Home > Property & Casualty > Fracking and the potential risks beneath the rock

Fracking and the potential risks beneath the rock

fracking630Hydraulic fracturing (or “fracking” as it is commonly called) is nothing new. The technique, pumping high-pressure, chemical-laced water and sand down a well to extract oil and gas from rock, has been used by drillers since the 1970’s, when the U.S. government and various energy groups first conducted research studies and pilot demonstrations of the method. But it’s the current scale of fracking projects, and the controversy surrounding them, that has brought the issue into focus.

From 2007 to 2010, shale gas production more than tripled to over 5 trillion cubic feet and is on track to double again over the next two decades, according to federal government data and the Energy Information Administration. Energy companies continue to lease land across the U.S. and build new wells in Texas, Illinois and Iowa. Proponents see this rapid growth as the path to energy independence and thousands of new jobs. But critics say otherwise. The potential environmental impacts of fracking – from ground water contamination, oil spills and explosions, gas migration and air pollution – have raised serious concerns and warnings from environmental groups and researchers. Public outrage and community protests against fracking in states such as New York and Michigan have prompted state governments to revisit their regulations of the industry or to ban fracking completely. Even the science behind fracking is uncertain. While proponents say evidence of environmental threats is unfounded, opponents tend to dismiss studies that show improved well-drilling safety standards, claiming they are funded by the oil and gas industry.

It’s these opposing viewpoints that have turned fracking into such a complex issue, and as a result, very difficult to insure. Operators aren’t always sure about how much coverage to buy, and underwriters must look closely at what types of coverage they are writing. In general, oil drillers tend to carry general casualty liability policies to protect against oil blowouts and other accidents. But the risks behind fracking are subtle, and more difficult to identify. Pollutants from gas extraction tend to leak out into the environment over time, and most policies don’t cover gradual pollution. Pricing these risks is another challenge. Insurers must consider the condition of shale rock at a given site, varying state regulations, and take a close look at the individual operations of the companies involved. The bottom line, say experts, is to know what’s underground before you start digging.

With so much controversy around the issue, insureds should consider the following:

  • Obtain a baseline of environmental data about fracking wells ahead of time. Contaminants can enter ground water if the wells are not built properly. As a result, dozens of lawsuits have been filed across the country claiming well-water contamination from fracking.
  • Landowners are eager to lease property to gas companies, but scientific research studies take time to develop conclusive results about potential risks. Therefore, risk managers must take the time to assess the project’s overall risk (including those posed by the use of heavy, expensive machinery, hauling tanks of sand and water, etc. ) and the likelihood of a serious accident occurring.
  • Read contracts carefully, and make sure all terms are understood by both parties. Most master service agreements often carry “knock for knock” indemnity clauses, in which case operators and contractors are responsible for their own equipment, without regard to fault. However, sometimes there is a carve-out for catastrophic loss, in which case most, if not all, of the fault falls on the site operator for personal injury, equipment damage or loss of use.

About the Author

Charles is a Vice President in the Renewable Energy Clean Technology Practice at William Gallagher Associates working with independent power developers, owner operators and manufacturers in the business of power generation.
617.646.0251 | clong@wgains.com | Connect on LinkedIn

  1. December 20, 2012 at 10:09 am

    Reblogged this on Standard Climate.

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