impact: public safety, road maintenance and local zoning issues. Frac sand is different. Large fortunes depend on our local wisdom. Power politics becomes the norm. Neighbors are aligned against neighbors. Often, existing ordinances provide an inadequate framework. Important issues will influence the economic, environmental and social health of their communities well beyond their terms in office.

Realistically, frac sand mining will continue in many locations. The shale gas industry will prosper, and the country will enjoy the benefits and suffer the inevitable environmental effects. For some localities, it will be an either/or decision: either participate in the economic boom and accept the dangers, or preserve the local character of their municipality and forgo the promised riches. But for others, local officials will take a more nuanced approach, recognizing that mining is not without consequences and mitigating or regulating to minimize the negative impact.

There is no universal “right” answer. This is democracy in action. An open, transparent process is critical. As Winston Churchill said, “Democracy is the worst form of government, except for all others.”

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