Fracking, Earthquakes and Insurance: A Collision Course?

By Eric Scheiner and Chen Foley | May 18, 2015

There is increasing information suggesting that hydraulic fracturing, commonly known as “fracking,” is not all it’s cracked up to be.

While it is clear that the resurgence of oil and gas production in the United States has been made possible by the process, new research suggests that the increase of earthquakes in certain parts of the United States is potentially attributable to fracking-related activities. The impact of this new research to the companies that engage in various parts the fracking process, as well as their insurers, could be significant.

Fracking 101

At a very basic level, hydraulic fracturing involves pumping a combination of water, sand and additives under high pressure into a well to break up hard and dense deposits of shale rock located deep underground. The purpose is to release oil and gas reserves stored in the shale. While not new – the process has been around since the 1950s – its use has only become extensive in recent years.

While hydraulic fracturing clearly has economic benefits, it may not be the savior its proponents declare it to be.

Fracking has been credited with the dramatic increase in domestic gas production in the U.S., which may contribute to the elimination of energy imports between 2020 and 2030. According to some, the economic growth derived from hydraulic fracturing has helped offset the economic shock of the most recent recession. Fracking is also hailed with having driven down energy prices, while spurring job creation and investment, often in small rural communities.

There’s Something in the Water

While hydraulic fracturing clearly has economic benefits, it may not be the savior its proponents declare it to be. The need to source thousands, and sometimes millions, of gallons of fresh water to fracture the shale is itself problematic.

Since 2011, the U.S. Environmental Protection Agency has reportedly been studying the impact of hydraulic fracturing on the quantity and quality of available drinking water. As a result of this process, it recently released data on the water and chemicals used at fractured wells in 20 states.

The data shows that fracturing fluid is primarily comprised of water (on average 88 percent of the fluid by mass is made up of water), while another 10 percent of the fluid is comprised of sand, used to keep the fissures open and permit a continuous bleed of oil or gas. The remaining 2 percent is comprised of chemical additives. The most popular of those additives (reported in 65 percent of all disclosures seen by the EPA) are hydrochloric acid (hydrogen fluoride), methanol (methyl alcohol) and hydrotreated light petroleum distillates (distillates).

The health risks associated with these additives are well documented. They create occupational exposures for employees, as well as pollution risk and general liability risks where third parties are accidentally exposed to them.

Assuming there is no sudden or accidental spill or other containment breach prior to the fracturing fluid being pumped into the ground, there remains a risk that, if a borehole ruptures, fluid will escape. The fallout could lead to contamination of the surrounding land, and depending on the depth at which the leak develops, might also threaten groundwater supplies.

Out of Sight Is Not Out of Mind

The vast amounts of water used in fracking do not disappear once the oil and gas is retrieved. This water, referred to as wastewater, is becoming an increasingly problematic byproduct of the extraction process. While some wastewater remains in the well, much is expelled. It can be collected in pits or held in tanks at the site, but must ultimately be treated or disposed of someplace else. A common disposal method involves re-injecting the wastewater back into the ground.

Opinion is mixed about whether the storage of wastewater below the surface is problematic. However, the science appears to be tilting the scales in favor of heightened caution. Opponents of fracking and some plaintiffs have long argued that it causes earthquakes. However, until recently, evidence of a connection between the two has arguably been tenuous.

On April 23 the United States Geological Survey released a report that links an increase in the frequency of earthquakes since 2009 in the Central and Eastern United States to “industrial operations that dispose of wastewater by injecting it into deep wells.” While the USGS’s findings have been tempered with a qualification – “[a]lthough the disposal process has the potential to trigger earthquakes, most wastewater disposal wells do not produce felt earthquakes” – the press release accompanying the report goes on to note that “[m]any questions have been raised about whether hydraulic fracturing. … is responsible for the recent increase of earthquakes.

“USGS’s studies suggest that the actual hydraulic fracturing process is only occasionally the direct cause of felt earthquakes.” Further, the USGS found that there has been an observed increase in seismic activity in 17 identifiable areas in eight Central states since 2000, and a substantial increase in earthquakes in those areas since 2009.

The USGS study builds on its earlier findings, which appeared to link wastewater disposal with a magnitude 5.3 earthquake in August 2011, near Trinidad, Colo. The Trinidad earthquake was reportedly the largest recorded seismic event along the Rocky Mountain Front Range since 1967 (when another magnitude 5.3 earthquake hit outside Denver, which was also believed to be attributable to wastewater disposal). The USGS’s study of the Trinidad quake concluded that, “the M5.3 earthquake likely occurred on a pre-existing, naturally stressed fault, but that the fault was triggered to slip by wastewater injection.”

For its part, the government of Oklahoma has now also acknowledged a link between earthquakes and the disposal of “billions of barrels of wastewater from oil and gas well” underground. The Oklahoma Geological Survey, as reported by The New York Times, said that it is “very likely” that wastewater wells are causing the majority of the state’s increasing earthquakes. In fact, before the 2000s when oil and gas exploration increased significantly, Oklahoma experienced an average of under two earthquakes a year exceeding the magnitude of 3.0. By contrast, in 2014 Oklahoma experienced 585 earthquakes with a magnitude of over 3.0, including some earthquakes well in excess of that magnitude that have caused significant damage.

Additionally, the Oklahoma Office of the Secretary of Energy and Environment has now started the website as part of its efforts to develop solutions and coordinate efforts to address the phenomenon of increasing seismic activity.

The journal Geology also released a peer-reviewed paper concluding that injection wells used to store wastewater from fracking activities were related to certain earthquakes. But even with these findings, it is a wholly different thing to establish a sufficient nexus between wastewater disposal and seismic activity in order to create legal liability in court.

Fracking related litigation, including allegations of property damage and personal injury from fracking-related earthquakes, is not new. However, the position of those who believe they have been harmed by man-made earthquakes is likely to now be strengthened, which will inevitably lead to increased litigation. Further, while no plaintiff has yet been able to establish a conclusive link between wastewater disposal and an earthquake, and subsequently a link between that earthquake and the damage or injury, it will be interesting to see if and/or how the USGS report, Oklahoma government acknowledgments and other recent studies will impact such litigation going forward.

There is currently one case pending before the Oklahoma Supreme Court on this point. It raises the question of whether a magnitude 5.7 earthquake on Nov. 5, 2011 (the strongest earthquake recorded in the state until that time), causing Sandra Ladra to suffer property damage and personal injury, was caused by wastewater disposal. It total, 13 homes were reported as being destroyed.

Despite being the subject of early jurisdictional wrangling, the court is expected to address the liability of energy companies named in the suit sometime this year. If liability is ultimately found in the case, there could be a potentially significant sea-change in the litigation landscape with regard to wastewater disposal and the fracking industry in general that would cause, at the very least, a significant increase in litigation.

From cases filed previously, it can be expected that plaintiffs will assert liability theories based on negligence, gross negligence, strict liability and/or nuisance. But energy companies and others involved in the process should be mindful that liability may not just stem from direct actions taken against them. Homeowners policies and other property coverages are likely to be the first port of call for those suffering tangible loss to property. In this regard, if those policies are triggered, affected carriers may sue the companies that operate the wastewater wells. Despite the low severity of these claims, their cumulative value could significantly impact wastewater operator companies and their direct insurers.

The Wall Street Journal reports that a judgment against an energy company would have a devastating effect on the sector. While there have been no reported judgments, energy companies have in the past taken steps to settle similar litigation. For example, BHP Billiton and Chesapeake Energy Corp. settled cases brought against them by homeowners in Arkansas, and EOG Resources resolved property damage litigation in Texas. The terms of those compromise agreements are confidential.

But Is a Judgment Against the Energy Sector Likely?

Although the proverbial jury is still out, what bodes well and in the favor of the energy sector is that recent scientific developments probably do not go far enough to establish liability against those engaged in fracking – as opposed to the wastewater well operators, where there is at least more of a direct connection.

However, that is unlikely to sway plaintiffs. The recent findings will likely be seen by them as justifying legal action on their part.

Even if no direct link is ever proved to the satisfaction of a court, the sector will nonetheless be forced to pay legal fees and associated costs for experts in an attempt to disclaim the existence of one. The science may not be the magic bullet for which plaintiffs had hoped, but it will certainly serve to open Pandora’s Box in terms of increased litigation and efforts to refute any connection between earthquakes and fracking-related activities by the energy sector.

In a strange turn of events, on March 3 the Oklahoma Insurance Commissioner issued a bulletin, mandating that homeowner’s carriers not deny coverage for earthquake claims on the basis they were man-made events. He said that the science linking earthquakes with fracking was “unsettled” at the time, and that carriers that were denying coverage were doing so on the basis of, “the unsupported belief that these earthquakes were the result of fracking or injection well activity.”

Where developments this past April leave homeowners insurers in that state is far from clear given the more recent pronouncements discussed above, but the insurers of the companies involved in fracking and/or wastewater disposal associated with fracking should clearly be concerned.

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