Despite widespread environmental concerns and community opposition, in large swathes of the US, the fracking industrial complex has seemed unstoppable. That may finally be changing.
One major risk, which we’ve discussed at length, is how many shale gas companies are deeply indebted and depend on continued access to cheap credit. With energy prices low, many are having to continue to produce to service debt, keeping the supply glut going longer than it would if more could afford to cut supply and wait for prices to recover.
But even if the more financially fragile and/or higher cost fracking plays go bust, for the most part, that means they’ll be restructured, with the lenders taking losses and the new buyers having a go with a cleaned-up balance sheet. Thus quite a few of the current shale gas operators will go away, but not their operations.
However, a more fundamental threat to the industry looms: that of costly earthquake litigation. Oklahoma is ground zero. In the last year, the state has had more earthquakes of magnitude 3.0 or greater than in the previous 30, including a 5.6 magnitude tremblor, the strongest in recorded state history. Two different geology journals attributed the quake to fracking activity in the immediate vicinity. The earthquake risk apparently does not result from the fracking (the fracturing of geological structures) per se but fluid disposal. From the Wall Street Journal:
[R]esearchers say the most serious seismic risk comes from a separate process: disposal of toxic fluids left over from fracking and drilling by putting it in wells deep underground. Geologists concluded decades ago that injecting fluid into a geologic fault can lubricate giant slabs of rock, causing them to slip. Scientists say disposal wells are sometimes bored into unmapped faults. The practice isn’t new, but has proliferated with the U.S. drilling boom.
Some states are trying to mitigate earthquake risk by limiting the depth and greatly lowering the injection rate of waste water. The Wall Street Journal story does not discuss what economic impact restrictions like that would have.
The article focuses on Sandra Ladra, who sustained injuries and whose home was several damaged in the magnitude 5.6 Oklahoma earthquake. She sued the operators of disposal wells close to the epicenter, New Dominion and Spess Oil.
Energy companies are worried about how much damage a successful suit could do. Again from the Journal:
Industry executives said a verdict against an energy company would be devastating. “If a lawsuit was successfully prosecuted that would have a huge impact,” said Kim Hatfield, president of closely held Crawley Petroleum Corp. in Oklahoma City and an official of the Oklahoma Independent Petroleum Association….
Bob Gum, a lawyer representing New Dominion, said at an October hearing that disposal wells—and the oil-and-gas industry broadly—would be jeopardized if the court allowed the lawsuits to proceed, saying: “The legal risk associated with operating them will become uninsurable.”
Ladra’s case was dismissed in lower court, based on the argument that the court did not have jurisdiction. However, the state Supreme Court had agreed to take it and to determine whether her case can proceed or whether she needs to go to state regulators first. Note that another homeowner in Ladra’s town sued the same well operators and is seeking class action status, so even at this early stage of this type of litigation, there is a lot riding on this decision.
The Oklahoma state insurance regulator has taken the point of view that insurers can’t wriggle out of paying out claims on earthquake-damaged homes by arguing the quakes were caused by fracking. So even if the Oklahoma Supreme Court rules against Ladra, he will presumably order her home insurer to pay the damage. They in turn would be likely to sue the regulator, since they don’t want to be stuck paying out on the upsurge of earthquake claims in Oklahoma and Texas. And if they lose a suit against the regulator, they would think hard about possible grounds for suing the disposal well operators.
Even with the fact set in Oklahoma appearing to be favorable to plaintiffs, new legal arguments often have a rough time in court. But that does not mean if Ladra is defeated that later lawyers, learning from her experience, won’t prevail. Indeed, some of the bigger players appear to have decided it’s best to keep these cases out of the press if possible. BHP Billiton and Chesapeake Energy settled a 2013 case lodged by five homeowners for a confidential amount.
Fracking has long looked like it is not worth the environmental cost. And while it’s been an uphill battle to win that political fight, fracking does enough damage that the costs to property will put a big damper on development. Most people would find that to be a very desirable outcome.