INDECS – INSIGHT 8

Earlier in the year in Insight 7, INDECS shared details of proposals that would see the requirement (as part of the application for a drilling consent) for operators to demonstrate that they and their partners have the financial capability to address the potential cost of well control pollution remediation and compensation in the event of a well control incident.

We can now advise that for any such wells to be drilled after 1st January 2013, such companies must evidence that they have properly estimated the potential consequences of such an event according to the methods set out in the published guidelines.

The guidelines propose methods to assess two elements of this exposure:

1. The cost of bringing a well under control following a blowout; and
2. The cost of remedial measures and payments of compensation to third parties for pollution damage.

The figures for each element are aggregated to produce the minimum amount of financial capability to be demonstrated to DECC (Department of Energy & Climate Change). It is stressed that this does not in any way limit the liability of the operator and its partners in any way.

The operator can either provide financial evidence for the joint venture as a whole, or collate individual evidence from its partners and deliver to DECC.

Calculating Cost of Well Control

DECC now requires the operator to consider in its Oil Pollution Emergency Plan (OPEP) the use of a capping device (if appropriate) and to “be suitably prepared to drill a relief well”. The intention of the Guidelines is to provide a methodology which can be applied consistently across the industry to estimate the costs of a capping device and relief well drilling.

There is an important exemption to the requirement to do this for any wells which would not flow without some form ofartificial lift even if the well integrity was compromised.

A guide for the cost of drilling a relief well entitled Guidelines on relief well planning – subsea wells can be obtained from http://www.oilandgasuk.co.uk/publications/

We understand that where the relief well can be classed as “Basic” it is appropriate to consider a limit of 2 times the original Exploration & Appraisal well budget AFE plus US$ 40 million for the deployment of a capping device. For a “Complex” well a separate calculation for the cost of a Relief Well must be used.

The guidelines on relief well planning includes a section entitled “Relief Well Complexity Assessment” that determines which classification the subsea well falls under. This outlines the data required and the availability of critical well equipment that must be considered. Once obtained an assessment of the relief well planning should be conducted, “using the operator’s existing assessment process”. There follows detailed design guidelines for both basic and complex relief wells.

It will be interesting to see whether this process is well understood (and consistent across the industry) by those furnishing financial responsibility documentation to DECC.

Calculating Cost of Remedial Measures and Compensation for Pollution

There are a number of categories of well for which the calculation for remedial measures and compensation is not necessary – in these cases the likelihood of any pollution is extremely remote and costs are highly unlikely to exceed US $250m. For these wells it is considered that the existing financial responsibility demonstrated by the operator to OPOL (currently USD250m) will be sufficient to address the pollution impact of any incident. This exempt category includes:

• Gas wells;
• Gas condensate wells (other than HP/HT wells);
• Wells which require artificial lift to flow.

Methods of demonstrating Financial Responsibility

There are five different options permitted:

1. Reliance on credit/financial strength rating
   (not less than “BBB-” from Standard & Poor’s; not less than “B+/bbb”, from A.M. Best; not less than “Baa3” from Moody’ s; not less than “BBB-” from Fitch (“Investment Grade”);
2. Insurance (including from a captive)
   The insurer(s) should be authorised by the Financial Services Authority, be exempt from authorisation in the UK or be subject to an equivalent level of regulation for the purposes of the Solvency II Directive. The credit rating of the insurer must be Investment Grade;
3. Parent company/affiliate guarantee
   The credit rating of the Parent company/affiliate must be Investment Grade;
4. Any combination of a) to c);
5. Any other means considered acceptable to DECC.

Where Insurance is used

There is the understanding that many companies may cover the above risks in an Operators Extra Expense (O.E.E.) policy which has a combined single limit over a number of heads of claim, including redrill. Similarly there is recognition that the policy may have a Combined Single Limit for property damage (i.e. OIL). The guidelines state that,

“Provided that the limit is equal to or greater than the level of FR [Financial Responsibility] suggested under these Guidelines (taking account of any ring-fenced OPOL coverage) there should be no requirement for the insurance coverage required under these Guidelines to be ring-fenced from other risks or for UKCS coverage to be ring-fenced from coverage for other areas of operation.”

The insurance should cover the entire duration of the drilling activity. If the insurance is an annual policy which expires during the drilling period then it should be renewed or replaced. There appears no automatic requirement to provide updated information. Deductibles should not exceed US $10 million for any interest.   Verification of Insurance certificates are required to be signed by the insurer or broker in a prescribed form.

The third party verification requirement has been removed from the industry Guidelines, and a requirement for assurance to be provided at the appropriate level within the licensee companies will be part of DECC’s Guidance Note. This is likely to take the form of a Board resolution which gives two Directors the authority to sign the certificates on behalf of the company. At the time of writing we are not entirely sure how this will work.

Useful Links

Full details of how to meet the new financial responsibility can be found on the Oil & Gas UK and DECC websites:

http://www.oilandgasuk.co.uk/knowledgecentre/Key_issues.cfm#insurance
http://og.decc.gov.uk/en/olgs/cms/environment/leg_guidance/frc/frc.aspx

The Way Forward

We understand that once adopted for exploration and appraisal wells, the plan would be to introduce similar financial responsibility guidelines for ALL wells.

INDECS will keep monitoring the situation closely, with particular interest in the lead time necessary to evidence coverage before wells are spud.