Marcellus Shale opportunities for engineers abound, but so do risks

July 2012 » Columns » BEYOND WORDS
Rob Hughes

Considering Marcellus Shale industry five years ago from a risk management perspective, an initial reaction may have been that it offered exciting opportunities for engineering and construction professionals, along with significant risks. The risks included being sued by gas producers, local townships, homeowners, and environmental groups, with each alleging the firm had materially contributed to cost overruns or delays, worker injury or death, soil and groundwater contamination, or toxic discharges into rivers and streams.

These impressions would have been reinforced if you considered the risk and insurability issues for engineers relating to the master service agreements (MSAs) used by a number of gas producers. The MSAs often included several uninsurable terms and clauses that unfairly shifted risk from the producer to the engineer.

Defense and indemnity obligations would fall on the construction professional regardless of whether the professional was at fault – even where the loss was caused solely by the producer or a third party completely isolated from the professional. The MSAs also included language holding every project member responsible for site safety. That was in direct contradiction to several state laws, including Pennsylvania (in the heart of Marcellus development), that limit or absolve engineering firms from liability for safety issues.

Early discussions with producers often failed to facilitate any substantive changes. Thus, engineering firms faced a business decision of signing the MSA (including the uninsured obligations) or forgoing the possibility of immediate and long-term work at a time when both private- and public-sector projects were scarce.

In the ensuing years, gas producers have seen an array of environmental claims, and while difficult to track, there also have been worker-related accident claims. There have been roadway accidents involving Marcellus work vehicles, workers, and bystanders, and roadway deterioration requiring extensive repairs and resurfacing. It’s unclear whether these incidents have led to concurrent claims either directly against an engineering firm or by way of a third-party claim.

Indeed, a number of engineering firms are working on Marcellus projects; some in Pennsylvania have enjoyed unprecedented growth – in revenue and employee count – during the last year or two stemming from Marcellus work. For example, in 2008 and 2009, Lancaster, Pa.-based RETTEW’s traditional transportation, water/wastewater, commercial, industrial, and residential markets were flat. At that time, RETTEW President Mark Lauriello recalled, the firm saw an opportunity with the oil and gas companies entering Pennsylvania’s Marcellus Shale region. The firm was aggressive in pursuing a share of Pennsylvania’s natural gas market and consequently grew by more than 110 percent in 2011. It now has 475 professionals in 10 offices. Underlying the firm’s success and in managing the risks related to the Marcellus work is being both technically sound and fostering strong “relationships with our oil and gas clients,” Lauriello said.

As the Marcellus boom continues, the positive momentum has contributed to a culture of collaboration among various parties on a project. Nonetheless, risks remain, especially in instances where a client (the producer) isn’t in position to determine whom to sue. For example, in the context of worker injuries or auto accidents, a plaintiff’s lawyer decides whom to sue. In all likelihood, suits ultimately will be filed that include the engineer who prepared the traffic plan to/from the well site or who happened to be onsite when the accident occurred.

Of course, risks evolve. In five years, Marcellus Shale may look vastly different as the focus shifts from locating and opening wells to maintaining and closing wells. Engineers must practice sound risk management and evolve along with the shale boom. Two evolutions are already in progress. First, there’s an increasing emphasis on larger infrastructure projects, such as pipelines needed to consolidate and deliver gas collected from thousands of individual wells. An error in pipeline engineering that delays the operation date or increases construction costs is likely to result in a large claim.

After construction, risks continue throughout the operational phase, with engineers providing inspection services on older, in-place lines that may be in need of extensive upgrades. For instance, a gas line (not in Marcellus) exploded in Allentown, Pa., last year, killing five and destroying several homes.

Finally, the economics are changing with natural gas prices at 10-year lows. Gas producers are operating on much lower margins and may not be as deep-pocketed as a year ago. A shallower pocket may prompt the producer or a plaintiff’s attorney to look to other parties to share the blame for worker injuries or environmental contamination.

Rob Hughes is senior vice president with Ames & Gough (www.amesgough.com), an insurance brokerage and risk consulting firm.


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