February 8, 2013

The Oil & Gas Industry: A Litigator’s Perspective

Article by Tom Chapman.

The biggest headline incident to befall the offshore energy industry in recent years is without a doubt the Macondo blowout on 20 April 2010. However, that is not to say that the industry has not suffered other large losses, which include the sinking of the Aban Pearl in May 2010 and the FPSO “Gryphon” casualty in Feb 2011 to name but a few.

Thankfully, incidents such as these do not occur every year, but history tells us that as we continue to explore ever deeper and technically challenging, remoter waters, the inherent risks of so doing (and the effects of any incident that might occur) invariably increase which in turn will have an impact on the operators and contractors performing the works, and the insurers insuring them.

FPSOs

The FPSO market is a particular area that is seeing significant expansion. This prosperous area of the energy industry is central to the future of global oil and gas output. Across the world, the majority of easily accessible onshore reserves is already in decline (with the exception of the oil sands such as those in Canada), thus the industry’s focus is moving increasingly towards offshore production. This shift presents an excellent opportunity for the FPSO industry which is likely to drive sales growth for the next decade at least. The FPSO industry is currently dominated by Brazil, Nigeria and China and it is estimated that the following decade will see a growing market share within the developing and emerging markets in Asia and Africa.

Insurance implications for incidents the likes of the “Gryphon” are huge, not to mention the inherent risks in having tankers mooring close to the producing FPSO and the dangers that come with operating in remote and sometimes hostile territories. In addition, even where the insurance coverage aspects are limited, the size of the deductibles (typically US$5m+) are also giving rise to disputes between operators and contractors.

Shale Gas

In addition to the “boom” in FPSOs, recent technological advancements in the onshore energy industry also have the potential to dramatically affect the way it operates. The oil sands and, in particular, the gas shales are significant plays of natural resources which until recently were not commercially viable to produce. The emergence of these plays, brought about by technological developments, has opened a new chapter in the oil and gas exploration and production market which contractors and insurers are keen to exploit.

A by-product of the shale gas advancement is the process of fracking. In short, this involves injecting vast quantities of highly pressurised ”fracking” fluids (water, chemicals, sand etc) into shale formations to free trapped natural gas by causing or expanding pre-existing fractures and permitting the reserves to flow through the well bore up to the surface. According to the US Energy Information Administration, domestic US natural gas production from shale alone is expected to nearly triple over the 25-year period 2010 – 2035, not to mention the recent lifting of the ban for similar E&P to take place on our own shores.

As fracking expands, in the short term we can expect to see more of the spills, blowouts and other types of quickly manifesting incidents that have already materialised. Not to mention the pollution potential both subsurface of aquifers but also on the surface if an incident does occur. Whereas a few years ago there was a lack of insurance capacity for fracking, this is now becoming an area of focus for the offshore energy insurance market and many underwriters are now writing fracking risks. The fracking process poses new challenges both to operators and insurers, who are faced with ever expanding fleets of road-going tankers required to travel to often remote locations, not to mention the inherent dangers in operating with fluids at pressures that if a failure in the equipment were to occur, could have potentially catastrophic consequences for the crew, the equipment and the wells. Moreover, one of the largest exposures is the risk of pollution and energy companies involved with fracking are increasingly reviewing their pollution liability insurance to manage these risks.

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