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Hydraulic Fracturing Holds Litigation Risks

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. 

Courtesy National Drillers Matthew Cabral
Matthew D. Cabral, an associate in the firm’s Albany, N.Y., office, has broad litigation experience, including cases involving construction defects and injury, premises liability, personal injury and toxic torts. He is a former clerk for the U.S. Environmental Protection Agency.

 
 
 
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