Monday, May 16, 2016

Earthquake surge rattles Oklahoma’s fracking industry

Oklahomans are no strangers to natural disasters. The Midwestern state stretches across Tornado Alley — one of the most tornado-prone places in the world — and residents grapple with hail, thunderstorms and severe weather.
In the past few years, however, homeowners, property developers and insurers in Oklahoma have faced an unfamiliar challenge: earthquakes.
Oklahoma experienced 890 earthquakes with a reading of 3.0 or greater on the moment magnitude scale last year, compared with just one in 2007, according to the US Geological Survey. The jump coincides with the rise of hydraulic fracking in the state’s oilfields. These earthquakes have become more and more violent, with one of magnitude 5.1 in February. A magnitude 3.0 earthquake would be barely noticeable, while those around 5.0 could cause windows to break.
Though alarming for local residents, the spike in earthquakes has left the insurance industry in flux because there is not yet a legal precedent for who is liable for damage. “There has been such great uncertainty for the last few years. It’s just not clear what the future looks like,” says Joe Woods, vice-president at the Property Casualty Insurers Association of America.

The Oklahoma Geological Survey said last year it is “very likely” that “the majority of recent earthquakes . . . are triggered by the injection of produced water in disposal wells” as a result of oil and gas extraction. But the government has not placed official regulations on drilling in a state whose economy is highly dependent on the oil industry.
Some homeowners and companies, as well as the Sierra Club, an environmental group, have taken legal action against energy companies. But these cases are in early stages so there is no ruling yet on liability.
The insurance industry is “concerned”, Mr Woods says, but it has been hard to make the public fully aware of the issue because most of the earthquakes so far have been small.

John Doak, Oklahoma’s insurance commissioner, has warned insurance companies not to deny coverage of these earthquakes by marking them as “man-made”, which is not covered under standard earthquake insurance.
“I am concerned that insurers could be denying claims based on the unsupported belief that these earthquakes were the result of fracking or injection well activity,” Doak says.
There are signs, however, that the public is starting to take notice. More and more homeowners in Oklahoma are buying earthquake insurance, with 15-20 per cent of policyholders adding it to their coverage, compared with 2-4 per cent in 2011, according to the Oklahoma Insurance Commission.
If a precedent were set linking the actions of energy companies to these earthquakes, then homeowners and insurance companies would have the right to take legal action against whomever was in charge of the well, Mr Woods says. “The insurance companies would most likely try to strengthen the ‘man-made’ language to make it clear they’re only covering acts of nature,” says Mr Woods, although insurers are a “long way” from establishing a conclusive link.
Oklahoma’s regulators in recent months asked oil well operators in some areas to cut their water disposal by 40 per cent, which has curbed fracking, although they do not explicitly forbid it.
Any moves to curb fracking will directly affect the commercial property market in Oklahoma, says Bruce Rutherford, international director of real estate investment company Jones Lang LaSalle. The mandate to cut water disposal will “make it more difficult” for the energy industry to rebound and will delay the recovery in commercial property prices in those areas, he says.
I am concerned that insurers could be denying claims [as man-made]

S&P analysts wrote last year that “earthquakes near fracking sites introduce a unique risk for investors that have exposure to real estate in affected regions”, due to the uncertainty surrounding insurance and whether coverage includes man-made earthquakes.
The state and urban planners can play a role in mitigating the risks of property damage, says Robert Merkel, senior project engineer at Thornton Tomasetti, an engineering consulting company.
“Maintaining and enforcing building codes, that’s how we’ve addressed seismic risk throughout the country as earthquake engineering evolved over the last several decades,” says Mr Merkel. “Right now building codes in Oklahoma would be designed so that there’s no catastrophic collapse, but it wouldn’t prevent damage. So there could be a conversation to be had about whether that’s an acceptable standard.”
There are also steps homeowners can take to reduce potential losses from an earthquake. Removing parapets that hang around the perimeter of the building and carefully bracing short walls are a few of the of actions that can help, although there is no way to “earthquake-proof” a home, he says.
“People in Oklahoma might have some attitude that, well, my building survived several tornadoes so it will be fine in an earthquake,” says Mr Merkel. “But that can be a very bad assumption. Earthquake forces affect a building very differently than wind.”

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