Publication Date 11/22/2010
Source: BestWire Services
Energy and environmental insurers are eagerly eyeing an emerging energy boom: the development of the Marcellus shale natural gas area.
“It’s a major, major find that I think will impact the energy market not only locally, but globally,” said Chris Moscardelli, director of Societe Generale’s energy project finance group. “The Marcellus shale play has the potential to revolutionize energy in the United States.”
Marcellus shale is a rock formation that underlies about two-thirds of Pennsylvania and portions of New York, West Virginia and Ohio. The rock lies about 5,000 to 8,000 feet under ground, and some estimate it potentially could provide enough natural gas to fulfill the United States’ needs for years. The rising cost of oil, coupled with advances in technology needed to tap the gas, has resulted in a boom of natural gas wells being built in the Northeast.
While many in the industry may consider the south the heart of the energy business, the Northeast is gaining prominence, and bringing new geographical risks to the market.
“I was surprised at the scope of it,” said Art McDevitt, vice president of energy programs at U.S. Risk Underwriters. “You do think of traditional energy states like Texas and Louisiana, but Pennsylvania is in play right now.”
Pennsylvania is not new to gas and oil drilling. In fact, the very first commercial oil well was developed in 1859 in Titusville, Pa. Today, the Keystone state is ground zero for the Marcellus shale gas drilling exploration. The state has issued 2,538 well permits to drill for natural gas in the Marcellus shale area from Jan. 1, 2010 to Oct. 22, 2010, according to the Pennsylvania’s Department of Environmental Protection. About 1,124 wells have been drilled. Also, about 955 violations have been recorded by the DEP.
The drillers are often familiar faces, McDevitt said. “We’ve seen quite a few accounts move up there from other parts of the country,” he said.
To reach the gas trapped in the Marcellus shale, a vertical well is drilled down 1,000 to 5,000 feet or more, and then is turned to drill horizontally. Then a mix of sand, water and chemicals is used at a high pressure to fracture the rock, which releases the gas. This process is also called “fracking.”
Potential insurance buyers are anyone who has an interest in the drilling, which can include landowners, mineral rights owners, the driller of the well, the operator of the well, plus those who manufactured the equipment and any investor who’s backed the project. Many of these interests can be included on the operator’s policy as additional insureds.
“The risk is if there’s a loss, there might not be enough insurance coverage to protect everyone who’d be sued. If the operator has $1 million in coverage and you are dividing it 30 ways, you don’t have a lot of coverage for each person,” McDevitt said.
He suggested it is wise for the landowner, mineral rights owners and investors to get their own policies. This is called a nonoperating working interest general liability policy. That can run $1,000 to $3,000 in premium for a $1 million in coverage. “But we are seeing more and more people take higher limits,” McDevitt said.
Also, drillers and operators may buy what’s called “control of well” coverage, which would protect them if there’s a blowout in the well. The control of well insurance covers the cost to put the fire out and restore the well to its pre-blowout condition.
The act of drilling is hazardous, McDevitt said.
“The power is pretty fantastic. The drill pipes weigh 14 pounds a foot. You may need 10,000 feet of pipe, that means you are turning 140,000 pounds,” McDevitt said. The drill pipes come in 30-foot lengths, so workers have to put a new length of pipe on every two to three minutes. “It just takes a few moments of inattention to get hands stuck in the machinery or to slip,” he said.
One risk drillers face is hiring inexperienced or improperly trained crews, McDevitt said. “Most of our insureds have taken their own crews up there, while other companies are hiring people locally,” he said. “If they are hiring locally, we want to make sure they have training programs and are hiring qualified employees.”
U.S. Risks, a broker, provides general liability, umbrella coverage, automobile and inland marine insurance, plus property insurance on the drilling rigs and equipment.
Pollution is also a concern, McDevitt said, noting pollution is less of a risk with natural gas than with oil.
Pennsylvania officials say one driller, Cabot Oil & Gas, contaminated several drinking wells in the small town of Dimock, Pa. The state has made arrangements to extend a water line from a nearby town 5.5 miles at a cost of $11.8 million.
Typical pollution insurance has a time limit, for instance, the insured might have seven to 30 days to discover the pollution and 30 to 90 days to report it.
Joe Boren, chief executive officer of Ironshore Environmental, said he’s seen increased demand for insurance coverage for “gradual” pollution cases that go beyond the standard “sudden and accidental” pollution coverage.
“In the environmental business, generally what happens is whomever was involved… all have a tendency to get sued,” Boren said. “Environmental insurance coverage will give them protection for both the defense and clean up should they be found to be a responsible party.”
Environmental policies can have limits as high as $100 million to $150 million, but would involve several companies, Boren said.
Premiums vary depending on who is buying the policy. For instance, a landowner would expect to pay a lower premium than the well driller or operator, he said.
“It’s treading on new ground in term of how active the litigation is going to be,” Boren said. “We look at it on a case-by-case basis. This is yet another group of customers facing potential environmental issues that they want to protect themselves from.”