Well insurance helps oil and gas companies, contractors and investors protect themselves against costs arising from an uncontrolled blowout, equipment damage, an accident during drilling and the need to regain control of a well. The programme is usually designed individually after an engineering assessment of the project.

Key point: there is no standard universal policy for every well. Coverage depends on the stage of work, depth, pressure, geology, equipment, the experience of contractors, the environmental sensitivity of the area and the maximum possible loss.
Contents
  1. Which project stages can be insured
  2. Main coverage sections
  3. What affects the rate and terms
  4. Underwriting documents
  5. Typical exclusions
  6. Cyber risks and automation


Well insurance

WHY IS INSURANCE NEEDED?
To compensate your possible losses if a well goes out of control and to have funds to regain control of the well


TYPE (CLASS OF INSURANCE)

VOLUNTARY INSURANCE OF OIL OPERATIONS / DRILLING WORKS
WELL OUT OF CONTROL

INSURER:

The insurance company of your choice


POLICYHOLDER (WHO CAN ACT AS POLICYHOLDER):

You, as a legal entity with an interest in the preservation of property that is the subject of drilling works or is used to carry out drilling and remedial works on wells.
The policyholder may be:
• an oil company;
• the Customer;
• a Contractor;
• a subcontractor.


BENEFICIARY:

A legal entity that is the recipient of the insurance payment if an insured event occurs.


WHAT IS INSURED (OBJECT OF INSURANCE)

Oil, gas, geothermal, water and other wells on which:
1) Drilling, deepening, servicing, repair, restoration or preparation for the start of production is carried out;
2) Oil, natural gas or other liquid or gaseous minerals are being produced;
3) Production of oil, natural gas or other minerals has been temporarily halted for any reason, and the well has been plugged or otherwise suspended;
4) Production of oil, natural gas or other liquid or gaseous minerals has ceased after the depletion of the oil- or gas-bearing layers feeding the well.
Drilling or other equipment provided to the Policyholder by the customer or another owner, or transferred to the Policyholder under lease, hire or leasing contracts and used on the insured wells, including drill or casing pipes, drill bits and other field equipment, may also be insured, provided that the Policyholder is obliged to compensate damage to such property under the law or under such lease, hire or leasing contracts;
At the same time, the necessary and reasonably incurred costs of salvaging the insured property, including downhole equipment (if the latter is subject to insurance), may be insured if an event occurs, or threatens to occur, that gives rise to the Insurer's obligation to make an insurance payment.

To conclude an Insurance Contract, a questionnaire must be completed.

WHEN IS A WELL CONSIDERED TO BE OUT OF CONTROL?

A well is considered to be out of control if a flow of drilling mud, oil, gas or water suddenly arises, coming out of the wellhead onto the surface of the ground, the seabed or the bottom of other bodies of water, and if:
Such a flow cannot be quickly enough
- stopped by using the preventers or other blowout prevention equipment located at the field, which is intended to prevent blowouts and which, taking into account the conditions of the drilling works, must be present at the field;
- stopped by increasing the weight or pressure of the drilling mud column or by filling the well with other similar materials, or
- used for the production of the relevant minerals without danger to the field, to any property or to human life, or if
The occurrence of such a flow would cause the relevant well to be declared out of control by the state mining supervision authorities or other official bodies vested with the relevant powers by law.

WHEN IS CONTROL OF THE WELL RESTORED?

Control of a well that has gone out of control is considered restored if:
1. The flow of liquid or gas that caused the well to go out of control ceases, is stopped or can be stopped without danger to the field, to any property or to human life by using the relevant equipment located at the field;
2. Drilling, deepening, development or repair of wells, or other works of a similar nature, carried out immediately before the insured event, have been resumed or can be resumed immediately.
3. The insured well has been returned to the condition in which it was immediately before the insured event, that is, if production of oil, gas or other minerals has been restored on a production well, or a suspended well has been suspended again, etc.;
4. The flow of oil or gas that caused the well to go out of control can be used, without danger to the field, other property or human life, for the production of the relevant minerals.
5. Control is considered restored from the
moment of the relevant statement by the state
mining supervision authorities
or other official bodies vested
with the relevant powers by law.


TERMS OF INSURANCE
(INSURED RISKS)

An insurance risk is a presumed event against which the insurance contract is concluded.
An insured event is a sudden and unforeseen external impact on the insured wells and other objects of insurance, resulting in the well going out of control, a fire or another hazard that leads to damage to or loss (destruction) of wells and other insured property and gives rise to the Insurer's obligation to make an insurance payment.
The Insurer reimburses the costs incurred by the Policyholder:
• In connection with regaining control, or attempts to regain control, of insured wells that have previously gone out of control,
• When extinguishing, or attempting to extinguish, a fire on an insured well burning above the surface of the land or the seabed,
• When extinguishing, or attempting to extinguish, a fire on other wells caused by the insured well going out of control,
• When extinguishing, or attempting to extinguish, any other fire that has arisen at the field and poses a threat of the insured well going out of control or catching fire,

The following may also be reimbursed:
• The costs of redrilling or restoring insured wells or any section of them, if the damage to or destruction (loss) of the well was caused by:
• The well going out of control;
• Damage to drilling or workover equipment or drilling platforms as a result of:
- an explosion above the surface of the ground or the seabed;
- lightning;
- collision with land, water or air transport;
- storm or hurricane;
- flood;
- collapse of a derrick, drilling rig or crane;
- earthquake, volcanic activity or tsunami (however, only if the insurance contract provides cover against these hazards).
• Breakage or jamming of drilling tools.
The costs incurred by the Policyholder in connection with regaining control, or attempting to regain control, of a sudden and unexpected underground flow of oil, gas, water or other fluid moving along the bore of the insured well from one underground reservoir to another (underground blowout).

EXCLUSIONS

The following are not recognized as insured events: events resulting from:
• War and hostilities of any kind and their consequences, whether or not such war is declared;
• The use of nuclear energy in any form and the consequences of such use;
• Civil war, armed uprising, riot, the actions of armed insurgents or terrorists, and the actions of the authorities aimed at suppressing them;
• Confiscation, requisition, seizure, destruction or damage of property by order of military or civil authorities or other actions of administrative bodies;
• Intent of the Policyholder, the Beneficiary, their senior employees or representatives, and persons who acted, even if in their own name, with the knowledge and in the interests of the Policyholder or the Beneficiary, as well as the violation by any of these persons of the established rules for handling the insured property;
Note: the Policyholder, the Beneficiary, or their senior employee or representative is considered to have acted intentionally if he was aware of the danger of his actions (or omissions), foresaw the possibility of the insured event occurring, and consciously allowed it to occur or was indifferent to it;
• Detonation or explosion caused by the use or storage of explosives;
• The imposition on the Policyholder, its subcontractors or persons working for it of fines, penalties, forfeits or other punitive sanctions in monetary form under the legislation in force or under any contract;
• Downtime, temporary inability to use the insured property and other indirect losses caused in particular by delay in the supply of products or untimely delivery, interruption of production, failure to meet drilling deadlines or late commissioning of wells, reduced well productivity or a drop in flow rate or in pressure in the oil- or gas-bearing formation, inability to use the insured wells or other similar reasons, even if such indirect losses were caused by an insured event;
• Environmental pollution;
• Causing harm to the health or property of third parties;
• Carrying out work to regain control, or attempts to regain control, of an insured well if it was declared out of control by order of the state mining supervision authorities or other official bodies vested with the relevant powers by law;
• Carrying out work outside the territory of insurance;
• Damage to wells, their underground sections or underground equipment;
Unless specifically stipulated in the insurance contract, damage is not compensated if it results from:
• Drilling, repair, servicing, strengthening or deepening of wells, if such work was started and not completed before the start of insurance;
• Theft, unexplained disappearance, shortage or damage discovered during inventory;
• Internal breakdowns, engine explosion or other similar causes;
• Errors in the design, construction or engineering of the equipment.

SUM INSURED

The sum insured under the insurance contract may be set by agreement of the parties as an overall (annual) limit of liability for damage covered by the insurance across all events during the one-year insurance period.
Separate limits of liability may be set for each loss and for each insured well.

DEDUCTIBLE (WHAT IT IS, TYPES)

A deductible is the Policyholder's own participation in the loss, releasing the insurer from compensating losses that do not exceed a certain amount;
Why it is needed — the Policyholder should have an interest in the insured event not occurring;
2 types of deductible:
n Unconditional or deductible
n Conditional or non-deductible.
With an unconditional deductible, the insurance payment is made net of the established deductible.

INSURANCE PAYMENTS AND CLAIMS SETTLEMENT

To receive an insurance payment you need to do the following:

1) report the insured event promptly (as a rule, within 3 working days) in any way convenient to you (telephone, SMS, e-mail, fax, etc.);
2) contact the competent authorities and services;
3) minimize the consequences of the insured event and take all possible measures to reduce the damage;
4) collect the documents specified in the Insurance Contract for receiving the payment and submit them to the insurance company.

INSURANCE PREMIUM

The insurance premium is the sum of money you pay to the Insurer for the latter's undertaking to make an insurance payment in the amount defined by the Insurance Contract.

Insurance premium = sum insured * insurance rate

INSURANCE RATE (HOW IS IT DETERMINED?)

The insurance rate depends on:
• the type of well;
• the depth of the well (at the start of drilling, design depth);
• the number of wells;
• the value of the wells or the limit of liability;
• natural or climatic factors that increase the level of risk (increased seismicity, danger of volcanic eruption, flood danger, etc.);
• the type of soil;
• the characteristics of the well;
• the method of drilling the well;
• the qualification level of the workers, etc.;


PLEASE NOTE (OUR RECOMMENDATIONS)

1) when completing the questionnaire, try to give your insurance broker information that is as accurate and truthful as possible;
2) before concluding the insurance contract, study the Contract itself and the Insurance Rules, and if you have questions, ask your insurance broker to explain any clause that is not clear to you.

Which project stages can be insured

  • site preparation and mobilization of equipment;
  • exploration and production drilling;
  • well testing and completion;
  • repair, workover and stimulation;
  • operation and maintenance;
  • suspension and abandonment;
  • transportation of specialized equipment and materials.

The risks differ at each stage. During drilling, the key risks may be a blowout and loss of circulation; during operation, equipment damage and interruption; and during abandonment, integrity control and environmental obligations.

Main coverage sections

Well control

Reasonable and necessary costs of regaining control of the well after an event provided for in the contract are covered. The definition of "well out of control", the moment costs start and end, the involvement of a specialized service and the limit are important.

Redrilling and restoration

The programme may reimburse the costs of redrilling or restoration to a specified depth and condition. The calculation method, deductible, exclusions for technological failure and the limit of liability must be agreed in advance.

Clean-up and pollution

The environmental section may include the costs of containing and cleaning up sudden pollution. Gradual pollution, known defects, fines and obligations for ordinary environmental maintenance are often excluded or insured separately.

Property and equipment

The drilling rig, wellhead equipment (Christmas tree), downhole equipment, tubular strings and other property can be insured under a separate section. Clarify the restoration cost, wear and tear, the territory and cover for equipment underground.

Liability to third parties

Harm to life, health, property and the environment may require a separate liability programme. The limits should correspond to the possible scenario, and not only to the customer's minimum contractual requirement.

What affects the rate and terms

  • the type of well and the stage of work;
  • design and actual depth;
  • pressure, temperature and fluid composition;
  • onshore or offshore location;
  • history of accidents and blowouts;
  • qualifications of the operator and contractors;
  • blowout prevention equipment and the testing programme;
  • proximity of settlements and protected areas;
  • the emergency response plan;
  • limits, deductibles and reinsurance.

Underwriting documents

  1. the drilling programme and well design;
  2. geological and reservoir data;
  3. the blowout prevention equipment diagram;
  4. contracts with the operator and contractors;
  5. an estimate of the maximum possible loss;
  6. incident history and corrective measures;
  7. the response plan and contacts of specialized services;
  8. environmental permits and remediation plans;
  9. equipment value and the redrilling cost estimate.

Typical exclusions

The contract may exclude normal wear and tear, corrosion, known defects, wilful violation of rules, gradual pollution, loss of productivity, failure to reach the design flow rate, ordinary maintenance costs and contractual penalties. The exact list depends on the wording of the policy.

It is especially important to distinguish physical damage from technological failure. If a well has not delivered the expected result without an insured accident, the commercial risk is usually not covered.

Cyber risks and automation

Modern drilling rigs use digital control systems and remote operation. A failure, malicious interference or a data error can affect the safety of operations. A property policy does not always cover a cyber event, so you need to check the exclusions and separate cyber protection.

What to do in an accident

  1. protect people and activate the emergency response plan;
  2. notify the competent authorities and the insurer;
  3. record the parameters, the chronology of decisions and the costs;
  4. engage the agreed well-control specialists;
  5. keep contracts, invoices, logs and technical data;
  6. agree major costs in advance where this is safe and provided for in the policy;
  7. do not admit liability to third parties without legal analysis.

Reinsurance of large risks

The potential loss on a deep or offshore well may exceed the own capacity of a single insurer. The risk is spread through facultative or treaty reinsurance. For the client, it is important that the terms of the direct policy and of the reinsurance protection do not contain critical gaps.

Compulsory and voluntary insurance

Insurance of well control and drilling works usually falls under voluntary cover, but a project may at the same time create obligations under other types of insurance and liability. Services in compulsory types of insurance are provided only by insurance companies holding the relevant licence.

Having a compulsory policy does not replace specialized well cover: the objects, risks and limits may differ significantly.

Checklist before signing

  • do the insured wells and stages match the project;
  • how is "out of control" defined;
  • is redrilling covered;
  • what are the environmental limit and the retroactive date;
  • are contractors and mutual waivers of subrogation taken into account;
  • which costs require prior approval;
  • are the limits sufficient in the worst-case scenario;
  • is there a gap between the property, liability and cyber policies.

In brief

Oil well insurance is effective only with an accurate description of the project and an engineering-based limit. The original article below describes the structure of classic cover in detail; a modern programme additionally takes into account the environment, contractors, cyber risks and business continuity.