Upstream and Offshore Energy Insurance 3rd Edition

This guide to offshore energy insurance outlines the products that have been developed by the insurance industry to provide financial support. It covers topics such as:

• Offshore construction
• operating insurance
• business interruption, delay in startup and loss of hire
• offshore liability risks
• pollution insurance
• war, terrorists and political risk.

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Background and Introduction

For many years, offshore energy was not treated as a distinct subject within the London market. Risks were underwritten within the market’s marine hull book of business by insurers who had learned their craft on shipping insurance and treated drilling barges as an offshoot of their marine hull book. Policy forms for these specialised units were based upon London market policy templates originating in the 18th century and hull clauses that were developed initially for sailing ships, then iron and steel ships from the late 19th century onwards. Until quite recently, the Lloyd’s market did not have distinct risk codes for marine energy risks. Data was collected by the market within the marine sphere of business and, to a degree, this custom still continues since the International Union of Marine Insurers, which meets annually at important shipping locations around the world, will discuss topics relating to hull, cargo and offshore energy interests in a collective manner.

Therefore, offshore energy insurance has, to a large degree, been based upon the traditional principles and practices established in the marine insurance market. However, it has, in time, evolved into a distinct brand offering products that are unique to the insurance industry and tailor-made to the offshore energy industry. Exploration and production of hydrocarbons in a marine environment is a risky business. It requires significant capital expenditure and highly specialised equipment, techniques and manpower and, regardless of the skills and expertise that have collectively been acquired within the industry, there remains an element of the unknown. There is an unknown when a well is first drilled into a virgin reservoir (a process known as spudding) as unforeseen pockets of shallow gas reserves may be encountered, potentially creating problems in containment. There will be unknowns when installing equipment in very deep water or in remote territories, given that new problems may be experienced from localised environmental factors. There is a constant need to improvise in exploration and development, either to circumvent problematic reservoir characteristics or to overcome technical challenges in deep water or hostile environments. Technology must keep pace with economic viability, which is itself dependent upon the dynamics of supply and demand within the oil industry and the fluctuating price of oil.

Exploitation of offshore hydrocarbon resources has been fundamentally necessary to increase reserves and reduce reliance upon a finite supply from onshore sources. Without the support of entrepreneurial marine insurers, prepared to offer capacity and products that can provide suitable financial protection in the event of a catastrophic loss, and a willingness to underwrite risks at the forefront of technology, it is unlikely that offshore exploration and production would have reached the stage it has.

However, this reliance has come at a cost. Claims in certain categories of risk have, at times, been of a magnitude and frequency to create periods where underwriting capacity has reduced as a result of a voluntary withdrawal by certain insurers from the class of risk, and sometimes as a consequence of insolvency. During such volatile periods, insurers have inevitably had to impose higher premiums and deductibles, sometimes in conjunction with a restriction in the coverage form. Overall, however, with assistance from capacity supplied by the oil companies themselves, the insurance market has weathered these storms and has continued to support the oil industry, even following major accumulated losses, such as those resulting from Gulf of Mexico hurricanes in 2004, 2005 and 2008.

Through this process has emerged an insurance professional equipped with the required commercial and technical skills to engage in offshore energy insurance, itself a complex and far-reaching area, and also, of necessity, a familiarity with oil field practice and oil industry protocol. There are few businesses that are so demanding as the oil industry in terms of the breadth of engineering skills required, whether these skills relate to geology, foundation and structural engineering, chemical processes, nautical procedures or marine engineering. The insurance practitioner in the offshore energy sector must have some acquaintance with these disciplines in order to appreciate the various risks and hazards and, when a claim occurs, to be able to understand the sometimes complex process that brought about the loss. This book is, therefore, an attempt to combine an appreciation of oil field practice in its widest sense with an understanding of the products that have been developed by the insurance industry to provide financial support.

Dedication

The Author

Foreword

Acknowledgements

Author’s Preface

Chapter 1: History and Development of the Offshore Insurance Market

Chapter 2: Exploration (1) – Background

Chapter 3: Exploration (2) – Insurances on Mobile Offshore Drilling Units (MODUs)

Chapter 4: Exploration (3) – Control of Well Insurance

Chapter 5: Offshore Construction (1)

Chapter 6: Offshore Construction (2) – Essential Principles

Chapter 7: Offshore Construction (3) – The WELCAR 2001 Policyform – General Conditions and Physical Damage

Chapter 8: Offshore Construction (4) – The WELCAR 2001 Policy Form – Terms and Conditions for Section 1

Chapter 9: Offshore Construction (5) – The WELCAR 2001 Policy Form – Section II (Liabilities) and Marketing Practice for CAR Insurance

Chapter 10: Operating Insurance (1) – Principal Considerations

Chapter 11 Operating Insurance (2) – Physical Damage Wordings

Chapter 12: Operating Insurance (3)

Chapter 13: Business Interruption, Delay in Start-up and Loss of Hire

Chapter 14: Offshore Liability Risks

Chapter 15: Pollution Insurance

Chapter 16: The Mutual Entities – Oil and Ocil513

Chapter 17: War, Terrorists and Political Risk

Chapter 18: Decommissioning and Abandonment

Appendices

Index

Witherbys

Witherbys titles are developed using scripts developed by technical experts that are peer reviewed within work groups. Typically, they seek to improve understanding of the regulations, recommendations and guidelines issued by Industry.

Witherbys staff have significant expertise in the fields of navigation and hazardous cargoes as well as in the presentation of complex subjects in a graphic and easy to understand manner.

David Sharp

David Sharp has over 45 years’ experience in the marine and offshore insurance industry.

Within the upstream energy insurance environment, he is most well known for his involvement in Construction All Risk Insurance (CAR) and has worked upon some of the largest and most complex insurance placements, including the Australian North West Shelf project and the Canadian Hibernia project. In his current role at AAA Insurance and Reinsurance Brokers Ltd, David specialises in upstream risk insurance in West Africa and Russia.