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

Hydrofracking Risks & Opportunities: What Insurers & Reinsurers Need to Know April 5, 2011 Gregory S. Hoffnagle Robert W. DiUbaldo New York, New York New York, New York 212.912.2741 212.912.2881 GHoffnagle@eapdlaw.com RDiUbaldo@eapdlaw.com www.eapdlaw.com • www.InsureReinsure.com

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 2

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 3

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 4

How Hydrofracking Works 5

Why is Shale Gas on the Rise?  Over approximately the past 20 years, shale has come to the forefront as a major productive form of 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” 6

Horizontal vs. Vertical Hydrofracking 7

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 8

Hydrofracking Numbers: Size and Scope  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 9

Hydrofracking Numbers: Size and Scope  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 over 20-35% of the nation's gas supply 10

U.S. Shale Gas Basins As of 2010 “Saudi Arabia of Natural Gas” 11

Northeastern U.S. Shale Gas 12

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) 13

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) 14

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 15

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 16

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 17

Fiorentino et al. v. Cabot Oil & Gas Corp. et al.  Plaintiff’s claim that (improper) Hydrofracking caused the release of methane, natural gas and other 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 operations  Compensatory and punitive damages  Cost of future health monitoring  Attorney’s fees and costs 18

Fiorentino et al. v. Cabot Oil & Gas Corp. et al. (con’t)  On November 15, 2010, the District Court denied most of 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 19

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 20

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 21