Drilling for oil and natural gas in the USA is conducted at depths ranging from under 1,000 feet (coal seam methane) to over 20,000 feet. The technology developed to produce unconventional oil and gas from shale/source rock (horizontal drilling with multi-stage hydraulic fracturing) has significantly increased the costs of drilling and completing wells. The cost to safely drill and complete these unconventional wells is measured in the millions of dollars. If something goes wrong during drilling or completion operations the costs to control the problem can be significant (not to mention the potential loss of millions spent if the well itself is lost).
By far the most serious drilling or completion problem in terms of dollars and potential damage to property and personnel is a “well out of control” or “blowout”.
There are two typical well out of control scenarios, the first being a surface blowout. If you have ever seen a “gusher” in a western movie then you know what a surface blowout can look like. Today it is more typical to have a natural gas blowout, which may include liquids (such as oil or saltwater) flowing to the surface with the gas. In some areas there is also the potential for the release of harmful gasses such as hydrogen sulfide along with natural gas.
The second and more common scenario involves an underground blowout. An underground blowout is customarily defined as a flow of oil, gas or water into a well bore from one geologic zone which exits the well bore at another zone below the surface. While the threat of injury or damage to persons and property above the surface is mitigated, it can be just as problematical (expensive) to control as a surface blowout.
Some of the costs related to a well control event can be insured under general liability policies. These costs include legal or contractual liability for pollution damage, injury to persons or damage to property of others, damage to underground resources and loss of minerals. Typically general liability policies covering oil and gas exploration companies will exclude any cost of well control, loss of hole or redrilling expenses, damage to specialty contractors equipment, property below the surface of the earth, and first party pollution cleanup costs. In the early days of the oil and gas exploration business many of these items were uninsurable and considered part of the business risk. However as companies moved into offshore exploration the nature of risk and the catastrophic nature of the resulting damages created a demand for an insurance solution. The oldest and most creative marine insurance market in the world (Lloyds of London) originated the first control of well coverage for companies operating in the US Gulf of Mexico. Over the years the coverage has expanded and now includes risks not related solely to blowouts or offshore operations such as legal or contractual liability for damage to third party equipment in the care custody and control of the oil and gas operator.
All 3 descriptions relate to the same type of policy.
No, every underwriter seems to use a unique wording
The definition of “well out of control” is the most significant provision in every well control policy. Most other coverage extensions will only provide indemnity following a covered well out of control. The simplest definition is usually the best and states a well is out of control “when there is a continuous unintended, uncontrolled flow of drilling fluid, oil, gas and/or water from the well, above or below the surface of the ground or waterbottom or when it is declared to be out of control by the appropriate regulatory authority”.
Many forms do not automatically provide underground blowout coverage and require an endorsement, which often incorporates another definition requiring a flow from one zone below the surface to another zone through the wellbore.
Some forms give coverage for removal of wreck and debris in addition to cost of control and oilfield fire fighting expenses. Depending on the form coverage for removal of wreck may be limited to owned property or it may include coverage for third party property.
Most control of well forms do not provide any coverage for certain types of flows such as a “loss of circulation” or a “kick”. These are considered expected events common to drilling operations and either specifically excluded or excluded within the definition of a well out of control.
Redrilling and Restoration Expenses are provided following a loss insured under the control of well definition or resulting from an oilfield fire. In addition there is coverage (either in the form or by endorsement) for “Extended Redrill “. This provides coverage for loss or damage to the well resulting from events other than a well out of control but usually only following stated named perils. These perils usually involve fire and extended coverage perils but can include earthquake (if earthquake is not excluded in the control of well section), collision with vessels, flood, strikes and riots, etc. Some forms also include coverage for loss or damage resulting from a “crater”.
Some forms specifically exclude redrill/restoration if a well has been safely diverted to production or if the well can be completed through a relief well or through drillstem left in the hole. Most forms do not limit redrill expenses to the cost of the original well. Almost all forms will not cover improvements and betterments (i.e. upgrades in the redrill well plan which were not part of the original plan). Most forms also exclude redrill if a well was plugged and abandoned prior to becoming a well out of control.
Seepage and pollution/Cleanup and Containment expenses are generally provided only following a well out of control above the surface. Many forms also include a discovery and reporting provision.
All wordings include first party coverage for cleanup and containment costs as well as legal and contractual liability (including defense costs) for damages to property or persons. Most exclude punitive and exemplary damages. Directors, officers and employees are generally included as additional insureds as respects liability claims.