Energy insurance

Offshore Energy InsuranceGard AS Arendal

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https://www.youtube.com/watch?v=Q1mLhwrNN8E

Offshore Energy Insurance - What is so special?

What are the main differences between marine and energy insurance?

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• Drilling into unknown underground conditions (Wildcats)o High pressureso Uncertainty when pressured zones are reached

• High Risk Operations – release of hydrocarbons

• Resourceful Assureds

• Insured objects are stationary whilst operating

• Tailor made items and parts with long lead time

• High values and significant retention/deductible levels

• ”Tailor made” insurance policies – manuscript wordings

• Low frequency but large and complex losses

• Limited case law and market practice

Contents• Who needs it and why?• What triggers cover?• Main considerations for pricing• How are losses calculated?• Important practical claims handling considerations

Who needs it and why

Who needs it and why

Two categories of clients:•Oil Company: Can be either an operator or a co-venturer.

o An operator owns a license from the state to develop a field and extract the oil and/or gas. A co-venturerer pays a share of the expenses, but also receive a share of the revenue

•Contractoro Chartered in by the operator for a specific tasko Most Mobile Offshore Units (MOUs) are owned by various contractors. MOUs include:

Drilling rigs, accomodation units, and FPSOs.

The nature of the risks and structure of insurances for an oil company and a contractor differs – Still placed in the same insurance markets

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Oil Companies

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Contractors

Phases in the oil and gas industry

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• Exploration & Production (Offshore)o Upstream activities (prospecting, exploration, development and

extracting/production)

o Midstream activities (transport from offshore field to marine terminal/ refinery/petrochemical plant/gas processing & transmission)

• Refining & Marketing (Onshore)o Downstream activities (refining, petrochemical, processing,

marketing & distribution)

Kermac 16 – First “offshore” well

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As at 20.08.2016

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Split between oil & gas companies and contractors

By premium volumes, as at 20.08.2016

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Gard Energy lead – oil & gas companies and contractors

Who needs it and whyExploration and Drilling

Video

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https://www.youtube.com/watch?v=Do9dz6ypD7w

Jack-up Drilling Rigs – On Seabed

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Floating Drilling Rigs

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Who needs it and whyProduction

Development Concepts

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• Stationary platformso Steel jacketso Concrete - Gravity Base Structures

• Floating platformso Tension Leg Platform (TLP)o Floating Production Unit/System

(FPU/FPS)o Floating Production Storage and

Offloading Unit (FPSO)o Floating Storage Offloading Unit

(FSO) o SPAR platform

Fixed Platform

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Troll Condeep

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FPSO units – Floating Production Storage Offloading

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Floating Production Units in operation

23http://www.marinelink.com/news/manufacturers-opportunity381817

Location and Water Depth of Planned Floating Production Projects

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http://www.marinelink.com/news/manufacturers-opportunity381817

What triggers coverContractor’s hull insurance policy

The insurance needs of MOU owners – Operating units

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• Hull & Machinery incl. Collision liability and Sue & Labour• Total Loss Insurance - Hull Interest incl. Collision liability

- Freight Interest• Loss of Hire (excl. Total Loss)

• Contingent Operator’s Extra Expense

• War & Terrorist

• Protection & Indemnity Insurance• Comprehensive General Liability Insurance

The insurance needs of MOU owners – Operating units

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• Hull & Machinery incl. Collision liability and Sue & Labour• Total Loss Insurance - Hull Interest

» Freight Interest• Loss of Hire (excl. Total Loss)

Insuring Agreements:

• London Master Rig Drilling Contract / London Market Offshore Mobile Unit Form

• American Institute Hull Clauses• Nordic Marine Insurance Plan 2013 version 2016

Nordic Marine Insurance Plan 2013

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• Part One: General Rules

• Part Two: Hull Insurance

• Part Three: Other Insurance for Ocean- Going vessels

• Part Four: Other Insuranceso Fishing Vesselso MOU

o Builders Risk

Hull & Machinery incl. Collision liability and Sue & Labour

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• All Risk Policy• Assessed Sum Insured

• 3 sums insured availableo For Physical repairso For Collision liabilityo For Measures to minimize loss (Sue

& Labour)

• Ch. 18 reflects the general principles of the Plan

Chapter 18 Particularities

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• No cover for loss resulting from using MOU for drilling relief well

• Additional Safety Regulation: o Wells have to be equipped with Blow-Out

preventers

• Sue and labour limited to USD 500,000,000

• Collission liability limited to USD 500,000,000, or 50% of sum insured whatever is higher

What triggers coverContractor’s P&I insurance policy

P&I for Mobile Offshore Units

• Liabilities relating to any unit carrying out oil and gas drilling or production operations are not allowed entry in the International Group

• Gard has responded by establishing a separate cover based on specialised conditions for MOUs

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Knock for Knock

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Knock for knockLiability regime

• Liability: Each party to be solely liable for illness, injury and death of its personnel and for loss of or damage to its property (and for subcontractors’ personnel and property), pollution from its own property, removal of wreck of its own property, and their own consequential losses.

• Indemnity: The indemnitor shall indemnify and hold harmless the indemnitee from the indemnitor’s liability under knock-for-knock

• Waiver of recourse: Each party (and its insurers) shall waive its rights of recourse against the other party to the extent of its liability under knock-for-knock

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Knock-for-knock division of liability

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Offshore contracts

Main contract

Main contrac

tCompany Contractor

Other contract

Other Contractor

Other Contractor

1st tier sub-

contract Sub-

contractorSub-

contractor

2nd tier sub-

contract

Sub-contractor

1st tier sub-

contract Sub-

contractorSub-

contractor

2nd tier sub-

contractSub-

contractorSub-

contractor

3nd tier sub-

contractSub-

contractor

Company Group Contractor GroupCo- venturer

COMPANY liable for its Group’s personnel and property

CONTRACTOR liable for its Group’s personnel and property

Offshore contractsDivision of liability for what?

• Personnel• Property• Pollution• Removal of wreck• Consequential losses• Third parties (negligence, not knock for knock)

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Insurance premium contractor rigGard Explorer

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Gard Explorer – semi submersible delivered to Agder Drilling fromKorean yard 15 May 2015:

Estimated market value when delivered USD 600,000,000Hull and Machinery: USD 480,000,000 – 0.6%Hull Interest: USD 120,000,000 – 0.3%Deductible USD 2.5m, Brokerage 7.5%

Loss of Hire:60/180/180:Dayrate USD 440,000. Total sum insured USD 79,200,000 -1,4%Brokerage - 7.5%

Gard MOU P&I: Limit USD 250m. Fixed Premium USD 270,000.Deductible USD 10,000 Direct business, no brokerage

The Energy Insurance Market

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• 1966 - London Master Drilling Rig Contract Rate 9,75%

• 1973 – Norwegian Oil Risk Pool Rate 5,75%

What triggers cover Contractor’s - Claims

West Vanguard

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Petromar V

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Gryphon A – Loss of Mooring

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Petrojarl Banff FPSO

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Damaged risers / anchor chain corrosion

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Anchor chain damage

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Perro Negro 6 – Loss of stability

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Cidade de São Mateus

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What triggers coverOil Company’s insurance policy

E&P – ”package” policies

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• Physical damage to offshore installations

• Business Interruption• Cost of Well Control• Seepage & Pollution• Cost of Redrilling• Third Party Liabilities• Offshore Terrorism• Deliberate well firing

Business Interruption / Loss of Production Income

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• Is there a loss, when the oil is still underground?

• Cover based on Agreed Value basis or Indemnity basis: o Agreed Value= Value of Oil x

Expected Production

• Contingent BI cover

Cost of Well Control

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• Blowout = Unintended and uncontrolled flow of oil

• Uncontrolledo When the well is flowing above ground/water and the flow cannot

be stopped by BOP / increasing mud pressure / diversion into production

• Covero For materials and services of specialists necessary to get control of

the well

• Exclusion: No cover for loss in production capacity, loss of reservoir

Relief Well plan

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Well Redrill / Well Restoration

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• Additional cover to Well Control Costs

• Well out of control triggers insurance cover

• Insurance covers replacement to the same depth as the original well and to the same reservoir.

• Limits of cover

E&P – ”package” policies

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• Physical damage to offshore installations

• Business Interruption• Cost of Well Control• Seepage & Pollution• Cost of Redrilling• Third Party Liabilities• Offshore Terrorism• Deliberate well firing

Main Considerations for pricing

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Arendal Oil Company:Gard Explorer is chartered from Agder Drilling, but Arendal Oil Company is the Operator with a 30% interest in the well. Purchase of Operators Extra Expense cover (OEE) – includes Cost of Well Control, Seepage & Pollution, Cost of redrilling

Premium:0-10,000 feet: USD 18,07 per foot10,000-17,500 feet: USD 27,10 per foot17,500 – 20,000 feet: USD 40,66 per footDeductible USD 2m. Limit USD 150m. Brokerage 7.5%

Third party liabilityLimit USD 100mRate at 0,05% of limit. Deductibe USD 500,000 Brokerage. 7.5%

What triggers cover?Oil Company claims

Alexander L. Kielland – mechanical failure

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Sleipner ”A” - GBS collapse

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Troll A - Motor failure

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Seawater ingress

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Blowout : Ekofisk Bravo

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Explosion and fire on Piper “A”

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Elgin Platform Gas leak - North Sea

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Eugene Island Platforms - hurricane

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Eugene Island 330 S & C Platforms post Rita

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Typhoon TLP

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Claims

Energy claims (Offshore)

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• Drilling operationso Well blow-outs with or without fire/explosiono Collapse of drilling hole/seabed (cratering)o Collision against drilling rig/platform

• Production operationso Gas leakage with explosion/fireo Hurricane/weather damages o Mechanical failure/overload/fatigue fractureo Pipeline breakageo Excessive corrosion damage (Sulphur Reducing Bacteria)o Anchor or fishing equipment damage on pipelines/subseao Business interruption as a consequence of damage on other installation

Phases of claims handling

1. Emergency response phase2. Reinstatement phase 3. Adjustment phase4. Payment of claim

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1. Emergency response phase

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2. Reinstatement phase

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• Starting point: Same condition as prior to the accident• New for old?

• Repairs in the offshore sector:o more expensive o more lengthy

• Implications:o Loss of hireo Cancellation of contract

3. Adjustment phaseHow are losses calculated?

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• Request for documentation

• Determining the coverage (Practical group work)

Practical group work FPSO – Heavy weather damage

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Claims submittedRecoverable under NMIP 2013?

• Immediate salvage/loss mitigation FPSO: USD 15,000,000• Disconnection risers, umbilicals, mooring: USD 2,200,000• FPSO removal costs: USD 12,500,000• Cargo offloading costs: USD 465,000• ROV/Diver inspections FPSO/turret: USD 535,000• Subsea damage inspection campaign: USD 7,140,000• Seabed clean-up/restoration campaign: USD 22,500,000• Purchase of 10 risers: USD 100,000,000• Purchase of 2 umbilicals: USD 25,000,000• Purchase of mooring system (25% stronger): USD 22,500,000• Seabed assets repairs/replacements: USD 124,000,000• FPSO mooring reconnection: USD 7,500,000• Riser/umbilical tie-ins: USD 48,000,000• Project management: USD 23,000,000• Loss of Hire USD 324,000,000

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4. Payment of claim

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Important practical claims handling considerations

Practical claims handling

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• Cooperation:o Assuredo Salvorso Surveyorso Loss adjusterso Lawyers

• Importance of a proactive approach

Case Study

Total Loss • §18-10 – Condemnation

– 80% of insurable value (Market value)– Equals H&M + HI insured values (Spec. Cond)

• §18-12 – Request for condemnation• No deductible applicable if Total Loss/Condemnation

• §18-13 – Removal of unit– Insurer’s demand without undue delay– Insurer to bear costs and assume liabilities

Insurers’ liability• Total Loss, incl. condemnation

– Pay sums insured - §4-1

• Interest on the Compensation - §5-4– One month after notice of the casualty– Rate of interest 4.42% p.a. – US$24,220 per day

• Costs of measures to avert or minimise loss - §4-7– Extraordinary and regarded as reasonable– Costs of particular measures taken - §4-12, second paragraph– Up to an amount equal to the sum insured - §4-18

Further clauses to consider• §18-1 Measures to avert a blow-out, etc.

• §18-1 Safety regulations– Utilization of blow-out preventer

• §5-19 Right of the insurer to take over the object insured– May be waived at the time of payment.

Insurers’ response to the condemnation claim

• Requested a more detailed breakdown of K-FELS estimate

• Matthews-Daniel asked to verify the estimates– Most items appeared adequate, some on the low side and some items missing– Mat-Dan total estimate US$ 240,290,000

• Gard, as claims leader, confirmed acceptance of the request to condemnation of West Atlas– Waived Insurers right to take over the the ownership of West Atlas

• Total Loss compensation paid on 15 December – Interest agreed and paid at a later date

• Notified claim for loss mitigation costs not yet submitted

Commitment and capacity – Gard Energy

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• Underwriting energy risks since 1973• Sole insurer in Scandinavia providing extensive capacity• Working capacity USD 200 million

Pictures from www.oilrig-photos.com

Thank you

First Norwegian oil production

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• Ocean Viking Built at Aker Yard, Oslo 1965 – 1967

• 9 June 1971 - J/U Gulftide at Ekofisk Field

1973: West Venture – NORP insurers

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80% Gard Marine & Energy predecessors20% Norwegian Hull Club predecessors

First Gard P&I MOU entry

Finding - Marine Seismic survey

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Drilling

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Risk Allocation in Offshore fields

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• Starting point: Operator is responsible for the field on behalf of all JV licensees.

• Contractual allocation of liability with contractors and sub-contractors

• «Knock – for – Knock» is the ideal

An alternative field development…The Future

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• Ormen Lange

• Movie!