This is an extended version of the article that appeared in the July 2012 issue of Investment Advisor.
The search for natural gas and oil found through the process known as hydraulic fracturing, or fracking, is fraught with controversy. Eager proponents of the process tout the supply of gas to be found in areas like the Marcellus Shale in Pennsylvaniaand upstate New Yorkas a means to become less dependent on imported energy sources, and property owners in areas with few opportunities for income are delighted with the financial boon that gas royalties can bring.
Meanwhile, environmentalists and property owners (some disillusioned after wells have been drilled on their land) point to drawbacks like polluted groundwater, illness, poisoned livestock, earthquakes and explosions.
With so many areas of contention, insurers are finding that fracking presents numerous areas of risk. How (and whether) that filters down to any of your clients depends on many factors, and since all the data isn’t in yet, you should consider keeping an eye on the situation—particularly if you have clients who live or invest in areas where fracking is ongoing.
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The Marcellus Shale isn’t the only area in which fracking is carried out. Arkansas, California, Colorado, Delaware, Louisiana, Maryland, New Jersey, New Mexico, Ohio, Texas, West Virginia and Wyoming have seen the eager (and sometimes not so eager) embrace of the search for gas deposits via fracking.Vermontbanned the practice in May. There are fracking sites inCanadaas well.
The hydrofracturing process brings to the surface deposits that can only be extracted from surrounding rock by the injection of vast quantities of water to which a “cocktail” of chemicals has been added. The chemicals themselves are regarded as proprietary, and outside the industry, little is known about which chemicals are used and in what concentrations.
According to U.K.-based insurance broker Willis Group, insurers should be wary of the risks associated with fracking, since neither regulatory nor environmental standards have yet solidified, and the potential for high costs could be great. In its April “Energy Market Review,” the company said, “[Insurance] buyers will have to differentiate their risk by proving adherence to best practice if cover is to be provided at an economic price. This is especially the case in the environmental impairment liability arena, which can offer the critical protection for the ‘gradual’ pollution liability risk associated with the hydraulic fracturing (or ‘fracking’) process.”