Upstream Energy Contracts and Insurable Risks From the Oil and Gas - - PowerPoint PPT Presentation
Upstream Energy Contracts and Insurable Risks From the Oil and Gas Lease Operators Perspective Contracts and Risk Management JOAs and Issues for co-venturers C O N T E N T S Insurance Obligations v of Operators Contractors and Risk
From the Oil and Gas Lease Operator’s Perspective
v
Contracts and Risk Management Contractors and Risk Allocation Anti Indemnity Statutes Insurance Obligations
Customary Operator Insurance Coverage JOAs and Issues for co-venturers
The upstream industry’s first line of defense against third party claims is contracts
maintenance and well service)
Under the AAPL Model Form Operating Agreement the Operator will pay expenses incurred in the development and
proportionate share. (page B17)
The Operator has no liability to the other parties for losses
Uninsured third party damage claims (page B36) – all expenses of handling settling or otherwise discharging such claim or suit shall be a joint expense of the parties.
Under the AAPL Model Form Operating agreement, the only insurance required to be maintained by the operator is workers compensation (page B18). Additional insurance to be provided for the joint account is to be scheduled on Exhibit D. You need to physically review Exhibit D in order to know with certainty what other insurance is to be provided. Unless rejected by the non-operator the cost of insurance is generally billed back through JIB. Some insurance brokers encourage their non-operator clients to reject all operator coverage other than WCA and auto.
Advantage
Disadvantages
policies create potential for uninsured losses.
as they assume there is primary operator coverage.
clear with the insurance broker that there is no primary coverage.
Rejecting operator provided GL insurance – for the non-operator
includes liability for BI or PD assumed under a JOA.
problematic as limits on all well control policies are scaled to the insured’s interest.
not have adequate limits or coverage.
drilling and producing premium on a per well basis and may not credit the rates for providing less than 100% limits.
insurance.
Rejecting operator provided insurance – for the operator
Drillers Consultants Well service companies Horizontal drilling consultants Completion Contractors Waste Haulers
Typically these contracts have risk allocation provisions regarding injuries to people or damage to property that
The allocation is to intended to avoid disputes regarding liability for damages or injuries before a loss - so that the contracting parties can arrange proper insurance coverage for the risk they assume.
The allocation is generally without regard to cause
for loss or damage to a contractor’s downhole tools, they assume responsibility even if they are not in any way negligent or legally liable.
The allocation is usually along the following lines
Operator’s personnel and property
Contractor’s personnel and property
parties) is typically determined based on negligence.
by their employer and insured by exclusive remedy of WCA insurance
be assumed by the Contractor and covered under their CGL (contractual liability)
personnel and if contractor is sophisticated the risk is allocated to and retained by the subcontractor and insured by their WC and GL
determined based on the negligence of the parties
Insuring the allocated property damage risk is more complicated. It is common industry practice for the operator to assume liability for loss or damage to certain contractor’s surface equipment and usually all down hole tools - and the assumption is often without regard to fault
General liability is intended to cover the operator’s legal liability for damage to property of third parties (including contractors property). Legal liability requires negligence or fault on the Operator’s part. Coverage for property damage assumed under contract is limited by definition to the legal liability of another (in this case the contractor) for damage to property of a third party.
Under a GL policy an operator has no coverage when they assume the risk of loss or damage to their contractor’s property in the absence of their own negligence. In addition there are specific exclusions for certain property damage under the standard CGL (CCC) and there are endorsements that could limit coverage for specialty contractors equipment, even if due to negligence of the
For example, most horizontal drilling contractors make the
regardless of cause. So when a rotary steerable assembly with high end electronics is lost in hole, through no fault of the operator, the operator has no coverage under their GL for that allocated risk.
Often completion contractors will attempt to shift liability for damage to their surface equipment to the operator. Sometimes without regards to negligence if the loss is caused by a named peril (like well blowout) or damage due to negligence of the operator.
If you rent or lease a compressor and assume liability for loss
even if you are negligent.
Loss or damage to well site property of specialty contractors (both in hole and above the surface) is better covered under a “Care, Custody and Control” endorsement attached to a Well Control Insurance policy.
Under the CCC Endorsement coverage for loss or damage to contractor’s surface equipment assumed under contract is covered regardless of cause or negligence with very few exclusions. Coverage for down hole tools is limited to a few named perils
damage to surface drilling or service rigs.
costs (well pads and gathering line easements)
returns, drilling mud
(loss of minerals following blowout)
equipment, damage to drilling and service rigs, specialty contractors equipment, and frac spreads)
contractors equipment unless due to your negligence and not subject to the CCC exclusion (not all allocated risks are insured)
JOA is included in the definition of an insured contract
Standard oil industry requirements:
including coverage for the sole negligence of the additional insured (many companies exclude sole negligence) and including completed operations.
in written contracts
contracts
Anti Indemnity Statutes:
So after you have allocated risk and properly inured it, everything can be voided in states where oilfield anti indemnity statutes have been enacted – Texas, New Mexico, Wyoming and Louisiana. In Texas you can get around the statute if the indemnity obligations are supported by insurance and the limits required of both contracting parties are the same.
Anti Indemnity Statutes:
In Louisiana you can enforce Additional Insured status of a contracting party if you comply with the Marcel Endorsement – which requires that the Additional Insured pay a reasonable premium for the AI status. In Wyoming and New Mexico there are in general no exceptions to the statutes.
contractual endorsements as on slide 28
endorsements as on slide 28
redrill and seepage and pollution/cleanup and containment (above ground only)
legal or contractual assumption of property damage - damage to specialty contractors equipment including drilling and workover rigs, frac spreads, limited cover for down hole tools
and DIC; retroactive date; population encroachment (Anadarko loss); ground water contamination.
tank, gas processing and business interruption
motors, rotary steerables and MWD/LWD tools)