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 Operator’s 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 Allocation Anti Indemnity Statutes Customary Operator Insurance Coverage

The upstream industry’s first line of defense against third party claims is contracts

Typical Operator Contracts • • Mineral Leases Completion Services contracts • Master Service agreements (lease • Joint Operating agreements maintenance and well service) • IADC Drilling contracts • Waste haulers agreements • Horizontal Drilling contracts

Joint Operating Agreements and Insurance

Under the AAPL Model Form Operating Agreement the Operator will pay expenses incurred in the development and operation of the Contract Area and charge each party their proportionate share. (page B17)

The Operator has no liability to the other parties for losses or liabilities except from their gross negligence or willful misconduct. (page B15) 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.

Rejecting operator provided GL insurance – for the non-operator Advantage • Certainty of coverage and limits. Disadvantages • • CGL notice of loss provisions in insurance Make sure the definition of insured contract policies create potential for uninsured includes liability for BI or PD assumed losses. under a JOA. • • Many non-operator policies are inexpensive Well control insurance is not as as they assume there is primary operator problematic as limits on all well control policies are scaled to the insured’s interest. coverage. • Could be a claim problem if you are not clear with the insurance broker that there is no primary coverage.

Rejecting operator provided insurance – for the operator • Creates credit risk if the non-operator does not have adequate limits or coverage. • Creates Administrative issues • Creates Notice of loss issues • Many liability insurers charge operated drilling and producing premium on a per well basis and may not credit the rates for providing less than 100% limits. • May increase the cost billed back to the other coventurers taking operator arranged insurance.

Operator contracts with service providers Well service Drillers Consultants companies Horizontal drilling Completion Waste Haulers consultants Contractors

Typically these contracts have risk allocation provisions regarding injuries to people or damage to property that occurs during the performance of the work.

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 or negligence – when an operator assumes liability 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.

Insuring the Allocation of Risk The allocation is usually along the following lines • Operator assumes liability for injury or damage to Operator’s personnel and property • Contractor assumes liability for injury or damage to Contractor’s personnel and property • Injury or damage to other personnel and property (third parties) is typically determined based on negligence.

Insuring the Allocation of Risk – Bodily Injury • Liability for injury to Operator or Contractor personnel is retained by their employer and insured by exclusive remedy of WCA insurance • Suits against Operator by an injured contractor employee are to be assumed by the Contractor and covered under their CGL (contractual liability) • Contractor is usually responsible for injury to their sub-contractor personnel and if contractor is sophisticated the risk is allocated to and retained by the subcontractor and insured by their WC and GL • Injury to other third parties is often not allocated and liability is determined based on the negligence of the parties

Insuring the Allocation of Risk – Property Damage 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 or negligence.

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 operator.

For example, most horizontal drilling contractors make the operator liable for loss or damage to their tools down hole - 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 or damage it will be considered subject to the CCC exclusion 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 - typically loss due to a well control event or following damage to surface drilling or service rigs.

Operator’s General Liability Insurance Requirements

General Liability Insurance • Policy should protect all non-operators as Additional Insured • Policy should cover S&A Pollution liability including first party cleanup costs (well pads and gathering line easements) • Waste disposal operations exclusion should not apply to SWD, frac returns, drilling mud • Watch for seismicity exclusions in Oklahoma and elsewhere • Add coverage for damage to underground resources and equipment (loss of minerals following blowout)

General Liability Insurance • Be aware of the Care, Custody and Control of property exclusions • Avoid specific property exclusions (damage to underground equipment, damage to drilling and service rigs, specialty contractors equipment, and frac spreads) • Remember Contractual liability doesn’t cover damage to your contractors equipment unless due to your negligence and not subject to the CCC exclusion (not all allocated risks are insured) • If non-operated risks of the Named Insured are covered make sure a JOA is included in the definition of an insured contract

General Liability Insurance Standard oil industry requirements: • Add blanket additional insured as required by written contract including coverage for the sole negligence of the additional insured (many companies exclude sole negligence) and including completed operations. • Add primary/non-contributory language for the AI where required in written contracts • Add blanket Waiver of Subrogation as required by written contracts

General Liability Insurance 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.