Oil & Gas Coverage Harder to Find; More EXPENSIVE

Crude oil and natural gas exploration and production continue at near record levels and most observers see no let up. White House officials are stumping for a national energy policy that among other things seeks increases in oil drilling and energy production. And earlier this month OPEC voted to take no action to alter production quotas at its meeting in Vienna.

Reflecting the sector’s economic health, the drilling rig count worldwide was 2,430 operating in February, the highest since November 1987, according to Baker Hughes Inc. In Texas during April the rig count stood at 500 compared to 300 the previous April. Nationwide April figures are 1,206 compared to 805.

Texas leads all states in the number of rigs behind Louisiana, which has 224 rigs. Oklahoma has 146. Rig count is considered one of the most reliable measures for oil sector activity and a signal of the confidence for the future of the petroleum business.

Another factor contributing to the increased activity is rising oil prices which are spurring investment in domestic oil fields. Oil companies are expected to increase spending on drilling and exploration by 20 percent to more than $100 billion this year, Salomon Smith Barney has reported.

Most experts also predict that record-high prices from the patch to the gas pumps will hold firm at least into late fall. In the U.S., crude oil for July delivery rose as much as 81 cents, or 2.9 percent, to $28.74 a barrel on the New York Mercantile Exchange. Still, futures markets anticipate Brent crude oil prices will fall by December to around $27 a barrel.

Insurance market tightening
Accompanying the surge in the petroleum sectors is a harsh tightening in the oil and gas insurance sectors, both property and casualty. Producers are reporting a firming in premiums of from 10 to 30 percent. Some, in fact, advise that certain classes are almost impossible to place.

“Coverage for drillers is uncommonly hard to find,” said Ron McElyea, president of Western Surplus Lines Agency Inc., Abilene. “Underwriters are taking a hard look at the level of experience, age of the equipment, and the depth and breadth of the operation in putting together the policies for drillers,” McElyea said in explaining part of the reason for the difficulty.

He added that he believes drilling activity is about triple its level only a year ago.

McElyea also said that some of the forms are now more restrictive with increased endorsements being required for what had been standard features of the policy. “We are seeing endorsements required for risks to underground resources and more limited pollution cover,” he said. “Clean-up costs are now nearly always excluded,” he added.

Echoing McElyea’s sentiment is Anthony Koppel of Burnett & Company, who said he has never seen a market driven to such a hard state by what he termed “excess losses.”

“It is very tough to place business right now and that has changed in only the last six months or so,” he said, adding there are more blowouts and bad holes. “There are more losses associated with drilling,” Koppel said.

Gene Goodridge, worldwide energy manager of Chubb’s Dallas-based energy resources unit, reports also that premiums are up and will likely trend that way for now. “It is a severity issue,” he said, referring to the market today. Chubb, an admitted market, has raised prices some 20 percent, he said. Most admitted carriers, however, do not report substantial restrictions as may be found in the surplus lines sectors.

In addition to the hardening market, the market profile is also changing. There are fewer markets now writing oil and gas. “In fact some have bowed out altogether,” said McElyea. He said he is aware of some agents who have had to go the non-renew route when they discovered that once available markets had dried up.

And if they haven’t withdrawn, the premiums have increased markedly. “I know of one instance where there was a policy that included six contracts last year for about $100,000 per contract. When that came up for renewal this year, there were five contracts, but the cost had gone to $300,000 each.”

Goodridge believes a nearly 200 percent increase in medical costs coupled with steep increases in legal costs are diving the market. “An insurer’s duty to defend an entire lawsuit for a client when any of the allegations is covered by a policy is taking its toll,” he said.

As a part of the market transition the mix of premium is also changing. Currently more than half of the premium in the line comes from premiums in the under $100,000 per policy range. Only about 15 percent of the premium size is from the over $100,000 level. “That will likely change before long as the result of the hard market becomes clear,” advised McElyea.

Cover for oil spills
With control of well coverage and other forms addressing situations where oil goes out of control transitioning, the prospect of such coverage is becoming more challenging. Nevertheless, it remains a necessary part of the total protection.

On average, the U.S. uses over 6 billion barrels of oil and petroleum products each year. (A barrel is equal to 42 US gallons.) To meet this demand, each year the U.S. produces an average of 3 billion barrels of crude oil and imports an average of 2.7 billion barrels of crude oil and other petroleum products.

The Oil and Gas Division of the Texas Railroad Commission regulates the exploration, production and transportation of of oil and natural gas in the state. Its statutory role is to prevent waste of the state’s natural resources, top protect the rights of various interest owners, to prevent pollution and to provide safety in matter such as hydrogen sulfide.

The RRC is responsible for all of the state’s 234,400 active oil and gas wells plus some 53,000 oil filed injection and disposal wells. Since the drilling of the state’s first commercial well in 1894, there have been over 68,700 oil and gas fields discovered of which almost 30,000 are still active. Currently the state produces some 1.2 million barrels of crude oil a day and some 12.7 billion cubic feet of gas well.

With billions of barrels of oil transported and stored throughout the country, the potential for an oil spill is significant, and the effects of spilled oil can pose serious threats to the environment.

Some 675 barrels of oil spilled on land in Texas in 2000, according to the Texas Railroad Commission, which has jurisdiction over such spills in the state. Texas spills in 1999 were 820 barrels and in 1998, 863 barrels. Any spill in excess of five barrels must be reported to the RRC. Offshore spills greater than 240 barrels or more than three leagues (about 10 miles) from a barrier island must be reported to the General Land Office.

Worldwide, approximately 766,000 barrels of oil spilled into marine and inland environments as the result of 257 incidents where greater than 238 barrels were spilled during 1999, according to a report from the Oil Spill Intelligence Report..

Pollution coverages for the oil and gas industry commonly address “sudden and accidental” pollution. While such coverage has not been uncommon in endorsement form, recent activity suggests that such endorsements are becoming more restrictive if they are available at all, according to McElyea.

“Today we’re finding that you have to buy pollution and control of well coverage separately,” said McElyea. “Most forms no longer include this coverage and Lloyds is about the only market left,” he added.

And premiums for clean-up coverage have gone up as much as 55 percent in some cases over the same coverage last year, McElyea commented.

Chubb offers its pollution coverage under a separate policy. “We do address the clean-up aspect, of course,” said Goodridge, “but steer away from the bigger threats such as blowout. Chubb has a special unit to handle the clean-up. We want to remove the health hazards as quickly as possible,” he said.

Once the spill has been contained, the next step is remediation. Then follows working with the regulatory agency that has jurisdiction for the spill. Koppel said his experience is that third party liability is the most challenging arena for putting together proper coverage. “This is where ‘sudden and accidental’ becomes a gray area,” he said.

“Pollution coverage often varies most among the host of specialty coverages,” according to Marcus Jensvold, president of M.D. Jensvold & Co., a Houston-based MGA. “Included can be such items as time frame for discovering a loss; time frame for reporting; deductibles; whether coverage extends to clean-up costs, over-water operations, underground water pollution and saltwater disposal wells; and whether the form is for any-occurrence or named perils.

Generally the owner-operator of the well is responsible for the damages resulting from uncontrolled oil; although, liability can shift under different contracts, according to Jensvold. Standard contracts in use (daywork, footage, turnkey and master service) can be obtained from the International Association of Drilling Contractors. The IADC also has training materials for specific operations.

Other coverage provisions can address issues such as cost overruns for remediation of a specific project which can arise from discovery of additional amounts of contamination, newly discovered contamination or changes in regulatory requirements. Typically not covered are bodily injury, property damage or other liability claims, legal defense costs and government negotiations. Often a self-insured buffer is included as a part of the estimate of clean-up costs. Coverage ends when cleanup is complete, unless further coverage is included for unknown pollution as a result of negotiating such a provision

Experts caution that success will only follow a proper understanding of environmental coverage which requires the combination of a solid knowledge of the environment liabilities affecting the property or business as well as the law of environmental insurance. Two clear steps to successfully providing oil and gas pollution coverage are: 1. to correctly identify the potential sources of loss and the insurable interests in the transaction, and 2. to match or negotiate the available coverage with the anticipated loss exposure and the insurable interests.

Exposures are rarely ever similar given the number of factors that may contribute to the risks. Sometimes the policy may not cover the risks that the policyholder or others with a business or other interest may expect. All agreements, exclusions, definitions and conditions need to be carefully reviewed and analyzed.

Topics USA Texas Excess Surplus Energy Oil Gas Pollution Chubb