Insurance of offshore oil platforms

The first offshore drillings were performed in California in 1896. They are designed from pontoons, a technique used later in the 1930s to reach deeper layers in the Gulf of Mexico and Lake Maracaibo in Venezuela. The first real platform was set up off Louisiana in 1933. It extracts oil five meters deep.

Photo credit: US Gov. / USCG As of the 1960s, the offshore has grown considerably thanks to the developments in technology and to the increasing demand for energy. The technique allowed to exploit seabed further off the coasts and deeper. Today platforms can reach 2000 meters and studies are examining the possibility to access oil fields at 3000m for investments of about 200 billion USD.

The development of the offshore insurance market

Insurance premiums volume per market

The insurance premiums volume for offshore platforms has tripled during the 2000-2009 decade. In 2009, the total turnover amounted to 2.95 billion USD. The Lloyd's of London are the main market for risks placement (61.9%).

Premiums in 2009: 2.95 billion USD
* Includes facultative and proportional reinsurance No data: Nordic region, Russia and Kazakhstan

Distinguishing upstream from downstream

The so-called upstream operations are those dedicated to prospecting crude oil or natural gas. They include oil refining, sale of by-products and the distribution of natural gas. These activities are, therefore, not related to work performed by offshore platforms or other mobile vessels of exploration and production.

Structures performing offshore exploration and production operations (upstream)

Offshore platforms belong to the following categories:

  1. The fixed and floating offshore appliances, offshore storage systems, underwater equipment, offshore pipelines or any other offshore gear in connection with the previously mentioned tools
  2. The mobile offshore drilling units and related gear
  3. Offshore construction and installation projects
  4. Maintenance vessels and energy carriers
  5. Oil and natural gas in transit or in storage

Insurance of offshore drilling platforms

Risks covered

The most common risks which platforms are faced with are:

  • Photo credit: Gatrfanrisks incurred during the construction and transportation on the operating site
  • physical damages (due to collision, bad weather, breakdown, ...)
  • removing debris / wreckage
  • monitoring oil fields
  • general averages
  • the various third party liabilities
  • pollution
  • loss of profit
  • assistance costs

The risks are generally covered by mutual insurance or specialized insurers who, later on, get reinsured on the international markets, mainly in London. It's a tough market because in addition to the technical requirements, the required capacities are important. In view of the sums insured, the capacity limits are used up faster than in the other classes of business.

The insurance contract

Policies covering oil platforms are standard policies that are managed according to risk specificities. Insurers also offer tailor-made solutions.

The coverage of direct physical risks is carried out through the acquisition of a London Standard Drilling Barge Form policy or the so-called London Platform policy. The first one applies to mobile units, the second to fixed platforms. Additional coverage can be underwritten by the Protection and Indemnification Clubs (P&I Clubs).

Both of these policies cover drilling and operating sites including their equipment, tools, accessories, drilling gear, oil rigs, extraction ducts and pipelines, personnel compartments, etc. Subject to the terms and conditions of the policy, all risks of direct physical damage are generally covered. The deductibles, payable by the policyholder, are around 10 million USD.

The London Standard Drilling Barge Form covers mobile units in a defined geographical area. Unless otherwise stated, the unit is not covered outside this area.

The specific clauses and standards

The "knock for knock" clause

Photo credit: USCG / Robert M. ReedThe "knock for knock" clause is an agreement between oil companies and their co-contracting parties, designed for a cross waiver of liability for any damage to their property or equipment and / or their employees even if the material damage is, all or in part, due to negligence of the other. Companies derive two advantages:

  1. The huge capital intensity induced by the oil rigs would quickly ruin the owners / charterers during collisions. This provision adjusts the relationship between the contracting parties.
  2. It reduces risk and therefore the cost of insurance by limiting the number of covers. It allows each party to get insured only for the damage incurred by it or that which it causes to others. The companies pledge to indemnify the other party regardless of the fault and without bringing an action in court. The idea is to reduce legal costs and avoid overlapping of insurance policies.

The limitation of liability also exists for the owner of the platform. Limits on that clause have been defined, though.

Specific standards

Compliance with a number of standards is required by insurers. These provisions ensure compliance with international maritime safety standards.

ISM standards (International Safety Management): widespread in marine insurance, these provisions also apply to service vessels and mobile platforms with more than 500 units of tonnage. This is indeed an international code of safety management which defines the general principles and objectives. IMS standards have been applicable as of July, 1, 2002.

Used with permission from MicrosoftSTCW standards (Convention on Standard of Training, Certification and Watchkeeping for Seafarers): This Convention regulates the qualifications of flight crews at the international level. Adopted in 1978, implemented in 1984 and revised in 1995, it was the first international convention to require a minimum level of education and training for the crew. Applicable only to self-propelled vehicles, these standards have been extended to all offshore mobile drilling and exploration and operating gear.

The MODU code (Mobile Offshore Drilling Units): it is specific to offshore platforms. Adopted in 1989, it requires operators, IMO (International Maritime Organisation), members to comply with the principles set by the 1966 international convention. A revised version is to come into force in 2012. This standard is designed to establish the norms for the construction of mobile drilling machines. However, some provisions of the code allow the recourse to the MODU standards to all mobile oil platforms whose flag States have subscribed to the IMO resolution.

The main types of insurance

The main types of insurance are:

  • Insurance for material damage as defined in both standard policies described above.
  • Loss of profit insurance indemnifies financial losses due to temporary interruption of gas or crude oil supply, following an accidental material damage to the platform.
  • Well control insurance covers the cost incurred during the attempt to control the wellbore following an "explosion". Coverage can include the cost of re-drilling, leaks or pollution resulting in bodily injury or material damage to a third party and the costs of environmental cleanup.
  • General third party liability insurance covers the insured against a claim that the insurer is legally required to pay as a result of a bodily injury or a material damage caused to a third party.
  • Environmental pollution insurance covers the insured in the event of pollution resulting in bodily injury or material damage to a third party and the costs of environmental cleanup following the pollution.
  • Workmen’s compensation insurance indemnifies the insured in the event of an accident causing injury or death of an employee during the performance of his duty.

Coverages offered by the P & I clubs

Photo credit: US Gov. / NOAAOperators or owners of platforms are often forced to resort to non-traditional insurance coverage, underwritten solely by the P&I clubs. Some specialized clubs (Standard Club, G.A.R.D., etc) offer specific insurance for mobile offshore platforms, floating production storage and disposal units. Unlike the policies offered by traditional insurers, these clubs offer their guarantee for a number of listed risks called "Rules" or rules typical of each club provided that the policy holders comply with strict, non-negotiable rules.

The list of guarantees differs from one club to another. The basic covers provided by these clubs are:

  • Collision insurance with a floating structure or object. This guarantee can be given in addition to the hull insurance.
  • Insurance for all risks to staff (from death to the loss of personal effects).
  • Insurance for damages to third party (illness, injury, death, ...).
  • Insurance for pollution-related damages, including fines levied because of this pollution.
  • Insurance for costs incurred to remove or raise the wreck.
  • Insurance for damages and losses regarding assets, including loss of profit and the harm caused by the loss of time.
  • Insurance for the costs related to reports or appraisals.
The risks are generally covered by mutual insurance or specialized insurers who, later on, get reinsured on the international markets, mainly in London. It's a tough market because in addition to the technical requirements, the required capacities are important.

The loss experience of offshore platforms

Photo credit: US Gov. / USCGThe market of offshore energy insurance is volatile. Its results depend largely on the impact of hurricanes. Following a strong hurricane activity in the year 2000 off the coast of California, insurers have adjusted the terms and conditions of contracts. Insurance costs have become such that some oil companies, mainly in the Gulf of Mexico, prefer self-insurance.

Due to the technical complexity, the period between the occurrence of loss and the indemnification can take several years.

The catastrophe of April 20, 2010 that destroyed Deepwater Horizon platform is estimated at over 14 billion USD. Deepwater Horizon was a semi-submersible drilling platform. The thrusters which kept it online over the well made it a platform known as one of dynamic positioning. It could operate up to 2400m deep (3000m deep with modifications). The disaster caused the release of 4.9 million barrels of crude oil (approximately 678 000 t).

The human toll is 11 dead and 17 wounded. The coastline area of Louisiana, Mississippi, Alabama and Florida has been polluted. Deepwater Horizon was built in 2001 in South Korea and belonged to the oil company Transocean. Its crew was made up of 130 people. It was capable of drilling in harsh climatic conditions. It was designed to withstand extreme storms, swells of 25m, peaks and dips with winds of 190 km/h.

Causes and frequency of the claims in % of the number of platforms.
Losses over 1 million USD

Frequency of claims per geographic zone in % of the number of platforms.
Losses over 1 million USD

Source: International Union of Marine Insurance (IUMI)

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