20/01/2015
Although many in the UK Government support the continued development of fracking when it comes to drilling for shale gas, there is still some uncertainty as to how far the controls and requirements will extend when it comes to regulating the industry.
With the debate surrounding the issue becoming more intense in recent months, questions must be asked about the implications of fracking in the United Kingdom for insurers? How will underwriters manage the task of assessing risk, when it is possible that potential hazards to human health and property may not yet been identified or confirmed as being linked to the fracking process?
The Potential Effects of Fracturing on the Environment
Earthquakes
In 2011 a temporary ban (lifted in December 2012) was placed on fracking in the United Kingdom. This followed a series of minor earthquakes near Blackpool measuring 2.3 and 1.5 on the Richter Scale. Both tremors occurred near the Presse Hall drilling site where a company was conducting hydraulic fracturing (commonly known as fracking).
In order to let shale gas escape to the surface, a mixture of water, sand and chemicals are pumped at enormous pressure into areas surrounding rocks deep underground. This can inadvertently lubricated rocks on a fault line, causing them to slip past each other, causing a seismic event.
Both the British Geological Survey and the fracking company itself (after instigating its own report) concluded that this is what happened near the Presse Hall site, and therefore, fracking could be directly linked to the earthquakes.
There have been reports of seismic activity registering up to 4 or 5 on the Richter Scale in the United States, however, this has occurred when large amounts of waste water were injected into the rocks. The Department for Energy and Climate Change issued a report last year which concluded that due to the strength of the rocks in the United Kingdom, the fracking process could not induce an earthquake any higher than a magnitude 3 which is unlikely to be felt, let alone cause any damage to property. New controls and checks were also put in place after the Blackpool earthquakes to reduce the likelihood of earth tremors being caused by fracking.
Fracking Fluid Concerns
In the United States a great deal of concern has been raised about the contents of fracking fluid and its effects on water supplies and human (and the animals which we subsequently consume) health. This has not been helped by the reluctance of the fracking companies to disclose the exact ingredients of their fracking fluid, or the existence of the so-called ‘Halliburton loophole’ which allows organisations to inject some petroleum-based chemicals into the ground without obtaining a permit.
Recent studies have found increased levels of methane and arsenic in water wells near hydraulic fracturing sites.
The situation in the United Kingdom is considered very different according to Water UK and the Department of Energy and Climate Change. Tight regulations will ensure that any wells drilled for fracking that passed through groundwater supplies would have to be independently verified to make sure there was no risk of contamination to the water supply.
Other environmental concerns surrounding fracking include:
- Exposure to toxic chemicals
Legislation Governing Fracking
There are two Acts which govern the process of applying and granting licences for fracking operations in the United Kingdom. These are:
- Mines (Faculties and Support) Act 1966
In simple terms, the Petroleum Act 1998 grants individuals and/or organisations the right to search for petroleum. However, this licence does not grant ‘ancillary rights’ which are defined in s7(3) of the Act and include:
(3)...
a) a right to enter upon land and to sink boreholes in the land for the purpose of searching for and getting petroleum; and
b) a right to use and occupy land for—
i. the erection of such buildings;
ii. the laying and maintenance of such pipes; and
iii. the construction of such other works, as may be required for the purpose of searching and boring for and getting, carrying away, storing, treating and converting petroleum.
To obtain ancillary rights the prospective fracker has a duty to reach an agreement with the landowner which will allow the fracking company to engage in the activities mentioned in section 7(3), or apply for compulsory acquisition of the ancillary rights under the Mines (Facilities and Support Act 1966. Applications are sent to the Secretary of State in the first instance and then, if he or she is satisfied that there is a prima facie case for the granting of ancillary rights, then the application will be referred to the High Court.
In order to succeed in an application for compulsory acquisition of the ancillary rights the applicant must show the Secretary of State and the Court that every practical effort was made to reach an agreement with the landowner.
The Conservative Government has indicated that it intends to amend trespass laws which will make it difficult for objectors to fracking to stand in the way of an operation going ahead.
The Current Situation in the United States Regarding Insurance and Fracking
The United States has been using hydraulic fracturing for over 50 years, and not without controversy. Much of the concern surrounding environment and health issues associated with fracking are based on experiences recorded in America. With the fracking industry booming in the States, insurance analysts expect to see a short term rise in blowouts, spills and other accidents. This scenario is to be expected in an environment where the pace of growth outstrips the regulatory controls put in place to protect health and safety of persons and property.
The uncertainty surrounding long term public health is one of the biggest concerns facing insurers in the United States who underwrite fracking companies. In April 2014, a family in Texas was awarded $US3 million (£1.9 million) after each family member recorded a tangible decline in health after a fracking operation began near their home. The long term effect of hydraulic fracturing on public health is still relatively unknown, therefore, it is difficult for insurers to accurately assess the potential risk in this area. Given that health problems concerning contaminated water and air quality can take decades to manifest and the time it will take to clean up any contaminated sites, it is likely that this will remain a significant issue for insurers for many years to come (the current asbestos-related cancer litigations may provide a good illustration of what the situation involving the health impact of fracking could look like in twenty to forty years time).
Issues For Insurers in the United Kingdom?
As the fracking industry grows it is likely the United Kingdom insurance industry will look to the United States for guidance on how to manage claims and risk....up to a point. It has often been pointed out that risks can be mitigated by regulating for best practice and this is something that the UK government has been very committed to (note the speed in which checks and balances were put in place after the Blackpool earthquakes).
With regards to defending claims surrounding property damage caused by fracking, the fact that there is a requirement on the fracking company to make every effort to negotiate with the landowner before making an application for compulsory acquisition of the ancillary rights may make a difference to how the Courts view a landowners claim for negligence. If the landowner was made fully aware of the risks, and decided to proceed with granting ancillary rights in exchange for compensation regardless, then their acceptance and knowledge of the risks (even the unknown ones) may be regarded as a contributing factor when assessing damages.
In Summary
Although surrounded by uncertainty, the growth of the hydraulic fracturing industry in the United Kingdom provides opportunities for jobs and growth within the natural gas extracting sector. Insurance companies will be forced to assess risks on matters that may not come to fruition for many decades, however, it seems clear that the current Government plans to regulate the industry carefully in order to reduce uncertainty and promote growth. This growth will be advantageous to insurers due to landowners who are in the vicinity of fracking operations wanting to increase their cover.
In the meantime, we must wait for further regulations and the first claims to come through the UK Courts in order to make more accurate assumptions.
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Fisher Scoggins Waters is a leading construction, engineering and manufacturing litigation firm, specialising in disputes and disasters. For further information on this article or any of our litigation services, please contact us on +44 (0) 207 993 6960.