October 9, 2014

The Exploratory and Development Stage – an overview

In conjunction with our “know-how” guides on key aspects of insurance law [see our Claims-Handling checklist], we are publishing short overviews on the types of insurance cover available in the offshore energy market, and outlining some of the common issues that arise. We hope these guides willl be useful both to insurers who are new to the market and contractors/ operators looking for guidance on the types of covers available. Starting at the beginning of the oil and gas production process, we have compiled a quick reference guide on the exploration and development stage.

Despite developments such as managed pressure drilling and improved supervision, drilling is still a risky enterprise and well blowouts can still occur on both onshore and offshore wells. The costs associated with regaining control of such wells can be significant, and at their extreme may even involve bringing in a new rig to drill a ‘relief well’ in order to reduce pressure. Control of Well insurance (also known as Operator’s Extra Expense or OEE) is there to cover these expenses and, in addition, to pay for the cost of restoring or redrilling the well.

Key terms

  • The international industry standard wording for control of well insurance is the Energy Exploration and Development Insurance, known as EED 8/86.
  • The standard EED wording provides cover for:
    • Costs and expenses incurred in regaining control of an out of control well, for example appointing well control experts or mobilising a rig to drill a relief well
    • Costs and expenses incurred in restoring or redrilling such a well after it has been brought under control, typically up to 130% of the cost of drilling the original well
    • The cost of remedial measures that the insured is required to take to address seepage, pollution, clean up and contamination, and any damages and legal costs which the insured is liable to pay in respect of a well becoming out of control (including defence costs).
  •  It should be noted, however, that the EED wording excludes the following:
    • Loss or damage to any drilling or production equipment
    • Loss or damage to any wells or holes
    • Any loss of production or loss or damage to the reservoir
  • A well is defined as being out of control “when there is an unintended flow from the well(s) of drilling fluid, oil, gas or water above the surface of the ground or water bottom…” A kick which is brought under control using normal equipment and which does not result in a flow at surface will not therefore be covered and is treated as an operational expense of drilling the well.
  • A well is deemed to have been brought under control at the time that “the flow giving rise to a claim stops, is stopped or can safely be stopped…”
  • Cover is provided for all the insured’s expenses incurred between the time of those two events attempting to regain control of the well.
  • Under the EED wording, the trigger for a pollution claim is a covered well control incident and the seepage/pollution must directly result from that incident.

Optional extensions of cover

Making wells safe

This endorsement provides cover for actual costs and expenses incurred by the assured in preventing the occurrence of a loss covered in Section A when the drilling rig or surface equipment’s position over the well has been lost or damaged by certain named perils, which include lightning, fire, explosion and windstorm. An example may be if a drill ship is pushed off station by a windstorm, causing damage to the well head.

Underground control of well

As noted above, the standard Control of Well cover only responds to a blowout which emerges at the surface. This endorsement extends Control of Well cover to underground blowouts, which are defined as “unintended subsurface flow of oil, gas, water and/or other fluid from one subsurface zone to another subsurface zone via the bore of a well insured hereunder.”

Frequent issues

Due diligence

The EED wording expressly excludes claims where the assured has failed to exercise due care and diligence, either in the conduct of their operations generally or when a hazardous condition arises. A failure of due diligence requires more than mere negligence of the drilling crew, which is a covered peril, but rather a deliberate or systemic failing which is attributable to the company as a whole.