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Basics of Well Control Insurance

What is a well out of control?

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.

Do insurance policies covering damage to property and general liability also cover control of well expenses?

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.

What are “Operators Extra Expense Coverage”, “Cost of Well Control Insurance”and “Energy Exploration and Development Insurance” and how are they different?

All 3 descriptions relate to the same type of policy.

Are all control of well policies the same?

No, every underwriter seems to use a unique wording

What does control of well insurance typically cover?

  • Cost of well control and oil field fire fighting;
  • Well restoration and/or redrilling expenses;
  • Seepage and Pollution cleanup and containment expense;
  • Care, custody and control (usually by endorsement).

What are some of the significant differences in the forms?

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

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

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.

What endorsements are available:

  • Evacuation Expenses following an actual or threatened covered pollution event. This is usually limited to third parties (no coverage for evacuation expense related to the insured’s personnel/property or the personnel/property of the insured’s contractors). Coverage for business interruption or loss of use is usually excluded.
  • Care, Custody and Control covers damage to property of others leased or rented or for which the insured is legally or contractually liable while in transit to or located at an insured well site. Coverage usually excludes in hole equipment unless due to well out of control, fire, windstorm or total loss to drilling or workover rig. Salvage or fishing costs related to in hole equipment are usually provided up to 25 pct of the value of the equipment in hole. Some forms also provide unsound location liability for damage to drilling or workover rigs but generally damage to drilling and workover rigs is specifically excluded. Damages are limited to the depreciated value of equipment lost or damaged. Most forms also exclude loss or damage to equipment if a well is being drilled turnkey.
  • Wells of others which become out of control as a result of an insured well out of control.
  • Unintentional Errors or Omissions in reporting.
  • Making Wells Safe endorsement provides limited coverage for expenses incurred to prevent a well from becoming out of control. Coverage applies following damage to drilling, workover or production equipment by fire and extended perils as well as collision, flood, strikes, civil commotions or malicious damage. Some forms also include the peril of “crater”. Coverage applies if it is necessary to enter a well in order to restore production, continue operations or to plug the well. Coverage ceases at the time the well operations can be resumed or the well is or can be plugged.
  • Farmout Contingent Liability covers the insured’s liability for a control of well loss arising from an exploration lease that has been sub-let to another operator. Typically the insured will not own a working interest but as operator of record they may be liable if the sub-lessee cannot pay for well control expenses.
  • Deliberate Well Firing covers intentional damage resulting from igniting a gas flow from a well when the flow creates a bodily injury of property damage hazard.
  • Contingent Joint Venture liability covers the increased cost of a covered loss due to a co-venturer not being able to fund their portion of a loss.
  • Priority of Payments clause allows the insured to maximize his recovery under the policy by deciding which coverage section will apply and in what order damages will be paid.
  • Plugging and Abandoning expense fills a gap in many policies that do not explicitly provide coverage for these costs.
  • Some underwriters offer “Pay on Behalf of” rather than reimbursement coverage.

Other policy changes that can be/should be negotiated:

  • Earthquake exclusion should be deleted where applicable;
  • Terrorists exclusion should be deleted where applicable;
  • Amend removal of wreck coverage to include property of others;
  • Damage to Casing leading to a well control event.