Weighing it up

Economic necessity or environmental disaster? Fracking has made a slow progress in the UK, with government failing to win the public’s social licence to operate, and the right regulation in the UK. For underwriters looking at environmental liabilities, there are far more broad issues. Peter Davy investigates

It’s the Brits’ answer for everything, but can tea really overcome the barriers to shale gas in the UK? Ineos, the chemical company with ambitions to become a major player in UK shale gas production, seems to think so. Its drive to win round public support for fracking, the process used to extract the gas, began in earnest in April this year, with the first of a series of local consultation meetings in Scotland. It’s a process that “will involve us drinking a lot of tea in a lot of village halls”, according to Ineos director Tom Crotty.

Ineos argues that the potential risks are more than outweighed by “enormous economic benefits” from an industry that consultant Ernst & Young’s report last year said could see £33 billion invested in the next 18 years. As of January, however, only 11 new exploratory wells for shale gas and oil were due for drilling this year – and the UK arguably leads Europe in its drive for shale gas.

As Chris Lewis, EY partner and author of the report, says: “Europe hasn’t really got going.” Much of the reason for this is rooted in the fear of environmental damage. The most high profile concerns have focused on the risk of groundwater contamination and of seismic activity prompted by fracking – specifically as a result of the fluid, sand and chemicals being pumped into the ground at high pressure. On the latter, a number of cases for property damage are either ongoing or settled in the US, which has seen fracking of more than one million wells. In the UK, it was seismic activity linked to Cuadrilla Resources’ site in Lancashire that prompted the UKs moratorium on fracking in November 2011, lifted a year later.

However, potential claims are as likely to be prompted by the less headline-grabbing causes, according to Simon Jackson, partner, insurance specialist and part of the oil and gas group at law firm Clyde & Co. That was one of the lessons to be drawn from last year’s decision in the US case Parr v Aruba Petroleum Inc. There, a Texas family was awarded almost US$3 million for the energy company’s activity, which was held to constitute a private nuisance.

Jackson says: “The debate around fracking is focused on earthquakes and contamination of groundwater – the classic fracking risks as people understand them – but on the list of the things that Parr said had damaged them those were the very last things; it was almost an afterthought.”

Instead it was such issues as the diesel and gasoline emissions from trucks and on-site equipment, particulate matter stirred up by drilling and trucking, and evaporation of fracking fluid in pits releasing chemicals into the air.

“If I was an underwriter looking at the environmental liabilities presented by fracking, I would feel the need to look more broadly than just the earthquake and water table risk,” Jackson adds.

However, it is also necessary to look more broadly than the US, where fracking over the least decade has turned the country into the world’s largest producer of natural gas. Not only do producers face a different geology and population density in the UK that will bring its own challenges; they also face an entirely different regulatory regime.

Lewis says: “We have a much, much tighter regulatory framework in the UK and the standards applied and scrutiny that it gets are so much more significant.

In its response to the UK Parliament’s Environmental Audit Committee report on the environmental risks of fracking in January, trade group for the onshore oil and gas sector UKOOG, pointed out that fracking sites were regulated by four different regulators in line with 17 EU directives, requiring up to eight environmental permits for each site. A petroleum exploration and development licence from the Department of Energy and Climate Change is just the first step. An English site also requires environmental permits from the Environment Agency, planning permission from the Minerals Planning Authority, and approval of the well design from the Health and Safety Executive, among others.

Paul Rice, partner and head of client relationships for energy and natural resources at law firm Pinsent Masons, says: “All those different regulators are all adding a new set of conditions and potentially having a public consultation.”
Operators, and others, argue that these checks along with tougher regulations address many of the potential risks. Venting of unburnt gases, for example – a complaint in the US – will not be permitted; development in groundwater source protection zones is to be restricted; the industry has accepted it will disclose the composition of chemicals injected during fracking (another key area of contention in the US).

The industry may also benefit from the delay in developing shale gas by being able harness innovations and developments in the US and elsewhere. The EY paper, for instance, quotes a waste management specialist suggesting that recycling technologies could reduce the number of trucks needed to transport solid waste offsite by 70 per cent.

As a result many claim the risks are overblown. A report by broker Willis in 2012, for instance, has stated that they had been exaggerated. At the end of last year, the press was also taken to task for misrepresenting a report by the government’s chief scientific advisor Mark Walpot to link fracking with other long tail risks such as thalidomide and asbestos.

“The scientific evidence is clear that any environmental or geological risks can be managed effectively in the UK as long as operational best practices are implemented and enforced through effective regulation,” wrote Walport in a response to the Guardian, reiterating the findings of an earlier report by the Royal Society and the Royal Academy of Engineering.

But is this not what oil companies do day in, day out? Rice thinks it is. “None of this is new; in fact it’s been about a very long time,” he says. If not from fracking, controls in related industries can be adopted, such as limitations on the number of trucks that can go in and out during certain hours, dust suppression techniques and leak prevention from landfill to water tables.

Rice points to Wytch Farm in Dorset, in an Area of Outstanding Natural Beauty, a Site of Special Scientific Interest, and home to the Europe’s biggest onshore oilfield, as evidence that the industry has a good record of controlling the risks.

Despite this, challenges for fracking in the UK still remain. Partly this is because the risks must still be managed. That is illustrated by cases of property damage in the US, for example, where fracking continued even after seismic activity was detected.

“It’s not that the risk does not exist; it does. You have to integrate it into operational drilling technique,” says Etienne Champion, international casualty chief underwriting officer at insurer Axa Corporate Solutions. Likewise, properly cementing well casings is crucial to prevent leaking of fracking fluid into underground aquifers, and some companies are more expert than others in this regard, he adds.

Mostly, however, the difficulty is simply that, for all the theory, the risks of fracking at scale in the UK’s more densely populated geography remain untested.

“We have not seen the reality of fracking in the UK yet, so we can’t really accurately judge what the risk is,” says international technical manager at AXA, Sylvie Monereau.

That will come in time, but only as projects come onstream. It will require a higher oil price to make investments attractive, but also winning over the public to secure the social licence to operate, says Jonathan Wood, associate director for global issues at consultants Control Risks. For all the benefits of being able to learn from the US experience, in this regard at least it has been more curse than blessing.

“While there is technical, commercial and other knowledge that can be brought from the US, the industry also faces an operational environment that has been irretrievably conditioned by the experience there,” he says. The strong anti-fracking movement that developed in the US persists and has spread internationally.

Learning from the US, and the development of the industry means the ability to mitigate the environmental risks has increased and costs reduced, so that it is no longer a commercial barrier to the industry. Public opposition, however, must still be broached.

“The lesson UK policymakers and companies have learned is that they need to effectively give back to the communities as much as they can,” says Wood. To an extent that will be managed through financial incentives. In September Ineos announced it would give six per cent of its shale gas revenues to the homeowners, landowners and communities above its operations. It will also, however, mean convincing the public that fracking can be done safely. For that reason, putting the kettle on may be a good strategy.

This article was published in the May 2015 issue of CIR Magazine.

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