Fracking: Understanding all the business impacts

03 August 2014

Although the possible environmental impact of fracking on local businesses has received media coverage, other risks are not so often discussed. By David Banks

While fracking has become something of a buzzword for environmental groups and UK media outlets, a number of less well discussed issues may affect local businesses where fracking occurs. Companies might have two areas of concern when discovering that fracking will take place near their office or worksite: 1. The environmental aspect - whether there could be water contamination or earthquakes as a result of the fracking. 2. The social aspect - whether there will be disruption or protests. “It is important that these are addressed separately when looking at fracking for shale gas or oil, as the line between technical considerations and the social issues can sometimes be blurred,” says Christopher Jackson, Energy Division at JLT Specialty.

Environmental issues

Fracking, or hydraulic fracturing, is the process of pumping fluid into a drilled well at high pressure to create fractures in rock thousands of metres below ground in order to release gas and oil. Non-shale fracking has been taking place onshore in the UK for around 30 years, with about 10 per cent of the 2,000 wells drilled being hydraulically fractured to enhance recovery. Fracking of shale is relatively recent.

Concerns have been raised that shale fracking could lead to contamination of groundwater. However, today the process is much better understood than when it originated in the US; the UK has been able to learn from mistakes made there, says Jackson. “There are also financial incentives and penalties ensuring that the steel and concrete casings around wells are fit for purpose, preventing the escape of fluids into the environment. In Europe shale operations are often equity-financed so any ban on drilling as a consequence of damage to the environment would have a significant impact on shareholders.”

Worries about possible earthquakes arose after tremors were attributed to fracking at Preese Hall, near Blackpool, in 2011, prompting a temporary ban on fracking in the UK and creating a view in the public imagination that fracking was a high-risk exercise.

Subsequent scientific reports indicated that the seismicity was within that usually experienced in the UK, says Jackson. “As with any low level weather or seismic related insurance claim, a clear link between the event and the subsequent damage must be demonstrated.”

The social aspect 

The second broad issue concerning fracking is the effect of bringing heavy industry into a rural environment or the impact of mass protests. Heightened industrial activity should not be a significant concern in the context of insurance business risks, says Steve Exwood, Partner at JLT Specialty. 

He says the potential for increased traffic, road deterioration and noise is comparable to a construction project and should be managed and mitigated with the planning authorities during the planning process. “Increased traffic might be seen when the wells are drilled and during the fracturing of the rock process, but gas extraction should flow from that without further significant intervention,” says Exwood. 

But what about the effects of large protests? If fracking becomes more common in the UK, protests could themselves be the largest risk to communities, if the scenes of protesters near the fracking site in Balcombe, Sussex, are indicative. These risks could be similar to those produced by a music festival or large event in the locality. 

Reputational risks could be heightened for companies that trade on being in peaceful surroundings and/or depend on tourism, says Exwood. “For example, a spa or luxury hotel’s reputation as a calm and welcoming location might be affected by protests or the perception of industrial activity.” “The potential is there for business interruption or even physical damage to business premises near to fracking sites, but the history indicates that this could be unlikely,” says Exwood.

A broader view 

A government-commissioned report in 2013 stated that more than half of the UK could be suitable for fracking, with up to 2,880 wells being drilled, creating 16,000–32,000 jobs. 

One of the main differences between fracking in the UK and the US is space. The concentrated population in many parts of the UK will always be a feature for fracking and any other new business operation, and careful consideration needs to be given by all parties involved.

While paying attention to the headlinegrabbing risk issues is inevitable, a broader view of the impact and risks should also be considered.

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For further information, please contact Steve Exwood, Partner, Risk Practice, JLT Specialty on +44(0)115 898 0401