Drilling Deeper into the Marcellus Shale Supply Chain

Source: Risk and Insurance, February 22, 2011
By: Dan Reynolds, senior editor of Risk & Insurance

Carriers look to “mine” coverage for smaller contractors and subcontractors working to uncork Pennsylvania’s Marcellus Shale natural gas reserves.

The natural gas trapped in the shale layers running from below the Finger Lakes in New York to western Virginia could add $25 billion to the U.S. economy between now and 2020, according to a recent report by Zurich North America.

By then, unconventional natural gas production could amount to 60 percent of total U.S. production. Carriers insuring companies that are searching for and releasing the natural gas from the shale formation to the surface could also see potential in the expansion of the development of this resource.

Shale gas exploration in Pennsylvania, which has massive reserves, and Texas, where there are smaller but still substantial reserves, is sure to add to the $5 billion in annual premiums spent on insuring the U.S. energy market, said Patrick Lundy, head of energy for Zurich North America.

“For us, it certainly is a very big opportunity to work with customers and prospects,” Lundy said.

Lundy a veteran of Travelers, where he was a vice president in the oil and gas division, and of AIG, where he was a vice president in that company’s Global Marine & Energy Excess Casualty division, joined Zurich about 17 months ago.

The supply chain that is working to unearth Marcellus Shale gas is long and involved. In addition to large companies like Range Resources and Atlas Energy, there are numerous smaller contractors that are entering the space in support of the larger drilling companies, and that is where Lundy said Zurich has changed its underwriting attitude a bit.

“Since I came over, we made a cultural decision to change our appetite from writing just purely larger customers to wanting to home in on and be a full-service provider to the industry,” Lundy said.

Craig Sutton, a Dallas-based senior vice president in the energy business of Liberty International Underwriters, said his company is also looking to insure both big and small players in this market.

“We are interested in both ends of the spectrum on that,” Sutton said.

At Zurich, “drilling down” into the secondary and tertiary layers of the Marcellus Shale mining industry has meant dropping minimum premiums and being aggressive in touting Zurich’s risk engineering approach to both small and large companies.

“We are very comfortable with our risk engineering, and we have got a good product,” Lundy said of Zurich’s energy production expertise.

CLAIMS TO COME?

So far, Lundy said, claims in the Marcellus Shale formation have been nothing to speak of. But when you look at the history of energy production in a state like Pennsylvania, where the bulk of the Marcellus Shale gas is located, claims at this stage, at least environmental claims, aren’t necessarily the worry.

It was decades after many turn-of-the-20th-century mines had closed that Pennsylvania and its rivers took the brunt of one of that industry’s byproducts: acid mine drainage, a form of pollution that occurs when water seeps into abandoned mines, leaches metals from the mine and then oxidizes, turning streams and rivers a deep, toxic shade of orange.

And methane that has built up in abandoned coal mines has also been deemed to be the culprit in some recent shale drilling explosions.

Liberty International’s Sutton said the Marcellus play also differs from the other shale plays because of topography. Drillers who are used to the flatter landscape in Texas have had to make safety adjustments in the hillier terrain of Pennsylvania, New York and West Virginia.

In the short term, one of the risks outlined by Zurich is the risk entailed in what’s known as fracking, using tons of water to fracture shale layers and release the gas. Inadequate cement casing could cause those fracking fluids to leak into local groundwater tables, according to the Zurich report.

Much has changed since the late 1800s and early 1900s, of course. Savvy shale gas drillers are reusing not only the millions of gallons of impacted water created by their wells, but are using acid mine drainage from those abandoned coal mines as well as part of fracking solutions and creating what is at least in theory a closed disposal system.

As complex as the drilling process and the aftermath are in the Marcellus Shale, Lundy said, companies would do well not to approach this risk in the narrowest transactional sense.

“Our approach to business (is) that we are not just viewed as a risk-transfer mechanism,” Lundy said.

“Part of our insurance value supply chain is that we actually want to be imbedded in industry as being thought of as a leader in how we make improvements or help to educate customers and the community on what these risk exposures are and how we can help to mitigate them,” he said.

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