This document discusses managing environmental risk for successful oil and gas shale investment. It outlines the economic opportunities in shale plays and the typical drilling and fracturing process. Some key environmental risks that must be managed include issues related to wellbore integrity, flowback water management, spills, air emissions, and induced seismicity from wastewater injection. Both state and federal statutes apply, including regulations around casing/cementing, waste transport and disposal, air and water quality. Litigation has been filed alleging environmental damages. Investors can evaluate risk by ensuring companies follow best practices around drilling, fracturing, and waste management to protect water and air quality.

1. MANAGING ENVIRONMENTAL
RISK FOR SUCCESSFUL OIL AND
GAS SHALE INVESTMENT
SCOTT D. DEATHERAGE, GARDERE WYNNE SEWELL 1
DALLAS, TEXAS

2. SPEAKER
Scott Deatherage
Environmental
Office: (214) 999-4979
sdeatherage@gardere.com
2

3. OUTLINE OF DISCUSSION
• What Are the Economic Opportunities in Lending
and Investing in Shale Plays?
• What Actually Occurs During Shale Drilling and
Hydraulic Fracturing?
• What Environmental Risks Must Be Managed
During This Process?
• What State and Federal Statutes and Regulations
Apply?
• What Litigation Has Been Filed Alleging
Environmental Damages?
• How Can Lenders and Investors Evaluate and
Manage Environmental Risks in Investing in US
Shale Plays?
3

4. WHAT ARE THE ECONOMIC OPPORTUNITIES IN
LENDING AND INVESTING IN SHALE PLAYS?
4

5. Shale Plays in the US
5 5

6. ESTIMATED GROWTH IN SHALE GAS
PRODUCTION
6

7. DEFINITIONS
• Fracking is a process of pumping water, chemicals
and sand into a well to unlock the hydrocarbons
trapped in shale formations. Opening cracks
(fractures) in rock allows natural gas or oil to flow
from the shale into the well.
• Shales are fine-grained sedimentary rocks that can
be rich sources of petroleum and natural gas.
• Shale gas is found in shale “plays" -- shale
formations containing significant accumulations of
natural gas that share similar geologic and
geographic properties.
7

8. SHALE UNITS CAPABLE OF PRODUCING
NATURAL GAS IN LARGE QUANTITIES
• Shale plays and percent of US resources:
• Northeast: primarily the Marcellus (63%)
• Gulf Coast: Haynesville, Eagle Ford (13%)
• Southwest: Barnett & Barnett-Woodford (10%)
• Mid-Continent: Fayetteville, Woodford (8%)
• Rocky Mountain: primarily Mancos and Lewis (6%).
8

9. EMERGING NATIONAL ENERGY PROSPECTS IN
SHALE GAS
• The Energy Information Administration (“EIA”) projects in
its 2012 Annual Energy Outlook (“AEO”) pertaining to
the period 2010-2035:
• Natural gas production will increase throughout period.
• Growth in natural gas production will mostly be driven by
technological advances that continue throughout the period.
• Drilling in shale plays with high concentrations of natural gas
liquids and crude oil will have a higher value in energy
equivalent terms than dry natural gas.
• Shale gas resource base is lower than in 2011 AEO, but shale gas
production estimates increased between the 2011 and 2012
AEO.
9

10. TRENDS THAT MAY ULTIMATELY LEAD
TO HIGHER GAS PRICES
• "The U.S. could become the next Qatar, i.e. the
largest LNG producer in the world," said Thierry
Bros, a senior analyst at Société Générale. "The
U.S. is at a turning point.”
• “There are 8½ million 18-wheelers in the United
States. That’s 2½ million barrels of oil a day. So
that cuts OPEC in half if you had all the 18-
wheelers,” T. Boone Pickens said. “Is there any
obstacle from that happening? Not that I know of
because the fuel is so cheap.”
10

11. MOTIVATION TO INVEST IN SHALE
• U.S. is huge energy consumer, and natural gas usage expected to
increase every year.
• Shale gas production expected to increase from 5.0 trillion cubic
feet in 2010 (23 percent of total U.S. dry gas production) to 13.6
trillion cubic feet in 2035 (49 percent of total U.S. dry gas
production). Slide 6 depicts this increase.
• Increased production is driven by lower drilling costs and
continued drilling in shale plays with high concentrations of natural
gas liquids and crude oil.
• Investment returns in large part is a function of price of gas at sale
and fully-loaded costs of production, including lease payments
and regulatory compliance.
• Investors and lenders will finance shale plays to capture a return
stemming in part from dry gas displacement of other energy
resources, and more profitable extraction of oil and wet gas.
11

12. POTENTIAL PROFIT
FROM SHALE INVESTMENTS
• Even at current gas pricing, operators can strategically site
operations that can still make a profit or at least cover costs, but
search is mostly for oil and wet gas.
• Operators and partners can invest in shale for long-term in
anticipation expansion of types of usage of natural gas (i.e., fuel
fleets of cars, buses and trucks (e.g., 18-wheelers)).
• Shale gas trading, buying and hedging opportunities exist on
assumption that gas prices will rise in long-term.
• Larger operators have chance to acquire smaller shale interest
holders (i.e., industry consolidation) to achieve well-priced
acquisitions of shale assets for future gains.
• Technology is rapidly enhancing recoveries, increasing efficiency
and reducing operating costs that together can widen profit margins.
• Gas can be converted to LNG and other products for export, but the
market has not sorted out the complex issues associated with LNG,
including demand, production, infrastructure, pricing and shipping.
12

13. WHAT ACTUALLY OCCURS DURING
SHALE DRILLING AND HYDRAULIC
FRACTURING?
13

14. HISTORY OF HYDRAULIC FRACTURING
• Use of hydraulic fracturing to increase production
from conventional oil and gas wells grew rapidly
starting in late 1940s and continues to be used
routinely for reservoir stimulation.
• Hydraulic fracturing has been used to stimulate
approximately a million oil and gas wells.
• Improvements in horizontal drilling technologies led
to its increased application in conventional drilling
starting in the early 1980s.
14

15. TYPICAL PAD SITE
15
Rockwood, Fort Worth

16. DRILLING AND FRACTURING THE WELL
1.5 miles below surface
8,000 ft
Average
3,500 feet average vertical
lateral length depth
1616

17. WHAT ENVIRONMENTAL RISKS
MUST BE MANAGED?
17

18. STATEMENT BY AN ENVIRONMENTAL
GROUP REGARDING FRACKING
• "Liquefied natural gas is not only the dirtiest and
most polluting form of gas, but it also requires an
increase in fracking; a process we know to be
unsafe and dangerous," Deb Nardone, Sierra Club's
director of natural gas reform, said in a statement.
"The industry is pushing forward with these export
facilities with their profits in mind, not the families
who will bear the burden of increased fracking.“
(Emphasis added).
18

19. IDENTIFYING ENVIRONMENTAL RISKS
THAT MUST BE MANAGED
• Drilling in shale can be and has been conducted
in a safe manner.
• Thousands of wells drilled and fracked without
environmental impact.
• Hydraulic fracturing itself is not necessarily the
source of environmental risk.
• Key issue is whether and where pollutants can
be released from drilling or fracking and related
operations.
19

20. STUDY BY THE ENERGY INSTITUTE,
UNIVERSITY OF TEXAS
• Fact-Based Regulation for Environmental Protection in
Shale Gas Development (Feb. 2012)
• “Although claims have been made that ‘out-of-zone’ fracture
propagation or intersection with natural fractures, could occur,
this study found no instances where either of these has actually
taken place.” Id. at 18.
• “Particularly in areas underlain by gas-producing shales,
methane migrates out of the shales under natural conditions
and moves upward through overlying formations, including
water-bearing strata (aquifers).” Id. at 19.
• “The greatest potential for impacts from a shale gas well
appears to be from failure of the well integrity, with leakage
into an aquifer of fluids that flow upward in the annulus
between the casing and the borehole.” Id.
20

21. ENVIRONMENTAL MANAGEMENT
Flowback Water: Recycling and/or Proper
Disposal Protects Surface Water
Casing Installation
Protects Groundwater
1.5 miles below surface
Over 1 Mile of Rock
between Fracking and Groundwater: Serves
8,000 ft to Isolate Groundwater from Fracking
Average
3,500 feet average vertical
lateral length depth
2121

22. WELLBORE INTEGRITY
7 layers of protection isolate well bore
from its surroundings, preventing any
exposure of chemicals, gas, or
produced water with the environment:
1. Conductor casing
2. Cement, sealing conductor casing in
place
3. Surface casing
4. Cement, sealing surface casing in
place
5. Production casing
6. Cement, sealing production casing in
place
7. Tubing: In the Barnett Shale, for example,
the surface casing is drilled to a minimum
depth of between 50 to 100 feet below the
Trinity aquifer
2222

23. ISSUES IDENTIFIED IN UNIVERSITY OF
TEXAS STUDY
• Drill Pad Construction and Operation
• Hydraulic Fracturing
• Flowback Water Management
• Groundwater Impact
• Blowouts and House Explosions
• Water Consumption and Supply
• Spill Management and Surface Water Protection
• Atmospheric Emissions
• Health Effects
23

24. EARTHQUAKES
• Concern over small earthquakes from injection of
wastewater into disposal wells
• Approximately 144,000 wastewater injection wells in
the US
• Question of whether injection causing anything but
small tremors, not resulting in damage
24

25. WHAT STATE AND FEDERAL
STATUTES AND REGULATIONS
APPLY?
25

26. SHALE DRILLING AND FRACTURING HAS
MULTIPLE LEVELS OF CURRENT AND FUTURE
POTENTIAL REGULATION
• State Oil and Gas Regulation Applied to Shale Drilling
and Hydraulic Fracturing
• State Activity and Potential Future Regulation
• Federal Regulatory System as Applied to Shale
• Federal Activity and Potential Future Regulation
• Hydraulic Fracturing Fluid Disclosure
• Local Regulation
26

27. STATE REGULATION
• The laws and regulations related to hydraulic
fracturing are evolving, but states are regulating
environmental issues related to oil and gas drilling,
which includes drilling that utilizes hydraulic
fracturing.
• The federal approach has been to leave regulation
of hydraulic fracturing to the states, but some in
Congress have sought to impose federal regulation
of disclosure of fracturing chemicals and federal
permitting of hydraulic fracturing.
27

28. STATE REGULATION
• In most states, the drilling of shale gas wells using
hydraulic fracturing falls under the statutes and
regulations regulating oil and gas drilling.
• Texas
• Texas Natural Resources Code
• The Railroad Commission of Texas regulates oil and gas
drilling (“RRC”).
• Pennsylvania
• Oil and Gas Act
• Pennsylvania Department of Environmental Protection
(“DEP”) regulates oil and gas drilling through a division
called the Bureau of Oil and Gas Management.
28

29. GROUNDWATER PROTECTION:
WELL CASING AND CEMENTING
• The critical issue of properly casing and cementing
of wells is designed to protect potable groundwater
zones. See:
• 16 Tex. Admin. Code § 3.8 (Water Protection) (Drilling and
Completion Requirements)
• 25 PA. Code §§ 78.81-78.86; 58 P.S. Code § 601.207(b)
• Proper casing will prevent fracking water and
wastewater and any chemicals or contaminants
from being released from the well into the
groundwater.
• These requirements apply regardless of whether
hydraulic fracturing is used to stimulate the well.
29

30. SPILLS AND RELEASES
• Any spill or release of waste or wastewater would
be regulated by the RRC or DEP.
• 16 Tex. Admin. Code § 8
• 25 PA Code § 78.66 (reporting releases), § 91.33
(incidents causing or threatening pollution)
30

31. PITS
• A permit is required to maintain or use a pit for
storage of oil field fluids or oil and gas wastes.
• Only issued if regulatory agency determines
maintenance or use of such pit will not result in
pollution of surface or subsurface waters.
• See: 16 Tex. Admin. Code § 3.8(d)(6)
31

32. WASTE MANAGEMENT
• Permits are required for those transporting or
disposing of oil field wastes.
• Tex. Admin. Code § 3.8(d)(5)(A).
• 58 P.S. Code § 601.207(b)
• Waste disposal on-site without a permit that avoid
pollution of surface or groundwater is not permitted.
• Such disposal, whether intentional or not, would
generally result in an order to remediate and
potentially fines.
32

33. SURFACE WATER
• Discharges to surface water are governed by
state “Clean Water Acts”
• The Texas Commission on Environmental Quality
(“TCEQ”) regulates discharges to surface water
• The Texas Water Code prohibits discharges without a
permit.
• Federal Clean Water Act delegates to states National
Pollutant Discharge Elimination System program
responsibilities.
33

34. SURFACE WATER
• Discharge permits are required for discharges to
surface waters.
• Operators had been sending waste frack water to
municipal and private treatment works, who would
treat the wastewater and discharge with other treated
wastewater to surface waters.
• April 19, 2011, DEP announced that companies cease
sending waste fracking water (flow back water) to
these treatment works after detecting increased
bromide levels in surface waters.
34

35. AIR EMISSIONS
• Air emissions from oil and gas operations are
regulated by the relevant agencies under state
“Clean Air Acts.”
• Example: Texas Clean Air Act and regulations
promulgated under the Act prohibits air emissions
that would result in a nuisance or otherwise exceed
certain levels.
35

36. AIR MONITORING
• Over last few years, the TCEQ has conducted monitoring of
emissions from natural gas wells, compressors, etc. in Barnett
Shale based on complaints and testing by local governments.
• Spring 2009, the TCEQ installed automated gas
chromatograph monitors in two locations that are surrounded
by natural gas operations—the town of Dish, in Denton County,
and near Eagle Mountain Lake, in Tarrant County.
• Monitors operate around the clock, measuring levels of more than
45 Volatile Organic Compounds (“VOCs”), including benzene.
• Results: After months of continuous operation, there have been no
chemicals measured above levels of concern. The results from the
monitors are posted hourly on the TCEQ website.
36

37. PREPAREDNESS, PREVENTION, AND
CONTINGENCY PLAN
• In Pennsylvania, an operator must submit a
Preparedness, Prevention and Contingency Plan.
• Must be submitted and improved to obtain permit
• Must comply with during drilling and completion process
37

38. PRESUMPTION OF CAUSATION OF
CONTAMINATION AND DEFENSE
• The Pennsylvania Oil and Gas Act provides that an
oil and gas well operator is presumed responsible
for pollution of a water supply if it occurs within six
months of drilling and is within 1,000 feet of the well.
• One defense against presumption is pre-drilling
groundwater testing that shows contamination
previously existed.
• Statute and Regulations require operator to provide
DEP and landowner or water purveyor with results of
testing within 10 business days of receiving results,
and if not, may not be used to preserve operator's
defenses under the Act.
• 25 PA Code § 78.52(d); 58 P.S. § 601.208(d)(1).
38

39. PRE-DRILLING TESTING IN TEXAS
• Many operators drilling in Pennsylvania have been
testing water wells prior to drilling.
• Based on that experience, many operators are
conducting pre-drilling testing of water wells in
Texas and other states.
39

40. WATER SUPPLY FOR HYDRAULIC
FRACTURING
• Hydraulic fracturing requires a substantial amount of water.
• The average quantity of water used for a shale gas well varies
somewhat by the shale gas area:
• Barnett (4.0 million gallons (MG)), Fayetteville (4.9 MG), Marcellus and
Haynesville (5.6 MG), and Eagle Ford (6.1 MG).
• Water supply is thus a critical issue for shale development.
• In arid areas, such as Texas suffering a severe drought, water
supply becomes even more important.
• State law and agencies have so far insured water rights available for
oil and gas drilling
• State by state issue as water rights generally determined by state
law.
40

41. FEDERAL REGULATION
• Hydraulic fracturing is exempt from federal regulation
under the Safe Water Drinking Act (“SWDA”).
• SWDA is the regulatory program under which hydraulic
fracturing would be regulated.
• History of regulation stretches back more than a
decade.
• First issue in hydraulic fracturing was drilling wells to
extract natural gas from deep coal seems.
• Environmental group challenged EPA’s decision not to
regulate under the federal Safe Drinking Water Act
Underground Injection Control program (“UIC”).
41

42. ELEVENTH CIRCUIT OPINION FROM 1997
• “Nothing in the statutory definition [of “underground
injection”] suggests that EPA has the authority to
exclude from the reach of the regulations an
activity (i.e., hydraulic fracturing) which
unquestionably falls within the plain meaning of the
definition, on the basis that the well that is used to
achieve that activity is also used--even primarily
used--for another activity (i.e., methane gas
production) that does not constitute underground
injection.”
• Legal Environmental Assistance Foundation v. EPA, 118 F.3d
1467 (11th Cir. 1997)
42

43. EPA STUDY ON ENVIRONMENTAL IMPACT OF
HYDRAULIC FRACTURING
• EPA study resulted in report in 2004
• “Based on the information collected and reviewed,
EPA has concluded that the injection of hydraulic
fracturing fluids into [coalbed methane] wells poses
little or no threat to [underground sources of
drinking water] and does not justify additional study
at this time.”
• U.S. EPA, Evaluation of Impacts to Underground Sources of
Drinking Water by Hydraulic Fracturing of Coalbed Methane
Reservoirs, National Study Final Report
43

44. FEDERAL REGULATION
• Congress acted to exempt hydraulic fracturing.
• Section 322 of the Energy Policy Act of 2005
specifically excluded hydraulic fracturing
operations from regulation under the SWDA and the
Underground Injection Control (“UIC”) program.
• Exemption for: “The underground injection of fluids
or propping agents (other than diesel fuels)
pursuant to hydraulic fracturing operations related
to oil, gas, or geothermal production activities.”
• 42 U.S.C. § 300h(d)(1)(B)(ii).
44

45. REGULATION OF SALT WATER
INJECTION WELLS
• Salt water disposal wells, used in the oil industry to
dispose of water produced from drilling and
production, are currently regulated under the UIC.
• In Texas, this program is delegated to the RRC.
• In Pennsylvania, program is not delegated.
45

46. EPA STUDY OF HYDRAULIC FRACTURING
FOR SHALE GAS
• Congress provided funding for EPA study on
hydraulic fracturing.
• Feb. 2011, EPA submitted hydraulic fracturing study
plan to the EPA Science Advisory Board (“SAB”) for
review and comment and made it available to the
public.
• EPA stated that the scope of the study will include
full lifespan of water in hydraulic fracturing, from
acquisition of water, mixing of chemicals, actual
fracturing, management of flowback and produced
water, and ultimate treatment and disposal.
• April 21, 2011 and May 19, 25, 2011, SAB held
conference call to discuss EPA plan.
46

47. EPA STUDY OF HYDRAULIC FRACTURING
FOR SHALE GAS
• On April 28, 2011, SAB released draft comments on
plan, generally thought appropriate, concerns as
to:
• ability to meet study design by time frame set; and
• specificity in study as to actual research that will be
conducted
• 2012: EPA proposed year to release interim results
• 2012 to 2014: Additional results to be released as
particular investigations completed
• 2014: EPA proposed year to release another report
47

48. HYDRAULIC FRACTURING
FLUID DISCLOSURE
• Congress
• Bills have been filed to require disclosure of chemicals
added to water used for hydraulic fracturing.
• Attempts to end exemption under the SDWA and require
EPA permitting of hydraulic fracturing.
48

49. HYDRAULIC FRACTURING
FLUID DISCLOSURE
• Several states have passed laws requiring
disclosure
• Texas disclosure law has gone into effect
49

50. DIESEL USE
• Congressional investigation alleged that companies
were using diesel fuel in hydraulic fracturing.
• EPA has taken position that such use subjects
process to UIC regulation under the SDWA.
• EPA plans to issue guidance on diesel use in
fracking fluid.
• Question has been raised whether EPA must
promulgate regulations to impose a permitting
requirement.
50

51. EXAMPLE OF LOCAL ATTEMPTS AT
REGULATION
• Texas, Barnett Shale
• City of Fort Worth rules on drilling
• City of Dish attempted to block drilling
• City of Dallas to consider drilling requirements
51

52. LOCAL ATTEMPTS AT REGULATION
• Pennsylvania, Marcellus Shale
• In 2005, Salem Township sought to regulate hydraulic
fracturing through zoning ordinances.
• State Supreme Court ruled that local regulation was prohibited by
the Oil and Gas Act
• Independent Oil and Gas Association of Pennsylvania, et al v Salem
Township, Commonwealth of Pennsylvania, 931 A.2d 101 (PA.
Commonwealth Court 2007).
• Borough of Oakmont designated well locations using zoning
districts.
• State Supreme Court ruled that zoning is not covered in the Oil
and Gas Act, and, therefore, as has traditionally occurred, the
local government retained the ability to designate which areas
drilling may occur; but local regulations to provide drilling permits
is preempted by the Oil and Gas Act
• Huntley & Huntley, Inc. v Borough Council of the Borough of Oakmont,
929 A.2d 1252 (PA Commonwealth Court 2007).
52

53. A LOOK AHEAD
• States have promulgated regulations governing
the environmental issues related to hydraulic
fracturing and shale gas drilling in the form of
general oil and gas regulations.
• Additional regulation at the federal level may
not provide any additional environmental
protection not already occurring.
53

54. WHAT LITIGATION HAS BEEN FILED
ALLEGING ENVIRONMENTAL
DAMAGES?
54

55. TYPES OF ENVIRONMENTAL
LITIGATION ARISING OUT OF SHALE
DEVELOPMENT
• Groundwater contamination
• Gas migration
• Fracturing fluids
• Water storage and disposal
• Air emissions/noise
• Earthquakes
55

56. GROUNDWATER CONTAMINATION:
GAS MIGRATION
• Fiorentino v. Cabot Oil & Gas Corp., No. 3:09-CV-
02284-JEJ (M.D. Pa. filed 2010).
• gas in water wells
• contamination and pressure
• property damage and personal injury
• U.S. v. Range Production Co., No. 3:11-CV-00116-F
(N.D. TX Filed 2011)
• gas in water wells
• injunction
• civil penalties of $16,500 per day per violation
• shallow gas/deep gas
56

57. GROUNDWATER CONTAMINATION:
FRACTURING FLUIDS
• Hagy v. Equitable Production Co., No. 2:10-CV-
01372 (S.D. W.Va. filed 2010).
• fracturing fluids allegedly contaminated water supply
• inadequate or improper casing
• injunction
• remediation
• property damage and personal injury
57

58. GROUNDWATER CONTAMINATION:
WATER STORAGE AND DISPOSAL
• Scoma v. Chesapeake Energy Corp., No. 3:10-CV-
01385-N (N.D. TX filed 2010).
• storage and injection of produced water
• allegedly contaminated water wells
• heavy metals and other chemicals
• color, odor, taste
58

59. AIR EMISSIONS/NOISE
• Scoggin v. Cudd Pumping Services, Inc., No. 4:11-
CV-00678-JMM (E.D. Ark. filed 2011).
• venting
• equipment
• flaring
• fracturing fluids
• gasses
• noise
59

60. EARTHQUAKES
• Hearn v. BHP Billiton Petroleum, No. 4:11-CV-00474-
JLH (W.D. Ark. filed 2011).
• class action
• theories that fracturing “excites” faults
• theories that disposal through injection wells triggers
earthquakes
60

61. HOW CAN LENDERS AND INVESTORS
EVALUATE AND MANAGE ENVIRONMENTAL
RISKS??
61

62. ENVIRONMENTAL DUE DILIGENCE
• Engage experienced environmental attorneys and
consultants in oil and gas matters
• Develop due diligence plan appropriate to size of
play, which can be as large as 600,000 acres
• Have environmental attorney explain how data and
information collected may affect potential liability,
and value of investment or collateral
62

63. EXAMPLES OF QUESTIONS THAT
SHOULD BE EVALUATED
• How is the operator casing its wells?
• How are fracking chemicals being managed?
• How is wastewater being managed?
• Have there been notices of violations or
enforcement actions brought against the company
in the relevant field or other areas of current or
historical operation?
• Have groundwater wells been tested to establish an
environmental baseline?
• Have any lawsuits been filed against the operator in
the current or other fields?
63

64. NO “INNOCENT PURCHASER” DEFENSE
• Relevant federal laws may not provide such as
defense as is found under the Comprehensive
Environmental Response, Compensation and
Liability Act (CERCLA).
• State statutes governing oil and gas
environmental liability generally do not include
such a defense.
• Joint Operating Agreement may contractually
bind non-operating interest owner (discussed
more later).
64

65. ENVIRONMENTAL LITIGATION RISK
MANAGEMENT
• Litigation due diligence
• business partners (track record, stability of
management)
• contractors
• neighbors
• Politics and education
• Baseline testing
• Monitoring and reports
• Best practices
• Insurance
• Agreements (allocation of risk)
65

66. CONTRACTUAL PROVISIONS
• Indemnities
• Care to ensure environmental claims are covered—
beware of drafting issues
• Representations and warranties
• Appropriate environmental definitions
• Covenants
• Insurance requirements
• Provision of environmental reports and due
diligence opportunities—access and adequate
time for review
66

67. IMPACT OF JOINT OPERATING
AGREEMENT ON NEW INVESTORS
• Once an investor buys into a non-operating working
interest, liability may attach to that party.
• The Joint Operating Agreement usually assigns
liability equal to the ownership interest, unless the
operating working interest owner is grossly
negligent or engages in willful misconduct.
67

68. ENVIRONMENTAL INSURANCE
• Larger companies have substantial self-
insurance retention.
• Smaller companies may rely more on
environmental insurance.
• Evaluate the insurance coverage that may be
available to cover environmental claims.
• Understand what claims are covered.
• Understand pollution and other exclusions.
• As an investor, lender or non-operating interest
owner, consider whether to purchase own
insurance.
68

69. CONCLUSION
• Hydraulic fracturing is not the area of focus for
investors and lenders; rather, they should
examine other environmental risks.
• These risks must be managed by operators.
• State, federal and local regulations may apply to
these risks.
• Future legislation not likely to stop shale drilling
or hydraulic fracturing—but may increase costs
and delay drilling permits.
• Appropriate due diligence and contracting
allow lenders and investors to evaluate and
manage environmental issues in shale plays.
69