Hydrofracking risk: Not just for energy companies anymore

Companies in many different sectors need to assess their connection to hydrofracking and the risks it could bring

As previously noted, hydrofracking carries business risk for many companies, even those without direct links to the energy industry. Insurance carriers, for example, may see claims rise against a number of types of policies. Yet, this is not the only sector that could be open to liability from hydrofracking. Consider the following, for example.

Securities Violations: Investors, brokers and energy companies themselves may face liability stemming from corporate statements made about the benefits and risks of hydrofracking. At least one state attorney general—Eric T. Schneiderman in New York—is looking closely at the research done by hydrofracking companies and the information they possess about risks and benefits. To some extent, this is about possible environmental risk, but it’s likely Schneiderman may believe that companies were either underselling the risk of hydrofracking, overselling the benefits or both to investors in order to raise funds to finance operations. If this is the case, then investors and brokers stand to lose, and the companies themselves could face securities fraud investigations and charges.

Banking Sector: Hydrofracking risk could bring further complications for the banking industry at a time when it is still fragile from the economic downturn of 2008. This is especially the case for mortgage banks that handle farm properties.

Farmers were among the hardest hit during the recession and continue to face economic uncertainty. In particular, land prices plummeted and many farmers are underwater with their mortgages. In a bid to generate revenue, some farmers have granted hydrofracking leases for their properties—likely in violation of their mortgages.

This creates a gray area for banks where little legal precedent exists. The issue is further compounded if, as has been happening in greater and greater numbers, the farm property falls into receivership and ownership either reverts to the bank or is sold in a short sale. In these cases, there is little clarity on the status of the hydrofracking contracts. Does the lease go with the land?

This adds an entirely new wrinkle to the wave of bankruptcies we’re already seeing. Now as you sort out the rights of landowners and banks, you also have to consider the standing of the hydrofracking contracts. It’s a perfect storm that is only likely to get sorted out in the courts.

Municipalities: Stories related to hydrofracking fill the pages of local and regional newspapers on daily basis. In the face of this, municipalities face a troubling dilemma: how to take public opposition into account while also keeping within the bounds of the law. Many have handled this situation by passing laws that either ban the practice outright, or set tight restrictions on companies.

In response, companies, many of which have existing leases that allow hydrofracking, have launched lawsuits against these municipalities, seeking to strike down the legislation. Given that the companies are not going to devote resources to suits they do not see as valid, they likely feel they have a case. They have probably studied the issue, examined their existing contracts and reviewed issues with respect to jurisdiction and the pre-emption of municipal legislation by state and federal law

With municipalities in the U.S. already strapped for cash, such litigation will add significant burdens to public resources—and taxpayers—and that is not even considering the cost of potential punitive damages should the companies win.

In conclusion, hydrofracking is a complex issue with many risks and implications. It is important for all businesses and organizations, regardless of how small a connection might be to a practice, to assess the risks they face.

Contributing Author

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Greg Hoffnagle

Greg Hoffnagle is an attorney in the New York office of Edwards Wildman Palmer, and focuses his practice on international litigation and arbitrations involving energy/environmental, technology, cyber risk and securities insurance...

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