The Risks of Hydrofracking: As the Nation Scrambles to Feed Its Insatiable Energy Demand, a Natural Gas Drilling Method Has Become Increasingly Popular. but Critics Say It Also Carries Significant Environmental Risks. Will Insurance Help Mitigate Exposure?

By Chung, Huhnsik; Hoffnagle, Gregory | Risk Management, June 2011 | Go to article overview

The Risks of Hydrofracking: As the Nation Scrambles to Feed Its Insatiable Energy Demand, a Natural Gas Drilling Method Has Become Increasingly Popular. but Critics Say It Also Carries Significant Environmental Risks. Will Insurance Help Mitigate Exposure?


Chung, Huhnsik, Hoffnagle, Gregory, Risk Management


The process of high-volume horizontal hydraulic fracturing, or "hydrofracking," was first used commercially by Halliburton in 1949. It involves injecting millions of gallons of water, mixed with sand and chemicals, deep into the ground at high pressure in order to break up dense shale rock formations and release trapped natural gas to the surface.

Recently, hydrofracking has received considerable media and congressional attention as the method has become more widespread and the prospects for large-scale natural gas production from shale formations have become a reality. The scrutiny has largely focused on three areas of risk: legal liabilities emanating from negative environmental and health impacts, regulatory risk from new state and federal laws that would impose new costs or restrict hydrofracking operations, and reputation risk from the growing public and political concern paid to this issue--something exemplified by New York City Mayor Michael Bloomberg's vocal opposition alleging that hydrofracking poses an unacceptable threat to the water supply of nine million New Yorkers.

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At present, allegations abound that hydrofracking has resulted in the contamination of the environment--specifically to the detriment of aquifers, surface water and air quality. Some people have claimed that they have sustained illness and injury as the result of drinking water drawn from fresh-water aquifers contaminated by hydrofracking operations.

Further claims allege that vibrations and subterranean pressure changes associated with hydrofracking have negatively altered underground and surface geology--and even increased the risk for seismic events such as earthquakes. Other risks include well blowouts, nearby property devaluation, damage to crops or livestock, improper transportation, handling or storage of toxic chemicals and waste, and the migration of gases or naturally forming radioactive materials to the earth's surface. It remains unclear whether any of these will prove to be significant threats, but the practice is currently proliferating in many regions and many locals are becoming increasingly concerned.

Given all its uncertainty, one may logically ask why such an apparently risky enterprise is growing at such a rapid pace in the United States. There is no simple single answer. Instead, a confluence of political, technological and, perhaps most of all, economic factors are the driving force behind the recent hydrofracking renaissance.

For one, technical improvements to high-volume horizontal hydrofracking have allowed for easier exploration and discovery. Today, energy companies can explore greater areas of shale gas reservoirs per single well. In the past, older vertical hydrofracking wells covered less area and produced much less shale gas per well. Higher prices for crude oil and natural gas imports have also made hydrofracking--a relatively costly operation per well--more attractive. The market has turned something formerly considered a cost-prohibitive method for extracting sellable products into a financially viable venture for energy companies.

Along with the financial incentive for companies, hydrofracking has been able to rapidly expand because there are very few federal, and in some cases state, laws or regulations governing the industry. The infamous "Halliburton Loophole" has made headlines recently and been featured in the Oscar-nominated documentary Gasland. Simply put, this exempts hydrofracking operations from the Safe Drinking Water Act and exempts energy companies from having to disclose the ingredients included in the water, sand and (often toxic) chemical "fracking cocktail" used in the extraction process.

This loophole in the Energy Policy Act of 2005, legislation designed to combat growing energy problems by providing tax incentives and loan guarantees for energy production, took the Environmental Protection Agency off the job of regulating hydrofracking.

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The Risks of Hydrofracking: As the Nation Scrambles to Feed Its Insatiable Energy Demand, a Natural Gas Drilling Method Has Become Increasingly Popular. but Critics Say It Also Carries Significant Environmental Risks. Will Insurance Help Mitigate Exposure?
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