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The Energy Information Administration projects that shale gas production will nearly triple over the next two decades.

Environmentalists have blamed fracking for well-water contamination and cancer spikes.

A spate of lawsuits moving through the legal system will offer a clearer picture of the potential costs when something goes wrong.

What Lies Beneath

Over-hyped or over-estimated? Fracking’s biggest challenge is to figure out the potential risk.

By  Tim Logan

Depending on whom you ask, hydraulic fracturing—or “fracking”—is either the path to national energy independence or an environmental menace. It’s either the fuel for thousands of good jobs in parts of the country that badly need them or a disaster buried deep underground, its massive cleanup costs lurking. It’s either the next asbestos disaster or the next best thing.

At this point, no one can really say for certain. Which is why fracking, for all its potential, is proving to be such a challenge to insure.

The basic technology is nothing new. As drillers are quick to point out, they’ve used fracking for decades. They pump high-pressure, chemical-laced water down a well to extract oil and gas from rock. But the current scale of fracking projects across the country is unprecedented.

Shale gas production has grown fast, more than tripling from 2007 to 2010 to over 5 trillion cubic feet, according to federal government data. And it’s expected to keep growing. The Energy Information Administration projects it will more than double again over the next two decades, generating 13.6 trillion cubic feet—enough natural gas to heat 200 million homes—by 2035. Energy companies have added tens of thousands of new wells in Texas, Appalachia and the Dakotas and are snatching up leases on new fields in places like western Iowa and southern Illinois. Following behind are scientists, authoring sometimes conflicting studies on the environmental impact of all of this drilling, and state regulators from New York to New Mexico, who are racing to keep up.

So what’s an insurance broker to do?

The picture around insurance for fracking these days is about as clear as the gray muddy water being pumped out of the ground. Unknown environmental risks below ground and ever-more-expensive equipment above it leave operators weighing how much coverage to buy, while underwriters take a close look at what kinds to write. But for such a fast-moving industry, it’s slow going.

“In a way, we’re struggling to establish a viable market here,” says Theresa Fadul, energy practice director at IMA in Denver. “There’s limited competition and a lot of uncertainty.”

Traditionally, oil and gas drillers have carried general casualty and liability policies to protect against accidents, such as a well blowout or explosion. But with fracking, the risks are often more subtle, buried deep underground. Pollutants can seep out over time. General casualty and liability policies typically don’t cover that sort of gradual pollution, and even many environmental insurers are waiting for the science to become clearer before taking on the risk if something goes wrong at a fracking site.

A handful of underwriters have stepped into the gap. Some actually see a lot of opportunity. Increased scrutiny of gradual pollution is helping to fuel a noticeable shift in the way energy companies approach environmental risk, says John O’Brien, president of Ironshore Environmental. So-called “upstream” operators, who focus on finding and drilling oil and gas, traditionally haven’t carried much environmental insurance beyond “sudden and accidental” for obvious one-time events. But in the wake of the BP Macondo blowout in the Gulf of Mexico and now the uncertainty around fracking, more upstream firms are buying environmental coverage. O’Brien estimates the market has grown from “virtually nothing” to close to $60 million in premiums in the last five years.

“They’re looking at it in a different light,” O’Brien says. “There’s more potential litigation. There’s more scrutiny. And there’s a lot more exploration. Just in the last few years in fracking, we’ve gone from the Barnett Shale in Texas to the Dakotas, Colorado, Ohio, western Pennsylvania. It’s just a much bigger business.”

But pricing the risk associated with that business is still tricky. Much depends on the condition of the shale, on regulations that vary widely from state to state, and especially on the companies involved. Ironshore spends a lot of time vetting its clients, O’Brien says, visiting fracking sites and working through best practices.

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