Managing Risk on the New Frontiers of Energy Exploration, Fracking firms should offer sweeteners to locals, say MPs, UK shale resources ‘looks difficult, given local opposition’

Industry Perspective: Managing Risk on the New Frontiers of Energy Exploration by Marsh Risk Management Research, May 2013, Marsh & McLennan Companies
Significant Exposures
The associated risk exposures derived from shale gas production are significant. There has been widespread condemnation, ranging from allegations of contaminating water tables to claims that it induces earthquakes. … Although shale exploration uses similar techniques to those used in conventional platforms, the difference comes in the process of fracking itself. It is perhaps for this reason that the insurance markets, as a proxy for the inherent risk profile, are not clear on the coverage currently in place for shale activities. Current policies are not always updated to specifically include fracking activities, which could result in disputes when OEE and liability claims are presented.

Shale gas exploration remains contentious because it can be intrusive for local communities. Although South Africa and the UK have recently lifted a moratorium on fracking, bans still exist in some parts of the world. India has suspended fracking activities (although a licensing round is expected this year), and a handful of American states, mainly in the east, prohibit this activity. In New York, more than 100 communities have introduced a ban, while other local governments in Australia, Ireland, and Bulgaria have also banned fracking.

Managing The Risk
Organizations should consider the following steps to mitigate the distinct risks associated with shale gas exploration, including reputational risk:
1.Where shale gas exploration is under consideration, companies should pay due attention to their strategy for managing stakeholder relations. Consultation and engagement with communities local to reserves
will become necessary for proactively managing reputational risk.

2.Emergency response plans and recovery strategies for dealing with an unplanned incident should be well developed and rehearsed. The manner in which local communities and the media are responded to will be critical in the event of an unforeseen incident. [Emphasis added]

Source of above snaps: Industry Perspective: Managing Risk on the New Frontiers of Energy Exploration

Fracking firms should offer sweeteners to locals, say MPs, Energy committee says UK shale resources should be exploited but ‘that looks difficult, given local opposition’ by Fiona Harvey and Terry Macalister, April 26, 2013, The Guardian
Shale gas fracking companies should be made to offer incentives, such as cash payments or rebates on energy bills, to people living near their sites, according to an influential committee of MPs. But the demand for sweeteners to help overcome opposition to fracking came as one of the world’s leading insurance groups warned that those drilling in shale areas, deep waters or the Arctic risked “company-killing” reputational and environmental damage.

The energy and climate change committee says on Friday that substantial incentives would be needed to overcome local opposition to shale gas drilling, which has been associated with water, ground and air pollution in the US, and which green groups say is incompatible with moving to a low-carbon energy supply. The MPs also warn that, even if fracking does take place on a wide scale in Britain, there is no guarantee it will lower energy bills.

Tim Yeo, chairman of the committee, said: “We believe the UK’s shale resources should be exploited, but that looks difficult given local opposition to drilling. There has to be a way of getting to communities.”

He warned, however, that the government should not set too much store by shale gas when formulating its energy policies, because it might not have the positive impact that some have claimed for it. “We shouldn’t base energy policy on the supposition that we have 50 years’ worth of this gas to exploit. Some people seem to think shale gas is in the bag, that it is the answer to our energy problems, but it would be very rash to make that judgement now. We don’t know enough about it.”

The incentives that could be made available to communities must be substantial, Yeo said, if opposition was to be overcome. “It’s not just a question of building a new car park or a bypass. It might be cash incentives, and it might have to be very local – not to a borough council but to individual villages near the sites.” The committee’s central recommendation of incentives for communities to be paid for by drilling companies is at odds with the views of Cuadrilla, the only shale gas fracking company in Britain. Papers seen by the Guardian under the Freedom of Information Act show the company has written to ministers calling for taxpayers to foot the bill for incentives.

But green groups said the committee had not made a strong case for fracking. Friends of the Earth energy campaigner Tony Bosworth said: “This report does little to back the case for a UK shale gas revolution … Fracking is dirty, unnecessary and a threat to our climate and environment – it’s little wonder so many communities are in opposition.” Leila Deen of Greenpeace said: “This report confirms that what we know about UK shale gas is that we don’t know much. The only thing most experts agree on is that it won’t reduce bills.

Meanwhile, global insurance broker Marsh said that shale was one of the new frontiers for oil and gas companies which offered substantial rewards but also significant reputational risks if anything went wrong. Andrew George, chairman of Marsh’s energy practice, said the chances of an accident were not high but the stakes had never been higher, whether it was fracking for shale, drilling deep-water wells or working in the Arctic. “Reputational risk must be factored in much, much more. In the internet age a well can blow out in the morning and a company’s survival could be at stake in the afternoon.” This meant insurers had to offer the right products, but also that exploration companies had to recognise the scale of the new risks and insure themselves accordingly. Asked whether some were failing to do this, he would only say: “Different kinds of buyers [oil companies] have different levels of sophistication.”

In a statement ahead of a new report – Managing Risk on the New Frontiers of Energy Exploration – Marsh said oil and gas companies had the capacity to blow off course the whole global economy by getting into trouble.

It said one single accident could trigger a wider drilling ban or financially sink a business: “While the global energy sector is playing an increasingly pivotal role in stimulating economic recovery, the industry’s failure to mitigate the risks associated with the new frontiers in exploration and production could jeopardise future growth.” [Emphasis added]

New frontiers of energy exploration pose threat to global economy by Canadian Underwriters, April 24, 2013
As the risk landscape of the global energy sector grows increasingly complex and challenging, the sector’s failure to mitigate risks associated with new frontiers in exploration and production could jeopardize its growth and its pivotal role in stimulating economic recovery, suggests a report released Thursday by Marsh. “The global energy sector is driving struggling countries out of the economic mire, while sating surging demand for power in China, the Middle East and North Africa,” Andrew George, chairman of Marsh’s Global Energy Practice, notes in a statement. “However, myriad financial, physical and political risks are converging to create a risk landscape that is perhaps the most complex – and challenging – in the sector’s history,” George says. Global demand for energy is expected to increase by 1.6% per annum over the next 20 years, representing a 39% increase on total 2011 consumption, states the report, Managing Risk on the New Frontiers of Energy Exploration. “As demand pushes energy exploration into increasingly inhospitable geographies, the danger of a low-likelihood-but-catastrophic disaster rises and the requirement for more sophisticated risk management strategies becomes vital.”

The report specifically addresses deepwater drilling, Arctic extraction, shale gas and the Middle East. Associated risks include the following:

Shale gas: reputational risk, political risk, environmental (lack of containment, seismic, contamination), activist groups and liability exposure; …

“The velocity of risk in these new frontiers of energy exploration and production is exceptional. Improving operational resilience, business continuity planning and firmly embedding strategic decision-making in the boardroom is vital for energy firms, to protect both their investments and global economic recovery as a whole. One misstep could dramatically affect an entire industry,” adds Will Bruce, a principal consultant in Marsh Risk Consulting.

Rapid project inflation costs and the financial outlay associated with pursuing challenging reserves means the energy sector also requires significant capital investment. “Over the past 10 years, worldwide costs of developing production capacity have doubled, largely due to increases in the cost of materials, personnel, equipment and services,” notes the report. “With costs amplified further in the pursuit of challenging reserves, attention will be increasingly focused on ensuring the required return on investment is achieved while managing risk appropriately,” it adds.

The wide breadth of risk exposures in the new frontiers of energy exploration should do a number of things:

improve operational standards across the industry;
lead to the management of risk exposures from an enterprise-wide perspective; [Emphasis added]

[Refer also to:

CLIENT ADVISORY New Technology Creates New Insurance Issues for Oil and Gas Lease Operators by Pascal Ray and the AmWINS Energy Specialty Practice

This shift to unconventional drilling and heavy multi-stage fracking has created new insurance issues for the industry:
• Increase in blowouts during the completion/fracking stage.
• Increase in blowouts involving communication between multiple wells.
• Increase in blowouts caused by casing/cementing failure.
• Increase in blowouts caused by surface events.

In addition to these blowout trends, we are seeing:
• An increase in blowouts involving producing wells.
• An increase in blowouts involving plugged and abandoned wells.

While fracking has been the cause of some of the blowout increases, producing wells and plugged and abandoned wells are experiencing underground blowouts from the failure of old and corroded casings. These underground blowouts can lead to cratering events that are costly and difficult to bring under control. Underground blowouts can be much more expensive to bring under control than surface blowouts, yet many operators do not insure these wells or have high enough limits for them.

Another issue that has arisen from fracking is an increase in surface and water table pollution events that can result in expensive claims and erode the Control of Well limit rapidly, if not entirely. As a result, many of the blowouts that are now occurring are under-insured. [Emphasis added]

Nationwide Insurance: Fracking Damage Won’t Be Covered July 12, 2012 ]

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