CIn

Tuesday, March 1, 2016Houston, TX

1:45 – 2:35 p.m.

ENERGY 101—A PRIMER ON OEE/COW EXPOSURES AND INSURANCE

Presented by

Pascal RaySenior Vice President

Marine and Energy Practice LeaderUSI Insurance Services

Perhaps the most important policy covering risks in the oil patch is the control of well(COW) policy, aka operators extra expense (OEE) policy. There are many nuances andvariations in these policies that make the coverage vary considerably from insurer to in-surer. Since many of these terms are negotiable, it is important to be able to analyze andcompare policy forms and give careful consideration to the coverage options available.This session will provide a primer on the basics of the coverage, as well as the various cov-erage options available, to enhance your ability to ensure that the best possible protec-tion is arranged for any given insured.

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opyright © 2016 International Risk Management stitute, Inc.

www.IRMI.com

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Pascal RaySenior Vice President

Marine and Energy Practice LeaderUSI Insurance Services

Pascal Ray joined USI Insurance Services as marine and energy practice leader in March 2015.Prior to joining USI, he was the Upstream Energy practice leader for AmWINS Group, Inc. and anational resource in those areas. His experience includes developing and managing energy andmarine underwriting programs. He has created, developed, and managed energy and marinebinding authorities on behalf of the US domestic, the London, and the Bermudian insurancemarkets for the last 25 years.

Mr. Ray is an instructor for energy and marine insurance continuing education courses in his localcommunity and has written and participated in articles involving energy and marine industry in-surance issues. Current topics of issue include emerging with hydraulic fracturing in the oil andgas industry and the changing legal environment and risk for the maritime industry.

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Notes

This file is set up for duplexed printing. Therefore, there are pages that are intentionally leftblank. If you print this file, we suggest that you set your printer to duplex.

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Energy 101: A primeron OEE/COW Exposuresand Insurance

Presented By:

Pascal RayMarine & Energy Programs

USI Insurance Services, LLC

#IRMI2016

Control of Well insurance

provides coverage for

Blowouts.#IRMI2016

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CControl of Well Insurance• Introduced by Lloyds in the 1940’s and provided

coverage for expenses relating to bringing well under control only.

• This developed into a product that covered both Well Control Costs and Re-Drill Expenses in the 1960’s.

• In the late 60’s there became a need to cover Seepage and Pollution.

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• 1978 London OEE Form

• 1986 the EED 8/86 OEE form was developed by the Lloyds of London Rig Committee and continues to be the coverage form for most of the onshore and offshore drilling activity world wide.

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CControl of Well Insurance is also known as:

� OEE-Operator’s Extra Expense� EED-Energy Exploration & Development

Insurance� Well Control Insurance� Blowout Insurance� Cost of Control Insurance

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CControl of Well

Well Control Costs

Re-Drilling Costs

Voluntary Clean up and Containment Expenses

Seepage and Pollution Expenses

Removal of Wreck

Seepage and Pollution

Clean Up & Containment

Care, Custody, & Control

Evacuation Costs

Property Liabilities

A blended property and casualty coverage

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What is a Blowout?• An unintended,

uncontrollable flow of drilling fluid, oil, gas, or water, above the surface of the ground, or waterbottom in case of a well located in water, which cannot be controlled by the blowout preventers.

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An Unintended, Uncontrollable Flow of Drilling Fluid..

The well unloads fluid/mud in the initial phase of a blowout• There Is No Specific

Time Element In The Definition Of Blowout.

• Blowouts can last for days or take years to bring under control.

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…Oil…

• Burns with heavy, black smoke

• Pollution covered for Surface Blowouts

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…Gas…

Burns Clean• Little or no

pollution

• Natural Gas is not toxic but can be regarded as Air Pollution and significant claims are possible.

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…Or Water, Above The Surface Of The Ground…

• No Risk Of Fire

• May Involve Extensive Pollution Remediation For Land Operations

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… Which Cannot Be ControlledBy The Blowout Preventers

• Blowouts Are Not Necessarily Catastrophic Events

• Leaking blowout preventers

• Wellhead leaks• Corrosion leaks

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…Or Water bottom,In Case Of A Well Located In Water…

• Increased Risk Of Cratering

• Flow is usually outside of the casing

• Increased risk of total loss of the rig or platform due to loss of bottom support

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Causes of Blowouts

• Human Error• Equipment Failures• Shallow Gas• Cement/Casing Failure• Formation Kicks• Loss of Circulation• Inability to control

pressure• Various Downhole

scenarios

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BBlowouts Can (and do) Occur At Any Time In The Life-Cycle Of A Well

• Drilling • Drilling Into

Unexpected Pressures• Equipment Failures• Human Error

• Producing• Equipment Failures• Human Error

• Shut-In• Casing Failures• Wellhead Leaks

• Plugged And Abandoned• Physical Damage • Corrosion Failures

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Control of WellCoverage Sections

Pollution

Well Control Costs Restoration & Re-

Drill

Care, Custody and Control

tion

ontrol sts Restorat

D

Care, CusCont

Control of WellInsurance

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• …to reimburse the Assured for actual costs and/or expenses incurred by the Assured in regaining or attempting to regain control of any well insured hereunder which get out of control…

CControl of Well policy coverage

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CControl Of Well,recoverable costs

• Costs of Experts• Firefighters• Consultants• Mud Engineers

• Goods and Services• Drilling rig• Drilling mud• Chemicals and additives• Transportation costs

• Relief Well• Mobilization of rig• Drilling costs

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• …to reimburse the Assured for actual costs and/or expenses reasonably incurred to restore or redrill a well insured hereunder, or any part thereof, which has been lost or otherwise damaged as a result of an occurrence…

RRestoration and Redrill,policy coverage

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RRestoration And Redrill,recoverable costs

• Rig Dayrate• The cost of the rig until the well is restored to

the original depth and condition

• Redrill From Surface• If the entire well is lost

• Sidetrack Drilling• If only a portion of the well is lost

• Recompletion• Only to the extent as existed prior to

the incident

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SSeepage And Pollution, recoverable costs

• Pollution Response• Initial containment

• Pollution Clean-Up• Clean-up and disposal of oil or

contaminants

• Mitigation Costs• Costs incurred to lessen the

amount of damage• Protecting Sensitive

Environmental Areas and Beaches

• Litigation Costs And Defense Costs

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• The Replacement Cost Of Leased Or Rented Equipment For Which The Assured Is Liable By Contract

• Third-party Owned In-Hole Equipment• Rented downhole tools such as Measure-While-Drilling

• Third-party Owned Surface Equipment

CCare, Custody, and Control,recoverable costs

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Types of Blowouts

•Surface Blowouts•Subsea Blowouts•Underground Blowouts

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Underground Blowout, by definition

• A Subsurface Flow From One Zone To Another Zone Through The Wellbore

• There is no apparent activity above the surface

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Underground Blowout,the flow path

• Flow Is Either Through Uncased, Open-Hole Section Of The Well, Or Through Damaged Casing

• Thief Zone is permeable and lower pressured

• Flow is upwards through the wellbore

• Source Zone is deeper and higher pressure, producing gas, oil, or water

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• Well Control: Putting out the fire• Fire can be extinguished with:

• Explosives• Water• Nuclear • Or they can be blown out with

Big Wind…….

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Case Study: Porter Ranch Blowout

Occurred within the City Limits of Los Angeles

#IRMI201627

California holds the records for the largest blowouts in U.S. History

• The Porter Ranch Blowout is the largest natural gas blowout in U.S. history.• California also holds the record for the largest Oil Blowout in U.S. History.

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LLakeview Blowout Kern County California

1910 - Largest Oil Blowout

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Case Study: Porter Ranch Blowout and Evacuation Risk

Situation: Natural Gas Storage facility with a well that had a blowout

reportedly due to a casing failure.#IRMI2016

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• Current overview of the Porter Ranch blowout:

• Age of well: 62 years old and operational in 1954.• Duration of Blowout: October 21, 2015 to February 11, 2016. • Cause of loss: Well integrity: Reportedly a failed well casing.• Blowout solution: Relief well intervention and plugging of the well.• Scope of Evacuation: 6,400 families evacuated with two schools closed.• Type of Claim Event: Air pollution emanating a gas well blowout.• Complaints: Focused on health and environmental issues, but

business interruption, declining property values and other concerns exist.

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• Consequences: • State of Emergency declared by the California Governor.

• Federal Aviation Administration (FAA) declares a “no fly zone.”

• Numerous class action law suits from individuals and businesses, which will involve thousands of plaintiffs from the 30,000 area population involved.

• Punitive damage requests figure prominently in these lawsuits. Punitive damages are generally not insurable by law in California.

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• Consequences: • One wrongful death lawsuit.• The Los Angeles County district attorney’s office has filed criminal charges.• Numerous suits from various state agencies.• Numerous state and federal investigations.• Significant fines and penalties are possible.• Losses to date are approximately $250-$300 million dollars and will likely

rise.• Combined insurance limits on policies are reported at over $1 billion

dollars.

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#IRMI2016

The Porter Ranch blowout is a case study for emerging claimstrends for the oil and gas industry:� Well integrity risks are having implications for first and third party property, third

party liabilities, well control, and environmental losses.� There are increasing evacuation risks as oil and gas operations move into

populated areas.� Increasing defense and settlement costs.� The use of punitive damages is increasing which may or may not be insurable

depending on the state.� Fines and penalties are increasing.� All of the above is creating the need for higher insurance limits.

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#IRMI2016

Other notable Natural Gas Storage Facility Losses in the USAInvolving Well Integrity, Proximity, and Evacuation issues

There have been other cases involving catastrophic losses in natural gas storage facilities in the U.S. Theworst of these involved explosions, fire, evacuation, loss of life and significant property losses.

• Mont Belvieu, Texas, is the location of the largest underground natural gas storage facility in the world.A series of three casing failure events between 1980-1985 ultimately required the gas company toevacuate the residents and rebuild the town two miles away.

• Hutchinson, Kansas, in 2001- Casing Failure

• Napoleonville, Louisiana in 2003- Casing Failure

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Severity of Evacuation Risk

#IRMI2016

The Porter Ranch blowout has put a spotlight on evacuation risk, and how significant a largeevacuation event has the ability to significantly erode insurance limits. With more than 10,000people evacuated, it is one of the largest, if not the largest, evacuations due to a well blowout in thehistory of oil and gas in America.

There are other notable blowouts involving mass evacuations:� In 2003, more than 60,000 people were forced to evacuate their town due to a well blowout that involved

H2S gas. H2S is immediately lethal when inhaled in large concentrations and can be very harmful in lowerconcentrations. 9,000 people had to be hospitalized and 243 died. This happened in central China near thecity of Chongqing.

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#IRMI2016

� In 2006, a natural gas well being drilled reportedly had a well control event, resulting in a blowoutconsisting of mud and natural gas and became what is now called a mud volcano and nicknamed “Lusi.”

� Approximately 30,000 people were evacuated and permanently displaced, 12 villages were destroyed, andthere were 20 deaths.

� Legal authorities concluded this was caused by an underground blowout during the drilling process. Thewell apparently was not cased according to Indonesian law. Appropriate well design and proper casingusage could have prevented this catastrophe.

� This blowout occurred in East Java, Indonesia and continues today 10 years later, highlighting the timeduration that can exist in rare cases with a well control event. It is thought this blowout will stop on its ownat some point in the near future, but no one knows for sure.

� Total economic losses to date are said to be around four billion dollars.

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#IRMI2016

• An extreme example of what can possibly happen with evacuation risk occurred in Edmonton, Alberta, in1982. The city was under threat of a deadly H2S gas plume coming from a blowout near Lodgepole, Alberta,over 100 miles away. At this time, the population of Edmonton was approximately 550,000. There weremedia discussions regarding evacuating the entire city but this never materialized.

• Airports are another example of locations where evacuation risks need to be a central part in the riskmanagement strategy. Dallas/Fort Worth International Airport has over 100 gas wells and supportinginfrastructures; Denver International Airport has 72 wells on location; Oklahoma’s airports have 87 activewells; and Charleston, West Virginia, and Pittsburgh, Pennsylvania, airports also have wells on theirlocations.

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• Los Angeles County is perhaps the highest at risk in the United States due to its proximity of more than 5,000 active wells and thousands more abandoned wells that exist.

• Many of these wells are over 100 years old. • About one third of the population of Los Angeles County live within

one mile of an oil or gas well, approximately the same proximity as the Porter Ranch residents were to the well that blew out next to their community.

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#IRMI2016

2015 was significant for the Oil & Gas industry: � U.S. has become the number 1 producer of Oil and Gas in the world.

� America is now exporting Oil & Gas. USA is now in the global marketplace not accessible to for 40 years.

� America broke production records for both Oil & Gas in 2015 despite of the price drop on Oil from a high of$105 a barrel in 2014 to a low of $35 a barrel in 2015.

� The drilling Rig Count went from a high of 1,609 in 2014 to a low of 698 drilling rigs in 2015 while at thesame time Oil & Gas production increased to record levels due to hydraulic fracturing technology.

� The US Department of Energy has developed a new model to estimate U.S. Oil & Gas production becauseusing the Rig Count alone is no longer a viable metric.

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#IRMI2016

� Increases in Oil & Gas production in the U.S. are no longer dependent on new well drilling. The Rig Count isno longer an accurate measure of Oil & Gas production or a risk metric based on Oil & Gas activity forinsurers. Hydraulic Fracking is a well completion and well stimulation operation that is done independent ofdrilling operations and after the drilling rig is removed from the well. Fracking can be done years after thewell has been drilled. The drilled shale well is not capable of commercial Oil & Gas production until it iscompleted using hydraulic fracturing technology.

� There will be more wells hydraulically faced in 2016 than wells drilled. As fracking technology evolves, wellspreviously drilled with old fracking technology are now becoming candidates to be re-fracked to improveproduction performance. Older conventional wells are also being fracked to improve productionperformance.

� The risks involved with wells that are completed using Hydraulic Fracturing are significantly higher anddifferent than conventional wells.

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Paradigm ShiftConventional vs Unconventional

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Major Exposure Shift

Drilling Well Completion

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Contractual Shift

Drilling Contract Master Service Agreement

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PParadigm Shift: High Pressure, High VolumeHydraulic Fracturing

Old School Frack site Modern Frack Site

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Spotlight on Well Integrity

#IRMI2016

• 4.3 million existing wells in U.S. drilled in the USA since the 1800’s.

• Some wells are now over 150 years old.

• A well can blowout out in any phase of its life even when it is producing, shut-in, or plugged andabandoned and all wells should be insured regardless of the phase they are in.

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Spotlight on Well Integrity

#IRMI2016

• As the casing and cementing on older wells deteriorate, the risk of failure increases.

• Well integrity failures from older wells may become more commonplace.

• Oil & Gas wells are known to pollute ground water, air, and surface areas, as long as we havebeen drilling wells. Even with the millions of wells drilled, these occurrences are relatively rare.They can have significant severity when they occur, as the Gulf of Mexico blowout in 2010substantiated.

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CControl of Well: Evolving Risks• Evacuation• Pollution• Multiple well pad blowouts• Multiple well communications• Cap Rock breakage• Geo-mechanical Issues• EOR: Steam and Co2 Blowouts• Earthquakes

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T4. ENERGY 101– A PRIMER ON OEE/COW EXPOSURES AND INSURANCE

Rating scale for all questions:

4 = Excellent 3 = Very Good 2 = Average 1 = Somewhat Disappointing 0 = Very Disappointing

Overall rating for this workshop? 4 3 2 1 0 Pascal Ray Preparation and quality of information 4 3 2 1 0

Energy and enthusiasm of delivery 4 3 2 1 0

Educational focus (not a sales pitch) 4 3 2 1 0

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