From the Oil and Gas Lease Operator’s Perspective

Upstream Energy Contracts and Insurable Risks

vC O N T E N T S

Contracts and Risk Management

Contractors and Risk Allocation

Anti Indemnity Statutes

Insurance Obligations of Operators

Customary Operator Insurance Coverage

JOAs and Issues for co-venturers

The upstream industry’s first

line of defense against third

party claims is contracts

• Mineral Leases

• Joint Operating agreements

• IADC Drilling contracts

• Horizontal Drilling contracts

Typical Operator Contracts

• Completion Services contracts

• Master Service agreements (lease maintenance and well service)

• Waste haulers agreements

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.

Advantage

• Certainty of coverage and limits.

Disadvantages

• CGL notice of loss provisions in insurance

policies create potential for uninsured

losses.

• Many non-operator policies are inexpensive

as they assume there is primary operator

coverage.

• Could be a claim problem if you are not

clear with the insurance broker that there is

no primary coverage.

Rejecting operator provided GL insurance – for the non-operator

• Make sure the definition of insured contract

includes liability for BI or PD assumed

under a JOA.

• Well control insurance is not as

problematic as limits on all well control

policies are scaled to the insured’s interest.

• 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.

Rejecting operator provided insurance – for the operator

Operator contracts with service providers

Drillers ConsultantsWell 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

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, fracreturns, 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.

General Liability Insurance

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.

Other Insurance and Specialty Coverages

Other basic coverage

• Auto Liability and physical damage including the same contractual endorsements as on slide 28

• Workers Compensation and employers liability

• Umbrella or Excess Liability with same contractual endorsements as on slide 28

• What is an adequate limit of Liability Insurance?

Special Industry Coverage

• Cost of well Control including crossflow, restoration and redrill and seepage and pollution/cleanup and containment (above ground only)

• Care, Custody and Control endorsement (allocated risks -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

• Adequacy of Limits?

Special Industry Coverage

• Pollution Legal Liability – site and third party; gradual and DIC; retroactive date; population encroachment (Anadarko loss); ground water contamination.

• Property and lease equipment, crude oil in storage tank, gas processing and business interruption

• Specialty down hole tools cover –

• TransPac;

• Contractors “lost in hole limited liability” (mud motors, rotary steerables and MWD/LWD tools)