2012 Winter Newsletter - Shale Gas Boom
Shale Gas Boom: Hydraulic Fracturing and Potential Legal Claims
By Joshua W. Mermis
A “gas rush” is revitalizing the domestic petroleum exploration industry, and the legal ramifications could be felt for decades. Through hydraulic fracturing (“fracking”), petrochemical companies access once cost-prohibitive shale gas formations by creating fractures in underground rock formations, thereby facilitating oil or gas production by providing pathways for oil or gas to flow to the well. These pathways are commonly referred to as the “fractures.” The legal consequences of fracking could impact more than half of the Lower 48 states.
Background of Hydraulic Fracking
The basic technique of fracking is not new. In fact, fracking has been used in wells since the late 1940s. The first commercial fracking job took place in 1949 in Velma, Oklahoma, however, sequestered layers of shale gas were inaccessible until 1985, when pioneers such as Mitchell Energy and Development Corporation combined fracking with a newer technology called directional, or horizontal drilling in the Austin Chalk. Directional drilling gave producers access to the shale gas because it allowed them to turn a downward-plodding drill bit as much as 90 degrees and continue drilling within the layer for thousands of additional feet. The positive results were soon transferred to the Barnett Shale in North Texas. To date, more than one million wells have been fractured. The “hottest” shale plays are as follows:
- Bakken (Montana, South Dakota and North Dakota)
- Barnett Shale (Texas)
- Eagle Ford (Texas)
- Haynesville (Arkansas, Louisiana, and Texas)
- Marcellus Shale (New York, Ohio, Pennsylvania, and West Virginia)
- Utica (Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Virginia)
Confirmed and/or prospective shale plays are also found in Alabama, California, Colorado, Illinois, Indiana, Kansas, Michigan, Mississippi, Missouri, Nebraska, Utah and Wyoming. Shale plays have been confirmed in countries around the world, but the US is the leader in shale gas exploration.
More money, more problems
The new application of an old technology made it possible to profitably produce oil and gas from shale formations. Domestic and international companies quickly rushed to capitalize on the large reservoirs of shale gas. But unlike the preceding decades, where new oil and gas exploration had occurred offshore and in deepwater, oil and gas drilling started to occur in areas that were not accustomed to oil and gas activity. Overnight ranchers became millionaires as landmen leased large swaths of property to drill. The media started reporting about enormous domestic supplies of oil and gas that could be profitably produced from shale formations and politicians touted energy independence that could alleviate the country’s demand for foreign reserves. But with the increased attention came increased scrutiny.
Environmental groups have criticized the industry for fracking. The chief concern is that fracking will contamination of drinking water. Movies such as “Gasland” and “Gasland 2” fueled the public’s concerns that the drilling caused polluted water wells and flammable kitchen faucets. Additionally, the industry received criticism for the engineering process that involved high-rate, high-pressure injections of large volumes of water and some chemicals into a well to facilitate the fracking. The EPA and state regulatory bodies have become involved in the discussion and new regulations are likely to follow. In the meantime, some lawsuits have already been filed.
Pending Hydraulic Fracking Litigation
Plaintiffs have filed approximately forty shale-related lawsuits across the country. These lawsuits include: (1) tort lawsuits; (2) environmental lawsuits; or (3) industry lawsuits. As the shale boom accelerates more suits are anticipated.
1. Tort Lawsuits
Tort lawsuits have been brought by individuals and as class actions. Typically the claimants assert claims for trespass, nuisance, negligence and strict liability. Their complaints involve excessive noise, increased seismic activity, environmental contamination (air, soil and groundwater), diminution in property value, death of livestock/animals, mental anguish and emotional distress. The plaintiffs seek actual damages and, in some instances, injunctive relief. A few parties have even sought the establishment of a medical monitoring fund. The majority of these lawsuits have been filed in Texas, Pennsylvania and Louisiana. The first wave of lawsuits has established new law in the respective jurisdictions as the appellate courts weigh in with published opinions on issues that range from oil and gas lease forfeiture, consequences of forged contracts and contract formation.
2. Environmental Lawsuits
Environmental organizations and some citizen groups are seeking to enforce environmental laws and regulations in an effort to protect the environment and the public from what the litigants perceive to be negative consequences of fracking. In some instances they are even seeking to restrict the use of hydraulic fracking until it is proven to be environmentally safe. A popular target among these litigants is federal and state regulatory bodies, such as the EPA, and federal statutes, such as the Clean Air Act.
3. Industry Lawsuits
The final category of lawsuits includes those brought by the industry against the government. Claimants have sought to challenge federal, state and local government actions that have impeded the industry’s ability to drill.
Fracking Lawsuits 2.0 – Transportation, Construction, Personal Injury and Beyond
The survey of current fracking lawsuits does not take into account the claims that will spin out of the new shale plays. In fact, the engineering and logistical side of the fracking process—not fracking itself—will lead to many more attendant claims.
- Transportation: Transportation lawsuits are likely to increase because fracking means increased tanker truck trips. One state official recently opined that one horizontal well requires 1,000 truck trips during drilling and fracking.
- Commercial: Lessor involved in mineral disputes will lead to commercial claims. Many lessors will feel they were shorted, or want a better deal as those now positioned to lease their rights sign a more lucrative mineral-rights lease. Company-to-company disputes will also rise as the price of natural gas fluctuates.
- Construction: The contractors and design professionals building the midstream facilities, among others, will lead to construction-defect and delay claims. Many states have recently adopted anti-indemnity statutes that will impact claims that arise during construction of midstream facilities, pipelines and other infrastructure-related construction projects.
- Insurance: Coverage issues will arise as parties file first- and third-party claims for myriad reasons. Issues including comparative indemnity agreements, flow-through indemnity and additional insured endorsements, among others, will need to be analyzed.
- Personal Injury: Additional workers drilling and working the wells will lead to an increase in personal injury and work-place accident claims. Many of the shale plays are located in what have traditionally been considered “plaintiff-friendly” venues. A claim in Pennsylvania will have a different value than one located in Webb County, Texas.
- Product Liability: The products and chemicals used to drill and extract the oil and gas will lead to product liability claims involving both personal and property damage. The BP Deep Water Horizon well-blowout in the Gulf of Mexico will not be lost on those involved in domestic oil and gas exploration.
How to Reduce Future Fracking Litigation Risk?
Parties can act now to discourage litigation or better position themselves in the event they are named in a suit.
1. Institute electronic records protocol
The proliferation of email and increased retention and archival capabilities means that emails never die. A potential defendant would be well served with a protocol in place that outlines to its employees what are acceptable electronic communications.
2. Strictly comply with fracking fluid disclosures
For those parties who could be exposed to claims regarding the fluids used during drilling, it is important that they minimize the public’s suspicion that they are withholding information about the fluids. The best way to neutralize that misconception is to strictly comply with the state-mandated disclosure rules where applicable. It may even behoove them to voluntarily disclose the fluids’ contents through the companies’ websites.
3. Be prepared for a fire-drill
A party must be ready to quickly assert its position when a claim is brought. The best way to do so is to track current litigation. Following the cases will provide the company a preview as to what claims it may be subject to, and it also allows them to evaluate defenses. It may also enable the company to insulate itself from suit by avoiding certain actions. Along those same lines, knowing the facts, documents, emails, fact witnesses and expert witnesses will work to a party’s advantage. Some industry leaders have proactively retained experts even though they have not been sued.
4. Know your neighbors
Parties should view their neighbors as allies and potential jurors. To that end, it makes sense to open a dialogue about fracking with the regulators on a local, state and federal level. It would also benefit the parties to engage the community and publicize information about the benefits associated with fracking, e.g., jobs, lower energy prices, cleaner energy, energy independence, etc. Certain midstream players have rolled out a public education campaigns aimed at that very goal.
Articles on shale gas and fracking adorn the front pages of the Wall Street Journal and New York Times. 60 Minutes runs stories on shale-gas drilling and the faux pundit Stephen Colbert discusses fracking’s impact on his tongue-and-cheek news show. The promise of profits, domestic jobs and energy independence has the country talking about the gas shale plays that dot the landscape. Fracking and all that it encompasses will serve as the backdrop for a variety of legal issues during the foreseeable future.
Joshua W. Mermis
Johnson, Trent, West & Taylor, L.L.P.
 If one well requires 2 million gallons of water to break open rocks far below the surface and release oil and natural gas, that’s 366 tanker trucks hauling fresh water and 183 tanker trucks hauling waste water, for a total of 549 tanker truck trips per well, per fracking. For the average fracking, which may take 3.5 million gallons (6 million gallons is required in places such as Eagle Ford), that is 960 tanker trips.