ENERGY INSURANCE Oil & Energy Risks

Insurance

Introduction

1. Crude oil –important raw material –demand increasing in India –Import 40% of domestic need –diminish scarce foreign exchange

Viewed as one of most important sector of Economy

2. Sub sea oil and Gas deposits explored –same way as on shore –but sophisticated technology to know location and deposits- confirmation through Exploratory wells.

3. a) 1st offshore wells were drilled in shallow coastal waters in US

b) From Timber or steel structure known as “Jackets” or man made send banks

c) Next step to erect simple lattice work structures carrying in derrick /rotary table drive

d) Barge was used to store drilling material /equipment & provide power

4. Fully integrated floating units (mobile) for offshore work –drilling effectively in deeper waters

5. Exploratory wells –if successful -more wells “Appraisal wells” –finally production wells –very costly ventures –long duration 2-3 years –Skills required from Geology Reservoir engineers

6. Hydrocarbon is separated form water/ solid particles & sand. Volatile gases also separated. Facilities to be arranged either on the producing platform or separate at a distance linked by submarine pipe or pipe bridges.

7. Crude Oil –conveyed to shore by pipelines or tankers (shuttle services)

Offshore E & P activity complex, traditional Insurance cover e.g. Marine, Fire, Engineering & Liability not adequate without overlapping –Tailor made cover acc to hazards / risk assessment.

8. What do we mean by offshore risks?Fixed and/or floating structures, Civil works

& industrial plants in the open sea.Risks during; construction or Erection at

the operating locations; construction or assembly onshore or in protected waters; Transportation of such structures to operating locations; Final assembly and hook up and commissioning finally during operation.

9. Insurance –handled in Marine Dept. –Floating units are subject matter of Hull Insurance –Marine hazards predominate.For stationary installation such as platform Engineering and industrial fire policy matches

10. Additional Cover Control of wells –cover provides for

costs of well control when the well goes out of control due to blow out,re-drilling expenses, containment of seepage pollution and contamination. Making well safe and evacuation expenses etc.

Oil & Energy Risks Introduction

Insurance Industry has kept pace with advancing technology & evolved Insurance packages.Energy Insurance is now a distinct and separate area from the conventional policies Insurance aptly matches the multifaceted activities of the Energy SectorEnergy Industries –Contributor of considerable volume of premium income in the world market

Oil & Energy Risk Insurance Agenda

Oil & Energy OperationRisk Situation Equipments at RiskCover Requirements Insurance Covers Available Rating Issues Important Considerations

Oil & Energy Risk Insurance Oil & Energy Operation

Consists of two main activities Exploration & Exploitation

Phases in the development of an oil field are:

Seismic SurveyExploratory DrillingConstruction Production

Oil & Energy Risk Insurance Oil & Energy Operation

Seismic Survey Seismology involves creating sound waves on the surface that penetrates downwards into the rock layer, studying the reflections through sensitive instruments which record and measure their intensity and interpreting measurements by exploration Geologists for finally establishing the reservoir of Oil and/ or Natural Gas.

Oil & Energy Risk InsuranceOil & Energy Operation

Exploratory Drilling Once formation of oil is established a drilling rig is mobilised and exploratory wells are drilled.

Oil & Energy Risk Insurance

Oil & Energy Operation Construction

Having established the existence of a reasonable quantity of oil, permanent Drilling/production facilities are put up in the field. Platforms /Pipelines are fabricated on land, towed to location, installed, hooked up and commissioned.

Oil & Energy Risk Insurance Oil & Energy Operation

ProductionOil/ Gas is produced from the wells drilled and taken to process platforms and then transported to onshore terminals

Risk Situations

Risk involves fixed an or floating structure, civil Engineering Works & Industrial Plants in the open sea and also on shore during:

Construction/Erection at the operating location Construction/ Assembly on shore or in sheltered waters Transportation to the operating location Final assembly, Installation and Testing at the operating location Operations

Oil & Energy Operation Equipments at Risk

Jack up RigsSubmersible RigsSemi Submersible Rigs Drill ShipsDrill Barges Fixed Platforms Early Production systems Pipelines Equipments Offshore supply vessels Seismic Survey vessels Multi purpose supply vessels Onshore terminalsStorage Vessels /tanks

Any other floating system for the purpose of offshore drilling

Oil & Energy Risk Insurance Cover requirements for various stages of Operation

Seismic SurveySurvey vessels & Accessories need comprehensive production for hull & Machinery including cover against War

Cover requirements for vessels stages of Operation

Exploratory Drilling Equipments to be comprehensively covered against

Damage, total & partial due to blowouts and cratering FireInclement weather Jacking Accidents Loss of anchors in the case of drill ships and semi submersibles Collision Weather hazards such as low pressures, Cyclones, Ice etc

War/Strikes and Political Risks

Oil & Energy Risk Insurance

Cover requirements for various stages of operation

ConstructionAll Risks cover for all materials procured during transit, fabrication on land, Load out, Towage to site, Installation, Hook up, and commissioning. Also cover against contractual Liability

Cover requirements for various stages of Operation

Production /OperationAll accidental damage to platforms, pipelines and other equipments Additional expenses incurred by operators for control of Wall, Re-drilling expenses, Cost of controlling seepage, Pollution, ContaminationThird Party Liabilities Loss of Production Loss of Hire

Oil & Energy Risk Insurance Insurance Covers Available

Seismic Survey-(Vessels/Equipments of sensitive nature & high value operating in remote areas)

Institute time clauses (hulls)War & SRCC

Insurance Covers Available

Exploratory Drilling-Offshore

Jack up rigs, Drilling Rigs, Semis Submersibles etcLondon standard Drill barges Forms (All Risks)Physical Damage including risk of blow-out, cratering 25% additional insurance permitted against Total loss conditions War / SRCC

Drill Ships Hull & Machinery –London standard Drilling Barge Form War & SRCC

Onshore Fixed land rigs, Mobile land rigs, Work-over land rigs

Oil & Gas well Drilling Equipment Form (All Risks)

Oil & Energy Risk InsuranceInsurance Covers Available

Construction- Materials, while in transit, storage at site, land fabrication, land out, transit, installation, hook-up, testing, commissioning and twelve months maintenance

Cover –Institute Builders Risk Clause

Operation- Well head platform /process platform

Cover –London standard platform Form (All Risks)

Insurance Covers Available –Additional Covers

Operators Extra Expenses (Cost of Well Control)

Because of a blow-out a well goes out of control Continuous flow of drilling fluid, oil, gas etc.Declared to be out of controlCost of well control may be prohibitive OEE cover pays for all expenses relating to cost of control, re-drilling, seepage & pollution, cost of making well safe, removal of debris Cover subject to Energy exploration & Development wordings

Oil & Energy Risk Insurance Insurance Covers Available –Additional Covers

Liabilities Covers liabilities of owner/operator legally devolving on them for bodily injury to persons or property damage upto limits agreed Cover subject to special third party liability wordingsClaims made basis

“Occurrence” Basis and “Claims Made” Basis Pollices

Accident (Occurrence) Claim

“Occurrence” Basis Policy –Pays “Claims Made” Basis Policy- No Liability

Oil & Energy Risk Insurance Insurance Covers Available –Additional Covers

Loss of Earnings Cover for loss of hire and or standing charges, maximum indemnity and deductible agreed with the insurers Amount per day agreedLoss of earnings & standing charges relate to loss of production Loss of hire cover is for rigsClaims payable only when physical damage claim is admissible

Cover provision

Clauses Applicable to

Cover ITC hull All vessel engaged for survey,

support, supply and moorage

Named perils but widest possible cover prominent exclusion being War Strike, Riot, terrorism, Nuclear explosion

Institute War and strike clause

-Do-War and Strike Perils

Cover Provision

Clause Applicable to CoverLondon

standard Drill Burge form (Hull Risk)

Drilling rigs, Drill ships, Drill Burge

All risk cover excluding War Terrorism mechanical breakdown removal of wreck unless caused by fire

Cover Provision

Clause Applicable to CoverCut and cover well drill equipment

Land rigs All risk cover subject to as per London standard drill Burge

Form

Institute hull clause builder risks

All support

structure All risk excluding War and terrorism Nuclear explosion

Cover Provisions at a glance

Clause Applicable to CoverLondon

Standard platform all risk

Primary exploration& Development

Insurance

Platform support structure

Jack-ups/semi-submersibles

All risk similar to London standard drill burg Form

London standard Platform clause

Cover provisions at a glance

Clause applicable to Cover

Third Party Liability

Legal Liability Third Party Property /personnel damage

Cover provisions at a glance

Clause applicable to Cover

Loss of hire and charge

Standard LOP

Rigs

Loss of Production Operator

Oil & Energy Risk Insurance

Factors to be considered in rating of offshore risks Physical Damage

Value of Hull & Machinery Type of equipment to be covered Age of equipment Type of Operations Operating Area-environmental factors Platform –process or Well HeadPipelines –Length, Diameter, Make, Crossings, Raisers, Laying method, Depth at which laid.

Oil & Energy Risk Insurance

Factors to be considered in rating of offshore risksOperators Extra Expenses

Cost of well control Number of wells to be drilled Depth of wells Area in which the well is to be drilled Type of well –exploratory, producing, shut-in, work-over or plugged

Re-drilling ExpensesAll the above factors plus the daily rate of indemnity chosen by the insured

Cost of controlling seepage, pollution & contamination Area of drilling –whether thickly populated Surrounding property

Oil & Energy Risk Insurance

Factors to be considered in rating of offshore risksThird Party Liabilities

Area of Operation Type of operation Limit of indemnity

Loss HireDaily rate of indemnity Indemnity period Time exclusion

Oil & Energy Risk Insurance

Rating of Offshore Risks Physical Damage

Usually a rate percent applicable on the total value or the Hull & Machinery. The rate is again split into tow parts –H& M Rates and increased value rates. The sum insured for IV is usually 25% of H& M value.Operators extra expenses Rate per foot drilled. At inception a deposit premium is collected and adjusted at expiry of the policy period as per footage drilled Third party Liabilities A lump sum premium is collected at inception depending upon the limit of liability chosen

Oil & Energy Risk Insurance

Rating of Offshore RisksConstruction

Usually covered on a rats percent applied to the estimated full contract value. Sometimes individual rates are applied to each phase of the construction contract especially if more than one contractor is involvedLoss or production / loss of Hire A lump sum premium based upon the indemnity limit and period of indemnity chosen could be 60, 90 or 120 days. Time exclusion cold be either 14 or 28 days

Oil & Energy Risk Insurance

Important considerations in respect of Oil & Energy RisksEnergy Insurance is substantially reinsured. Hence policies are reinsurance drivenUnderwriting and rating wholly influenced by

Special risk characteristicsTechnical Processing of risksRestricted Market Problems of capacity vis-à-vis risk exposure and loss probability International Competition Concept of leading underwriter

Maximum care on the policy wording /scope of cover Freedom /Restriction on the direct insurer –claims settlement Concept of package Technology advancements –need for updating information

Statistics