Insurance Companies Having Hard Time With Hydraulic FrackingMay 18, 2012
According to an article featured by Reuters News Agency, the inherent risks of oil and gas extraction are often played down by those in the business. However, their insurers have every reason to keep a close eye on dangers for drillers. According to the article, underwriters now face a politically charged problem in the perceived threats to water supplies of hydraulic fracturing. Hydraulic fracking is a drilling technique where by a mixture of chemicals, water and sand is injected in the earth and high pressures in order to free trapped oil or gas. The article explains that fracking litigation and federal probes have left insurance companies scratching their heads over how to price the risk of the oil and gas production technique. Insurance companies say both the law suits and federal probes have been of little help in assessing the risk posed by hydraulic fracking.
However, the Environmental Protection Agency has just finished testing water at 61 homes involved in a recently litigated fracking contamination suit and found the drinking water was safe to consume. Sources say insurers may get more clarity once EPA releases initial findings of its five-state investigation into the risks to drinking water of fracking. Critics of the process say it can also pollute if fracking fluids seep out of wells. Reportedly, an EPA study showed fracking chemicals were likely present in a Wyoming aquifer near the town of Pavillion, but then it agreed in March to retest the water.
Reportedly, traditional forms of insurance for the oil and gas industry suddenly appeared inadequate once the shale boom was in full swing and water-contamination lawsuits cropped up. Sources say while some insurers avoid it, others like XL Group, Ironshore, Chartis and Zurich Insurance Group sell products such as those that cover the millions in dollars of costs of defending against pollution claims, even if they end up being dismissed.
According to insurance broker Willis Group, the market was getting tighter for what is known as "environmental impairment liability," or in other words, the coverage that would most directly relate to pollution claims from accidents – and so the cost is going up. Reportedly, some insurers are starting to exclude fracking from their policies. According to Willis group, policies for blowouts, called Operator's Extra Expense, exclude pollution from an underground blowout, which it saw as unlikely to change given the risks tied to fracking. Further, regulation varies between states and against federal standards and sometimes even conflicts.
Many insurance experts feel that the ultimate EPA findings on drinking water will sharpen up the debate. That study is viewed as a game changer as far as how the insurance industry will view these risks going forward. Industry sources say fracking involves injecting chemical-laced water into wells to crack open shale rock and release natural gas and oil. Sources say that while the technology is far from new, it has never been deployed as widely and extensively as in the past few years.
According to the article, Mark Regier, director of stewardship investing for Everence Financial, said the fracking debate entered a less contentious phase in the past year as firms like EOG and Chesapeake open up about it, though Chesapeake just took a hit to its safety credentials with a blowout in Wyoming. Experts assess bigger environmental dangers on a routine basis like pipelines and refineries, however; their record of past accidents and damages allows insurers to price those risks.
According to the article, Andrew Scholz, a special counsel at Goldberg Segalla in New York, saw parallels with long-running disputes like asbestos coverage, in that many complex issues have not yet been decided, "The underlying litigations concerning fracking are still in their infancy," he said. "There are many suits being filed and many more everyday, but many haven't gone to judgment and you haven't gotten to expert causation issues." According to Scholz, the lack of clear legal precedents meant lawyers had to draw analogies from other energy-related cases.