Fracking is a common source of energy production in the USA. Along with the technology and the ambition of developers, concerns have also migrated to the UK about the risks associated with such processes. Whilst the earliest production phase from “fracked” wells will take place under licence offshore, with little concern in terms of trespass or nuisance, there will come a time when production of shale gas is likely to take place on mainland Britain.

Against the obvious benefits, not least as the “gateway fuel” to support the transition from fossil to renewable energy, it is worthwhile reviewing what risks exist, how they might be addressed and the challenges that insurers will need to face in sizing up their potential liabilities.

In certain geological environments natural gas has become trapped within shale formations. Shales are fine-grained sedimentary rocks that can be rich sources of both petroleum and natural gas. The discovery and exploitation of this resource has, according to the United States Energy Information Administration, “rejuvenated the natural gas industry in the United States”. There is no economic reason why that should not also happen here in the UK. The British Geological Survey reports that there is one thousand three hundred trillion cubic feet of gas locked up in shales in the UK. That is not to say it can all be extracted, but it is there and, at current gas prices, has a potential value worth investigating.

A variety of risks are now commonly associated with fracking operations and include:

  • Air quality issues
  • Surface spills of oil or other chemicals used in the process
  • The release of energy such as to cause ground disturbances
  • The contamination of water supplies with anecdotal evidence of chronic illness amongst some local community residents

Such contamination would then be the subject of potentially costly and lengthy environmental remediation. If, for example, the water systems can be decontaminated, it is likely that claims from commercial and domestic users would be akin to the claims following the Camelford disaster in Cornwall when 20 tonnes of aluminium sulphate was erroneously added to the water supply in July 1988. In that case, referred to as the worst mass poisoning event in Britain, many of those who were in contact with contaminated water suffered short and long term health effects. Medical causation and the effects of the contamination is uncertain even now, over two decades after the event.

Examples of contamination experience in the USA have been reported in a widely accredited review of risks associated with fracking activity by Bhavini Kamarshi, Jason B. Kurtz, and Richard C. Soulsby of Milliman (June 2012). Their research identifies multi million dollar settlements paid to discharge a variety of claims following the contamination of natural resources by chemical agents.

The fracking industry will undoubtedly be learning lessons as it applies what may still be regarded as relatively new technology. Simply reflecting on relative population densities (an average population density of 83 persons per square mile in the USA as against 679 per square mile in the UK) the likely human impact of any failures around safety, design or execution of the production phase will be magnified accordingly. There are undoubted gains on offer, but at the same time might there be more to lose in terms of personal impact, and the cost such contamination events might have locally in the UK?

Even in the most heavily regulated of industries, accidents do still happen. That remains a likelihood in what will be a relatively new and developing industry here in the UK. Liabilities will arise and claims will be made, ranging from property damage and personal injury in the aftermath of acute events, but also with some potential long term or “chronic” impact on population health, and claims arising from latent damage.

That potential for an enduring “legacy” will be a major concern. Pollution Liability insurance (among other risks), will be necessary, but will it be available (if at all) at the levels needed when the magnitude of impact referred to above is taken into consideration? Will the policies that do come onto the market identify (or exclude or limit) the specific nature of the risks sufficiently clearly for there to be no genuine “coverage” issues in the future?

Taking an alternative and more positive view, will insurance fulfill its potential as the “global facilitator” and, through the imposition of conditions and limits in such policies, actually play a defining role in driving best practice in this emerging industry?

It remains to be seen what the Government and energy regulators will put in place to ensure appropriate protection for a population needy of new energy resources but fearful of the concept of extracting energy through fracking.

When they reported in 2012, Milliman identified a lack of insurance capacity. They considered it might expand as the industry matured and as the technology and the underwriting models to deal with it became better understood. Clearly there is a need to continue investing in the science underpinning the technology so that together the industry, the regulators and the Government understand the extent of the risks, and the insurers their exposure. That is especially the case where fracking is likely to be concentrated in the relatively few sites across the UK where the rock conditions are favourable, but where contamination events could have severe long term consequences for a regional population.

Bringing active fracking production onto the mainland of the UK is likely to be as sensitive an issue as nuclear power has been in the post-war era. Elements within the media suggest widespread scepticism of the licensing regime that will oversee fracking operations. In the battle for “hearts and minds” there is still much to be done to educate, inform and reassure our understanding of the risks and potential costs that might accumulate during and after fracking production has been undertaken.

A robust underwriting model for such risks has to provide sufficient certainty and then comfort for those who look for such cover to indemnify remediation or other costs and losses. Equally, the ingredients to be weighed behind exploitation in a particular geographical area will vary widely depending on such things as the density of population, the proximity of essential natural resources such as water supplies or even the past performance of the individual fracking operator. 

All these components represent a brave new world for insurance and claims and one which demands a thorough understanding of both the technology and the sensitivities and potential for harm to stakeholder interests. 

The technical aspects may differ slightly but the geological risks associated with fracking are being highlighted as we write. In 2011, prompted by a series of earthquakes in Faulkner County, the State of Arkansas banned the use of four natural gas drilling disposal wells. This week fourteen families have begun a lawsuit against Chesapeake Operating Inc. and BHP Billiton Petroleum LLC alleging that natural-gas disposal wells resulted in thousands of earthquakes in Arkansas in 2010 and 2011. The disposal wells get rid of drilling fluids and wastewater by pushing the liquids back into the earth and are alleged to have "caused thousands of earthquakes in mini-clusters and swarms in central Arkansas in 2010 and 2011." Losses are limited to minor property damage but the fourteen initial claims may be the first wave in a series of class actions.