Oil and Gas
Navigating a High-Risk Environment
By: Brock Nettleton, CIC, CRM – Business Risk Advisor
Operating in the oil and gas industry means navigating a challenging and high-risk environment. Comprehensive insurance coverage is essential to protect against the unique exposures that can lead to significant financial and operational impacts. In this article, we will explore the inherent risks of the oil and gas industry and delve into the specialized insurance coverages that extend beyond the standard general liability policy.
1. EXPLOSION & COLLAPSE HAZARD:
A. Explosion Hazard – Explosions can occur due to equipment malfunctions, blasting, or unexpected ruptures. The presence of flammable materials and high-pressure systems increases the risk of explosions, which can lead to significant property damage and loss of life.
B. Structural Collapse Hazard – Structural collapses involve the unexpected failure or collapse of a structure. This is particularly relevant where heavy machinery and infrastructure are common. A collapse can result in extensive damage to facilities and pose serious safety hazards to workers.
C. Claim Example – During the construction of a new pipeline, an explosion occurs due to a gas leak, causing a section of the pipeline to collapse. The incident results in significant environmental damage and disrupts the construction schedule. XCU coverage would help cover the costs of environmental cleanup, repairs to the collapsed section of the pipeline, and any additional expenses incurred due to the construction delays.
2. UNDERGROUND RESOURCES & EQUIPMENT HAZARD
Damage to underground resources, including oil, gas, water, and mineral substances, can have severe environmental consequences, such as contamination of water tables. Below are additional components to this exposure beyond underground resources.
A. Exploration of Production Areas – This includes any well, hole, formation, strata, or area where exploration or production of substances is conducted.
B. Drilling and Well Servicing Equipment – Damage can occur to equipment used in drilling and extraction processes, including but not limited to the casing, pipe, bits, tools, pump, or other machinery.
C. Claim Example – A well servicing contractor is performing maintenance on an oil well. During the operation, a piece of equipment malfunctions, causing a rupture in the well casing. This rupture leads to the contamination of an underground aquifer, affecting the local water supply. Underground Resources and Equipment coverage would help cover the costs associated with repairing the well casing, addressing the contamination of the aquifer and restoration of the water quality, and handling any legal liabilities arising from the contamination of the water supply
3. BLOWOUT & CRATERING HAZARD (CONTROL OF WELL COVERAGE)
A. Blowouts – A blowout is the uncontrolled eruption of oil, gas, water, or drilling fluid from a well. These incidents can occur when high-pressure reservoirs are penetrated, leading to significant damage and potential fires. Blowout coverage helps manage the costs associated with controlling the blowout, repairing the well, and addressing any resulting pollution.
B. Cratering – This hazard involves the creation of a bowl-shaped depression in the Earth’s surface around the well caused by the erosive and eruptive action of oil, gas, air, or water flowing to the surface without restriction from the well.
C. Claim Example – During a drilling operation, the bit unexpectedly hits a high-pressure gas pocket. This causes a blowout, resulting in significant damage to the wellbore and surrounding formations. The blowout also damages the drilling equipment. Blowout & Cratering (Control of Well) has four coverage parts that would indemnify the contractor in this scenario:
i. Cost of Well Control: Actual costs to regain control of the well and/or firefighting expenses from a well.
ii. Restoration or Redrill Expense: Repairing the well via redrilling, recompleting, fishing, or salvage operations.
iii. Pollution Cleanup: Seepage, pollution/cleanup, and containment expenses are provided in addition to legal and contractual liability (including defense costs) for damages to the property of others or bodily injury.
iv. Damage to Specialty Contractors Equipment: (Care, Custody & Control): Covers damage to property of others leased or rented or for which the insured is legally or contractually liable. This includes loss of down-hole tools as a result of an out-of-control well.
4. POLLUTION & ENVIRONMENTAL HAZARD – Property damage arising out of the discharge, dispersal, release, or escape of natural gas, oil, or other petroleum substances/derivatives, well drilling, or servicing chemicals, or saline substance into or upon land, the atmosphere, or a water source.
A. Pollutants – Pollutants can be defined as any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes material to be recycled, reconditioned, or reclaimed.
B. Varying Coverage Types – Pollution Liability has various coverage forms, which are often specific to a business’s operations. Common types include Sudden & Accidental (Time Element), Gradual (Claims Made), Contractor’s Pollution, Site Pollution, Underground Tanks, and Transportation Pollution. Note that coverage applicability and discovery/reporting requirements can vary depending on the form and insurance carrier.
C. Claim Example – An acidizing contractor is performing a well stimulation procedure to enhance oil production. During the operation, a malfunction in the acid injection system causes a significant acid spill into the surrounding soil and groundwater. The spill results in extensive environmental damage, contaminating the local water table and affecting nearby agricultural land. Pollution coverage would help cover the costs associated with the environmental cleanup of the acid-contaminated soil and groundwater, any legal claims or fines imposed by regulatory bodies, and any claims made by third parties for property damage or loss of agricultural productivity.
Contractual obligations and regulatory bodies often dictate companies to carry adequate insurance for these hazards. However, the business owner and risk manager should work together to ensure the proper coverage is in place for respective business operations. Having specialized coverage helps mitigate the financial risk of working in the oil and gas industry by ensuring that companies can manage unexpected expenses without jeopardizing their financial stability.
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