Hydrofracking Risks & Opportunities: What Insurers & - - PowerPoint PPT Presentation

Hydrofracking Risks & Opportunities: What Insurers & Reinsurers Need to Know

www.eapdlaw.com • www.InsureReinsure.com

Gregory S. Hoffnagle New York, New York 212.912.2741 GHoffnagle@eapdlaw.com Robert W. DiUbaldo New York, New York 212.912.2881 RDiUbaldo@eapdlaw.com

April 5, 2011

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Hydraulic Fracturing (“Hydrofracking”): Outline of Webinar

• Hydrofracking 101
• Brief Overview of the Evolving Regulatory

Landscape

• Types of Exposures
• Fiorentino et al. v Cabot Oil & Gas Corp. et al.
• Potential Insurance/Reinsurance Implications
• Questions and Answers

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What is Hydrofracking?

• Often oil- or gas-bearing formations have poor flow

rates due to low permeability, or from damage or clogging of the formation during drilling of the access well

• Hydrofracking is a technique used to create fractures

that extend from the well bore into shale formations to extract shale gas (i.e., natural gas from shale)

• These fractures allow gas to travel more easily from the

rock (shale) pores, where the gas is trapped, to the production well and then to the surface

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What is Hydrofracking? (con’t)

• Typically, in order to create these fractures large

amounts of pressurized water, “proppants” (sand or ceramic beads) and chemicals (diesel), are injected into underground shale formations

• In oil and gas exploration, before hydrofracking,

shale used to be considered the “sorry rock” drilled through to get to good reservoir rock – sandstone, limestone or dolomite to get to the oil

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How Hydrofracking Works

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Why is Shale Gas on the Rise?

• Over approximately the past 20 years, shale has

come to the forefront as a major productive form

• f producing useable “cleaner” energy
• The more recent push can be primarily linked to

several factors

• 1. Hydrofracking
• 2. High-volume Horizontal Drilling/Hydrofracking
• 3. Higher prices for crude oil and natural gas (import)

made it financially viable to drill

• 4. National Security
• 5. Unemployment – “Jobs”
• 6. President Obama’s “Blueprint for a Secure Energy

Future”

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Horizontal vs. Vertical Hydrofracking

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Hydrofracking Numbers: Size and Scope

• Generally done between 5,000-20,000 feet below earth

surface

8,000 feet = 6.5 Empire State Buildings 20,000 feet = 16 Empire State Buildings

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• Generally, 1-8 million gallons of water may be used

to Hydrofrack a well

• 60-90% of fluids sent down into the well remain

underground

• A well may be Hydrofracked up to 18 times
• More than 200 chemicals may be used in

Hydrofracking fluid

• For each Hydrofrack, 80-300 tons of chemicals may

be used

Hydrofracking Numbers: Size and Scope

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• Hydrofracking equipment operates over a range of

pressures and injection rates

• Can reach up to 15,000 pounds per square inch

(psi) and can produce 100 barrels gas per minute

• Evaporators evaporate off volatile organic compounds

(VOCs) and condensate tanks steam off VOCs, 24 hours a day, seven days a week

• There are currently approximately 495,000 shale gas

wells in the U.S.

• Texas has approximately 93,000 wells
• Pennsylvania has approximately 71,000 wells
• The EPA projects that by 2020, shale gas will comprise
• ver 20-35% of the nation's gas supply

Hydrofracking Numbers: Size and Scope

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U.S. Shale Gas Basins

“Saudi Arabia of Natural Gas” As of 2010

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Northeastern U.S. Shale Gas

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Brief Overview of the Evolving Regulatory Landscape: Federal Laws

• Safe Drinking Water Act (SDWA)
• The Energy Policy Act of 2005
• “Halliburton Loophole”
• Fracturing Responsibility and Awareness of

Chemicals Act of 2009 (FRAC Act)

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Brief Overview of the Evolving Regulatory Landscape: Federal Laws to Keep in Mind

• Clean Water Act (CWA)
• Clean Air Act (CAA)
• Comprehensive Environmental Response

Compensation and Liability Act (CERCLA)

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Hydrofracking: Types of Risks

• Some environmental and human health concerns

possibly associated with Hydrofracking include:

• Contamination of aquifer/ground water
• Contamination of fresh/navigable surface waters
• Contamination of air quality

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Hydrofracking: Types of Risks

• Property Damage (devaluation)
• Migration of gases and hydrofracking chemicals to

the surface

• Impacts on rock shelf causing seismic events or lead

to surface subsidence

• Presure explosions
• Loss of land value/enjoyment
• Contamination/loss of crops and livestock
• Accidents in the transportation, handling and

storage of toxic waste/chemicals

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Hydrofracking: Types of Claims

• Violation of Federal Statutes (CWA, CAA, CERCLA)
• Violation of State Environmental Statutes
• Negligence Per Se/Res Ipsa Loquitur
• Breach of Contract
• Medical Monitoring Trust Fund Statutory Claims
• Common Law Causes of Action
• Negligence/Gross Negligence/Strict Liability
• Negligence Per Se/Res Ipsa Loquitur
• Private/Public Nuisance
• Trespass
• Misrepresentation/Fraudulent Misrepresentation

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Fiorentino et al. v. Cabot Oil & Gas Corp. et al.

• Plaintiff’s claim that (improper) Hydrofracking

caused the release of methane, natural gas and

• ther toxins onto plaintiff’s land and into their

groundwater

• As a result, plaintiff’s suffer and will suffer current

and future illnesses and emotional distress

• Plaintiff’s seek:
• Injunction prohibiting future Hydrofracking
• perations
• Compensatory and punitive damages
• Cost of future health monitoring
• Attorney’s fees and costs

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Fiorentino et al. v. Cabot Oil & Gas Corp. et al. (con’t)

• On November 15, 2010, the District Court denied most
• f defendants’ motion to strike and motion to dismiss
• The Court held the following:
• Property owners sufficiently plead claims against

defendants which allege that defendants were/are responsible for

• Causing release of hazardous substances
• Failing to take necessary steps to remedy contaminated

water supplies

• Plaintiffs becoming physically sick and ill in a manner that

could continue into the future

• Costs incurred by plaintiffs to respond to defendants

release of hazardous substances and contaminants, including but not limited to

• Costs of health assessments/effects study
• Medical monitoring

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Potential Insurance Implications of Hydrofracking

• Commercial General Liability Policy Claims
• Environmental Policy Claims
• Directors and Officers (D&O) Policy Claims
• Engineers and Architects (E&O) Policy Claims
• Worker’s Comp Policy Claims
• Operators’ Extra Expense (Control of Well) Policy

Claims

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Potential Insurance/Reinsurance Considerations

• Notice
• Aggregation – event, occurrence, cause, series,

arising out of, common origin

• Allocation
• Exclusions
• Follow the settlements/Follow the fortunes
• Inuring Clauses
• Clash covers