The Commercial Line

<< Back

Protect Yourself and Your Land: Insurance Considerations Surrounding Fracking

Post Written by: Matthew Distelhorst

shutterstock_246008131Hydraulic fracturing, or fracking, has become a very controversial topic in today’s society. Fracking, for those unaware, is a technique for drilling deep under the Earth’s surface for natural gas. To drill for the gas, a well is drilled deep into the Earth’s surface, usually over 1-2 miles. Once deep enough to access the natural gas, the well turns 90 degrees and extends parallel with the surface. Chemically-treated water is then pumped into the well with a strong enough force to create cracks surrounding the well. The cracks release natural gas which is then pumped back up through the well with the fracking fluid.

This type of drilling is becoming very prominent in the area between New York, Ohio, and Virginia. This region contains a large natural gas bank known as the Marcellus Shale. The controversy surrounding fracking is largely due to the externalities of the operation itself. Many people worry that this type of drilling can cause contamination of water supplies that exist closer to the earth’s surface.

Fracking, by its nature, presents the possibility for major environmental issues. To avoid this, most hydraulic fracturing companies are insured by a handful of carriers. The increased use of fracking as a means of extracting natural gas, however, is leading to an increase in land-rights being sold by land owners to drilling companies. In these common situations (typically found in agricultural environments), the drilling company and land-owner typically have a deal in place that explains how the proceeds of the gas will be split amongst the parties.

When considering a fracking exposure, one of the most important features is the written agreement:

  • It is important that a written, formal lease agreement is in place which could come in the form of a Non Operating Working Interest. What this means is that the land owner is not operating the well, but owns a portion of the output of the well on his land. If a Non Operating Working Interest is in place, then the land owner does in fact have a financial interest in the well. In this situation, it is once again important to obtain proof of the well-operator’s insurance, as well as the written lease agreement. It is important to make sure that indemnification of pollution is included within the lease agreement.

Drilling for natural gas will likely continue to occur more and more frequently over the coming years, which is why it is important to understand what it is. The issue provokes several environmental issues as well as many potential benefits, which will likely further its status as a controversial issue. It is important to remain informed on the topic and to monitor the outcomes, whether they are positive or negative.

An important take away is value in validating all possible insurable exposures have the necessary coverage. A best practice for landowners would be to obtain proof of insurance of the drilling company and utilize an attorney to review any lease agreements for land that contains a well.

More general information on fracking can be found on the United States Environmental Protection Agency’s Website.

 

 

Sources

1) http://www.livescience.com/34464-what-is-fracking.html

2) http://www.popularmechanics.com/science/energy/coal-oil-gas/top-10-myths-about-natural-gas-drilling-6386593#slide-1

3) Jim Montgomery, Sector Analyst

Business Sector Analyst

Westfield Insurance

Leave a Reply

Your email address will not be published. Required fields are marked *