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Unearthing profit: the natural gas sector generates high hopes and emerging risks.

There is a challenge in measuring what natural gas holds for North America, both in terms of its value as an energy resource and for its revenue potential.

Gaining clarity over the risk profile of the "fracking" process, now widely used in U.S. natural gas production, is no different.

Ten years ago, less than 2% of the country's natural gas was drawn from shale beds. That figure now stands at 30%, according to the U.S. Department of Energy.

And fracking's growing role has insurance markets contemplating the opportunities.

Given the rising volume of drilling and advancements in this rapidly growing segment, Pascal Ray, senior vice president of AmWins Brokerage of Texas, is bullish on the upside potential for insurable values.

The real challenge lies in defining the baseline of exposure as natural gas wells multiply, often within a close geographic space.

"People are still trying to get their heads around what is going on" Ray said. "Over the last few years there has been a real paradigm shift in the oil and gas industry from conventional drilling to unconventional drilling" That shift from the conventional method of tapping naturally occurring oil and gas reservoirs to creating and harvesting man-made ones through unconventional drilling and fracking a mile underground comes with volatility.

The pad-drilling technology that allows multiple wells to operate through one surface location has led to a higher concentration of value being in much closer proximity, Ray said. The potential scenario of a single well blowout damaging multiple nearby wells has become a valid concern.

"Generally speaking, with control of well insurance, when an insured's well blows out and causes other wells to blow out, this scenario can be viewed as one occurrence and subject to one limit," Ray said.

Multiple Well Blowouts There's one such pad operation that has 36 wells, considered the largest pad drilling complex so far. While the fractures created to free trapped natural gas may pose issues for adjacent wells, the exact reach of the fractures is still being defined.

Pennsylvania regulators have said there are reports of gas well bores "communicating" with other wells up to a mile away, according to a January 2011 report by Alberta's Energy Conservation Resources Board. Texas officials also observed this scenario, but only 2,000 feet apart.

Ray said many operators aren't buying the type of limits needed to withstand an onshore wellhead blowout, which can now range up to $100 million.

"The pollution events can be even worse," Ray said. "There have been some events that have been $200 million to $300 million. Most operators, except for the very, very large ones, don't seem to carry near-enough pollution [cover]."

One of the largest natural gas players, Oklahoma City-based Chesapeake Energy, increased coverage limits in its insurance program during 2010. In an annual filing to investors, Chesapeake said it had increased its control-of-well policy by 50%, to $75 million. The policy covers sudden or accidental risk associated with drilling, completing and operating wells, and the company is mindful of its limitations.

"There is no assurance that this insurance will be adequate to cover all losses and exposures to liability," Chesapeake's annual filing stated. That statement is echoed in similar filings by other natural gas companies.

Chesapeake also raised its comprehensive general liability umbrella coverage by 14% last year to $400 million, and bumped up its pollution liability 30% to S 130 million.

Fracking Values Tilt Higher

Chesapeake spokesman Jim Gipson wouldn't discuss the company's insurance program in detail. In an email response, Gipson said fracking was one part of the overall process and coverage limits were on a per-incident basis.

"These limits are regularly reviewed, taking into consideration a host of analytical factors," Gipson wrote.

Ray said that other operators typically don't buy anywhere near Chesapeake's $130-million pollution liability limit. He believes many drilling operators are underinsured and not paying enough attention to an emerging risk profile.

In unconventional drilling, a vertical well is drilled a mile or so deep. From there, drilling continues along a horizontal trajectory, up to two miles in some cases, as sections of steel casing are installed. A high-pressure injection of water, sand and chemicals are then infused to break apart shale formations and free trapped natural gas deposits.

Ray said accumulated values on a fracking site easily range up to $35 million, far higher than the typical $10 million to $15 million values found at normal drilling sites.

"People are trying to put together more capacity for the care, custody and control issues because of the higher values on the well site during the fracking process," Ray said. "That's one issue, and that's one area where a new product needs to be developed."


Ray said that most of his clients carry between $5-million and $10-million limits on control-of-well coverage. He sees a need for an excess control-of-well policy that provides limits of up to $100 million.

"To my knowledge, there's not a place in the U.S. to go and get $100 million in one fell swoop without involving other insurers on a subscription basis," Ray said. "The agents need something easier."

Past History an Issue

Other potentially negative issues linger. Ray said there has been an increase in well blowouts on both producing wells and plugged and abandoned ones.

Abandoned wells can pose a challenge across swaths of rural Pennsylvania, where oil wildcatters dug wells free of regulation a century ago. The same can be said for some coal mines.

"The land men do their best job to find out where these other wells are located but in some cases there are no records," Ray said.

"There are cases of fracking and hitting another well and causing a blowout."

There has also been ongoing speculation about fracking's connection to earthquake activity. After a magnitude 5.8 quake near Mineral, Va., rattled the East Coast in August, an official from the U.S. Geological Survey downplayed any correlation.

Dr. Michael Blanpied, associate coordinator for the USGS Earthquake Hazards Program, indicated during a webcast that fracking could cause very small earthquakes.

"The thing that can induce large earthquakes is the high-pressure fluid injection, waste fluid injection, that's done in some places," said Blanpied, adding that he was unaware of such a process occurring in the area where the Aug. 23 earthquake occurred.

"Just to be clear, the connection between fracking and fluid injection and earthquakes is an area of active research and really we're only starting to learn about how those things are connected," Blanpied said.

Key Points

* The News: The potential of natural gas as an energy resource is fueling opportunity.

* Behind the Trend: Agents and brokers need to be cognizant of the emerging risk profile of natural gas.

* Watch For: Court cases and EPA decisions to play a bigger role as the segment's risk profile takes shape.
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Title Annotation:Agent/Broker: Specialty Producer
Comment:Unearthing profit: the natural gas sector generates high hopes and emerging risks.(Agent/Broker: Specialty Producer)
Author:Slavin, Al
Publication:Best's Review
Geographic Code:1USA
Date:Dec 1, 2011
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