One of the most hotly debated topics in America today is the drilling process known as hydraulic fracturing, commonly referred to as "fracking," and the benefits and risks proponents and opponents associated with the practice.
One
of the most hotly debated topics in America today is the drilling process known
as hydraulic fracturing, commonly referred to as “fracking,” and the benefits
and risks proponents and opponents associate with the practice. Proponents
argue that fracking offers the potential to recover a tremendous amount of
natural gas from various domestic shale formations. Doing so, they say, will
reduce American dependence on foreign energy sources while simultaneously
generating new wealth and creating jobs, often in historically depressed areas
of the country. On the other hand, opponents argue that perceived risks to
human health and the environment outweigh the possible benefits from the
controversial practice.
The stakes are high for both sides. For fracking proponents-specifically drillers,
who are determined to extract vast quantities of domestic natural gas from rock
formations far below the surface of the earth and deliver it to the
marketplace-millions of investment dollars are at stake. For opponents, the
possibility that fracking might cause groundwater pollution, air pollution
and/or earthquakes means that the practice must be stopped. With the stakes so
high, and the lines clearly drawn, it is not surprising that fracking-related
litigation is on the rise.
It is abundantly clear to all those involved that the courts will ultimately
decide the fracking debate. In fact, when New York’s Gov. Andrew Cuomo
announced recently that issuance of that state’s eagerly awaited fracking
regulations would be further delayed to allow for an additional health impact
study, he explained that the additional study was needed to bolster the case
against expected lawsuits challenging the final regulations.
Unfortunately, the drilling companies that seek to safely and efficiently
extract natural gas must do so within this contentious and litigious
environment. Because drillers are a key player in the extraction process, they
will no doubt be implicated (rightly or wrongly) in any litigation stemming
from fracking. Since fracking litigation presents too much to cover in one
article, we break the issues down in two parts. First, we analyze the risks,
real or perceived, that drillers face from fracking. Specifically, we analyze
the current status of the litigation being advanced across the country,
including the types of claims being made against drillers and the most current,
best defenses being interposed in those suits. Then, in part two, we will
analyze risk management implications for drillers, including insurance coverage
issues and risk-shifting contractual provisions that can help reduce the risk
of those future claims.
The (Real or Perceived) Risks of Fracking
Today, it is common knowledge that the United States is home to trillions of cubic
feet of recoverable natural gas, which is mainly contained in shale rock
formations located far below the earth’s surface. This “shale gas” is now
recoverable thanks to developments in horizontal drilling and fracking technologies that permit larger areas of shale
gas to be harvested from a single well pad. The fracking process consists of
pumping a fluid and a propping material, such as sand, down the well under high
pressure to create fractures in the gas-bearing rock. The propping material (“proppant”)
holds the fractures open, allowing more gas to flow into the well. This
“fracking fluid” consists mostly of water, but it also contains compounds to
make the fracking process more effective. The compounds often include a
friction reducer, a biocide, a gel and various other agents.
Regulating the use of private lands is primarily the responsibility of state
governments, although certain federal regulations apply. As more time passes,
and more experience is gained, energy companies have revised their practices.
Many states have evolved and enhanced their regulatory
framework with the essential goal of minimizing any risks associated with
fracking. Despite this regulatory overlay, opponents claim current safety
practices are insufficient to protect against the perceived risks of fracking,
particularly the fear that fracking fluid or methane gas may contaminate
underground aquifers. Another major concern raised by opponents is the
possibility that fracking may be causally related to seismic events. These
fears have given rise to a number of lawsuits.
Fracking Litigation to Date
Since the first fracking-related complaints were filed in 2009, there have been
more than 40 lawsuits filed in state and federal courts alleging some level of
bodily injury, property damage or environmental harm caused by fracking or
related activities. The majority of these lawsuits are premised on common law
theories of liability. The predominant claims are bodily injury and property
damage. They mainly allege that groundwater has been contaminated from wells
near the fracking sites due to inadequate well casings. In the personal injury
context, the plaintiffs claim that they suffered myriad medical conditions. In
the property damage context, plaintiffs essentially claim that the land has
lost value due to contamination. Specific liability claims include: negligence
(based on allegations that improper or inadequate well casings allowed fracking
fluid to leak from well bores); negligence per se (based on alleged violations
of applicable state regulations); fraudulent misrepresentation (based on
allegations that drilling companies misled the public); breach of contract
(based on allegations that drilling companies violated agreements pertaining to
safety procedures); and trespass (based on the alleged intrusion of fracking
fluid onto adjacent property).
At present, fracking litigants claim that fracking fluid has contaminated water
in Arkansas, Colorado, Louisiana, New York, Pennsylvania, Texas and West
Virginia. While almost all of the lawsuits encompass property damage claims,
the early lawsuits are focusing on alleged health effects arising from the
consumption of contaminated drinking water. A handful of those lawsuits were
settled, with a number of cases being dismissed because of lack of a causal
connection between plaintiff’s alleged injuries and fracking.
For example, the U.S. District Court for the Eastern District of Texas, in the
matter of Harris v. Devon Energy Prod. Co., L.P., dismissed the plaintiffs’
claims against Devon Energy due to insufficient evidence. In that case,
plaintiffs alleged that Devon’s drilling operations caused the plaintiffs’
groundwater to become polluted with gray sediment. The plaintiffs alleged that
groundwater testing revealed the presence of what they claimed were hazardous
substances, some of which are contained in bentonite mud used during well
drilling. On Jan. 25, 2012, the District Court dismissed all claims against
Devon on the basis that recent testing of the plaintiffs’ groundwater wells
showed no contamination present at levels that are toxic for human consumption.
Similarly, the U.S. District Court for the Eastern District of Arkansas recently
dismissed two consolidated contamination lawsuits for failure of the plaintiffs
to allege specific facts tending to prove the contamination alleged.
In the consolidated contamination cases Tucker v. Southwestern Energy Co. and
Berry v. Southwestern Energy Co., the court ordered the plaintiffs to re-plead
their claims. According to the court, the plaintiffs failed to meet the new,
higher pleading standards required in federal court as set forth by the U.S.
Supreme Court in Ashcroft v. Iqbal. Pursuant to the standard, the plaintiff
must plead facts sufficient to move his claims “across the line from
conceivable to plausible.” In the opinion of the District Court, however, the
plaintiff’s allegations were “mostly conclusions and general statements.” The
court specifically stated that the plaintiffs failed to “allege specific facts
tending to show Southwestern Energy did anything to cause” the contamination
alleged. The court ordered the plaintiffs to re-plead their actions alleging
“particular facts about particular fracking operations by particular fracking
companies using particular substances that allegedly” caused the plaintiffs harm.
More recently, in a significant decision out of a state court in Colorado,
Strudley v. Antero Resources Corp., the court dismissed with prejudice a toxic
tort action involving personal injury and property damage claims arising from
well development activities. From the outset, because of the significant
discovery and cost burdens that would be associated with the case, the court
entered what is called a “Lone Pine Order,” which required the plaintiffs to
establish exposure and causation early in the case. Plaintiffs were unable to
do so and the case was dismissed. Legal commentators following fracking litigation
have raised the question of whether other courts will follow Colorado’s model
to require a plaintiff to establish from the outset whether they can satisfy
their claim.
Despite legal setbacks, plaintiffs continue to bring lawsuits alleging
fracking-related contamination. However, a subtle shift can now be seen in the
overall litigation. Recently, given the hurdles of proving a causal connection
between fracking and a personal injury claim, plaintiffs are now pursuing the
property damage claims more aggressively. Recently, for example, three gas
drilling companies were named as defendants in a federal lawsuit filed by a
group of Arkansas residents who allege that drilling waste injected into
disposal wells has contaminated the ground under their property. The complaint,
brought by nine families and individuals who live in Faulkner and Independence
counties, alleges that the defendants, Houston-based Southwestern Energy Co.,
Oklahoma City-based Chesapeake Energy and Fort Worth, Texas-based XTO Energy,
have been injecting waste fluids from the fracking process into disposal wells
and that “once injected into these disposal wells, the oilfield waste fluid
flows out horizontally and is then permanently and forever deposited into the
rock formation.”
The defendants have lease agreements with some of the plaintiffs for gas
drilling rights. According to the plaintiffs, those leases “do not permit or
contemplate the permanent disposition of oilfield waste upon the property of
the plaintiffs,” and the gas companies never informed the plaintiffs of their
plans to inject oilfield waste onto their property. The defendants counter that
the publicly recorded mineral leases expressly allow injection of fracking
fluids below their lands. The suit lists numerous harmful effects the
plaintiffs allege have occurred on their land because of the drilling waste. It
seeks $2 million in compensatory damages and $15 million in punitive damages
for each plaintiff, plus an order requiring the defendants’ disposal wells to
be monitored for migration of waste fluids, and states a claim for treble
damages on the basis that the defendants violated federal racketeering laws.
Also notable is the fact that the plaintiffs are now seeking class-action
certification for the lawsuit so other landowners similarly affected can
receive damages as well. This is critical because class actions are very
expensive cases to defend.
In addition to pursuing the groundwater
and sub-surface contamination cases stemming from the use and disposal of
fracking fluid, plaintiffs also assert claims alleging ground water
contamination and air pollution caused by the release of methane from shale gas deposits. The plaintiffs in these cases point to studies tending
to show that methane released during the fracking process can contaminate
shallow drinking wells. However, methane is naturally occurring in many
groundwater sources. The studies on which these plaintiffs rely draw a distinction between “thermogenic” (i.e. subsurface) methane and
“biogenic” (i.e. surface) methane. Yet, other studies suggest that the
distinction between thermogenic and biogenic methane is too simplistic because
thermogenic gas can and has been found to occur in geologic strata much closer
to the earth’s surface. This question is hotly debated, and the outcome of
these cases will probably rest on its determination.
Finally, it should be noted that a number of lawsuits seek damages stemming
from earthquakes allegedly related to fracking activities. Notably, these
tremors are not being attributed to fracking per se, but to disposal of the
fracking wastewater injected into deep disposal wells. In recent years, there
have been reports and studies of measurable tremors in locations where deep
waste disposal wells received large quantities of fracking wastewater. A number
of cases were filed following tremors in Arkansas, and more recently after a
series of recent quakes near Youngstown, Ohio. The causation theory is that
when the wastewater is injected deep into the disposal wells it reduces
friction and causes adjacent faults and layers to shift.
Conclusion
In virtually every case the driller is a primary target of these lawsuits.
Drillers must defend against them aggressively by demanding from the outset
that plaintiffs show a causal connection between the claims and the alleged
injuries. Thus far, thanks in no small part to a lack of peer-reviewed evidence
correlating the claims asserted with the causes alleged, fracking-related
lawsuits have proven relatively defensible, with many cases being dismissed or
settled inexpensively. To date, there have been no major trials involving such
claims against drillers.
However, in a few instances plaintiffs were able to show that mistakes were
made somewhere in the fracking chain, despite ever-increasing safety practices
and significant regulatory oversight. In such circumstances, it is critical for
drillers to quickly investigate to determine which entity or entities among all
the players caused the incident or played a role in contributing to it. Stated
simply, an immediate and accurate investigation into any alleged incident will
help reduce the share of responsibility for the driller, particularly where it
is only tangentially involved in the incident giving rise to the lawsuit.
Furthermore, in addition to aggressively defending against the claims on the
grounds that they have no merit, the prudent driller must be prepared to deal
with cases that are not dismissed early. For example, every driller must
appreciate that there are risk management strategies available to it, such as
insurance coverage issues and risk-shifting contractual provisions. While these
strategies will not prevent the filing of lawsuits, they can help reduce the
risk associated with those claims. Coming up in the second part of this article
we will discuss those risk management strategies. ND