Around 300 professionals attended the Offshore Energy Insurance Conference held by International law firm Clyde & Co and Lloyds in London.
The event, held at the Grange Tower Bridge Hotel, focused on the global challenges for the London insurance market and oil contractors and operators responding to a major offshore energy disaster, in what proved to be a valuable educational exercise for both the London energy market and the oil & gas sector.
Experts from Clyde & Co's offices around the globe analysed a hypothetical scenario set in five different jurisdictions, highlighting the issues and considerations in each case. The timing of the event could not have been better, with the publication only the day before of the U.S report regarding the causes of the April 20, 2010 Macondo well blowout being published by the Bureau of Ocean Energy Management, Regulation and Enforcement.
Clyde & Co partners Graeme Baird spoke about the scenario taking place in the North Sea, with New York's John Wood analysing the US/Gulf of Mexico, John Whittaker looked at Russia, while Stirling Leech concentrated on Brazil. They were also joined by Allens Arthur Robinson Sydney partner, John Edmond, formerly of Clyde & Co, who spoke about the scenario happening in Australian waters. Clyde and Co's HSE expert, David Leckie gave an overview of the different regulatory requirements around the world.
Clyde & Co, senior partner, Michael Payton, who acted for the London market in relation to the Piper Alpha tragedy, opened the conference with Judy Knights, energy executive performance management directorate at Lloyd's. Michael gave a recap of the impact on the market after the disaster, highlighting Clyde & Co's involvement, and emphasising the role the recommendations from Lord Cullen's Report played in improving safety in the United Kingdom, with all 106 recommendations being adopted. These included, most importantly, the decoupling of health and safety in the industry from the Department of Energy to the Health and Safety Executive due to the obvious conflict of interest.
Clyde & Co head of energy and marine, Nigel Chapman, introduced the scenario stating that it had been "greatly exaggerated to create discussion about the potential loss, liabilities and cross-liabilities that it creates."
The scenario included the semi-submersible drilling rig Little Jewel, drill ship State of the Art 4 and the FPSO Humungous. After a catastrophic failure in her draw works due to operator and software design error, in a rush to move to a new drilling area without retrieving the marine riser, the Little Jewel's derrick collapses and the marine riser and blow-out preventer are released, dropping to the seabed rupturing third party gas resulting in a number of fatalities. The State of the Art 4 is enveloped in a gas stream due to the ruptured gas flow line an explosion occurs. The BOP stack is pulled over resulting in a rupture and uncontrolled flow of oil into the sea.
The fire continues for two days before the State of the Art 4 sinks. Seven crew members are killed in the original explosion, 12 suffer serious burns and two salvage team members drown when the vessel sinks and a substantial amount of oil is released into the environment from the uncompleted well. The FPSO Humungous is forced to move away from the drifting State of the Art 4 before she sinks, and fails to disconnect her risers causing considerable damage.
In his analysis of the international regime, referring to the report just released in the U.S, Clyde & Co partner David Leckie, said: "The regulatory regimes across the globe are fundamentally different and some are deeply flawed. There is often a disconnect between international HSE standards and local law regimes."
He went on to say that the new report: "simply told us what we all knew, that there was a failure by the U.S. authorities to implement the recommendations as set out by Lord Cullen which is remarkable really considering that Occidental, the party at the centre of Piper Alpha, and Lord Cullen's report was from the U.S." adding that "Deep Water Horizon's tragic loss of life need not have occurred."
The main recommendation in the report is that the U.S. regime allowed for the very conflict of interest between industry interests and safety that had been recognised all those years ago in the Cullen Report. This flaw was acknowledged by Clyde & Co New York Partner, John Wood.
Clyde & Co London partner Graeme Baird assessed the impact of the incident in the North Sea, explaining that: "the oil company must have a pre-approved oil pollution emergency plan (OPEP) in place and that prior to any operations a detailed “safety case” must have been agreed and approved by the HSE highlighting potential dangers, consequences and methods of control." He also explained that operators in the UK must demonstrate a capability of being able to pay the OPOL limit of US$250 million as a condition of licensing.
Guests also heard how the regulatory regime in the UK was reviewed by Parliament in 2010 and deemed "fit for purpose".
John Woods, looking at the scenario in the US, said the rules regarding oil pollution were stringent with the responsible party liable for all damages and removal costs as well as possible fines and even prison terms for non compliance.
He said: "State Government involvement would be likely if the incident occurs in state territorial waters and/or if injury or harm may be suffered by the state or the state’s citizens."
John Whittaker, looking at the Russian response said those responsible could face extensive civil claims for death, environmental damage and personal injury, with those in violation of the rules for environmental protection during the performance of operations also facing criminal charges for ecological crimes possibly resulting in up to five years imprisonment.
In Brazilian jurisdiction, which is about to experience huge expansion in this sector, Rio de Janeiro partner, Stirling Leech said: "Liability is usually fault based - subjective liability. However, strict liability - independent of fault -applies in specific cases in law and when the activity, by its nature, involves risk for others. Strict liability applies in cases of product liability, goods or services placed in the market, and in the exploitation of oil and gas."
He added: "Criminal liability is normally based on the fault of the causing agent and can be attributed to an individual or corporate entity. Penalties can include fines, restriction of rights including the suspension of activities, rendering of community services, funding of environmental projects, contributions to environmental and cultural public entities, and incarceration."
John Edmond, partner, Allens Arthur Robinson, spoke about the Australian approach focusing on environmental law, criminal law, and civil law; emphasising the onerous obligations placed on operators by Australian legislation that will attach operators to Australian jurisdiction despite the terms of their contracts, referring to the Quantas v Rolls Royce litigation following the grounding of Quantas airplanes in November 2010 last year.
Jonathan Hess, manager corporate insurance of Hess Services UK Limited gave an interesting insight into how an oil major would respond and what would be expected of insurers.
A detailed panel discussion then took place with industry experts consisting of Robert Dorey, syndicate director, Charles Taylor; Paul Stratton, senior energy and liability claims adjuster, Munich Re; Howard Burnell, energy liability underwriter, Amlin; Adrian Latimer, risk and insurance manager, Schlumberger and Paul Riches, consultant at Longdown Consultants.
Jonathan Hess also sat on the panel and a full and frank exchange took place between the panellists in a lively and entertaining discussion.
Adrian Latimer, risk and insurance manager for Schlumberger questioned whether insurers would cover sub-surface pollution in such a scenario stating that "the most important defence is not insurance but the sanctity of the contract with the operator."
Nigel Chapman displayed a very helpful overall summary of the repercussions in various jurisdictions which showed that it is clear that all the Governments in the jurisdictions concerned would require stringent response plans and be heavily involved in the response. Other issues such as strict or fault based liability varied from place to place, with varying liability limits for pollution, and reliability on exclusion clauses, Australia in particular being a regime where it is difficult to contract out of liability and avoid litigating in Australia.
The conference was a unique experience with so many experts in the industry in close proximity and keen to work together in everyone's best interests.
Nigel Chapman concluded: "Prevention is better than cure and, ultimately, cheaper although it does increase base unit cost. The more challenging the environment, the greater the potentiality, even if the probability is low. That is a question for governments as much as the industry."