| ||Fast Focus|
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
What Lies Beneath
Over-hyped or over-estimated?
Fracking’s biggest challenge is to figure out the
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
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.