Aon’s 11th Energy Insurance Training Seminar Overview of Energy Insurance Euan Nicholson Upstream, Midstream & Downstream Onshore….. Downstream / Midstream Midstream Definition: After initial production until point of sale ( processing, storage, transportation and marketing) Downstream definition: After Production phase until point of sale Where does Offshore end and Onshore begin? • Rig – Tanker – Processor – • Oil is onshore as soon as it leaves the flange of the tanker. Rig – Pipeline – Processor – If the pipeline goes straight from the rig, offshore market can provide cover all the way to the refinery. History of Refining • First ever refineries…. – Jaslo, Austrian Empire (now Poland) in 1854-56 – Small refineries. – Whaling – Kerosene for lamps. The process has become increasingly complex … Onshore Facilities: Types of Plant Types of Non-Marine onshore plants: Refineries Ethylene Plants Aromatics Oil/Gas Stabilisation Oil/Gas Storage Pipelines Transportation Onshore Facilities: Chemical Plants Downstream derivatives: Polyethylene Polypropylene PTA (Pure Terephthalic Acid) MTBE (methyl tert-butyl ether) Synthetic Rubber VCM (Vinyl Chloride Monomer) Why Refine? Crude Oil needs to be processed. Oil Products: – Gas – Naptha – Kerosene (Aviation Fuel) – Light and Heavy Gas Oils – Lubricants – Gasoline – Tar – Coke Why Insure? • Onshore hazards: – Fire – Explosion – Lightning – Aircraft – Storm – Flood – Earthquake – Machinery Breakdown – Sabotage, riots, strikes, civil commotion, malicious damage… – War, terrorism Resulting damage… Big Spring 2008 Resulting damage… Big Spring 2008 Big Spring loss 2008 • • Loss Limit – US$350,000,000 – EML now clearly too low Loss Cost – Vastly in excess of US$350,000,000 Closer to home… • • Coryton Refinery – Partial Loss in October 2007. – Small fire in dehexaniser column. – Affected production but not distribution. Buncefield storage depot, December 2005 – Physical Damage loss. – Damage to surrounding property. – Negligence! Major losses in modern history • • • Flixborough (1974) – 28 killed, 36 injured. – Poor engineering planning. – BIG loss at the time. Phillips 66, Pasedena Chemical Complex (1989) – 23 killed, 130-300 injured. – Including BI, loss over US$1,000,000,000. Toulouse Fertiliser Plant (2001) – 29 killed, 700 injured. – Including BI, loss over US$1,000,000,000 All VAPOUR CLOUD EXPLOSIONS Insurance • • The pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected to the risk So it is the transfer of loss and sharing of losses with others – Risk Transfer Key Features of Insurance Contracts • • Indemnification Valuation of Insured Losses – – – – Replacement Cost Actual Cash Value (ACV) Agreed-upon Value Deductibles Physical Damage & Business Interruption • Covers: ~ • All Physical onshore assets, including: – Refinery – Pipelines – Jetty – Storage tanks – Vehicles – Unprocessed Oil and its products Premium setting: ~ Insurers will apply a rate to the sum insured to reach the premium. Long term consequences Shareholder dissatisfaction Lender dissatisfaction Loss of continuity of market Potential for sale & take-over of the business Deferral of expansions Upstream: Exploration & Production Offshore Production and Drilling Platforms Concrete gravity based structure Tension Leg Platform • Relies on weight to keep stable • Deepwater • Made of steel and concrete • Tension legs permanently moored to seabed • Up to 300m jacket height SPAR • Hull is a buoyant structure • Deepwater • Oil storage in hull Conventional Platform • Mooring lines connect platform to seabed • Steel jacket supporting topsides • Jacket legs piled into seabed • Shallow – medium depth water Offshore production and drilling platforms cont. FPSO (Floating Production Storage Offloading) • Deepwater or isolated areas • Low cost option • Ability to weather vane FLNG (Floating Liquefied Natural Gas) • Gives access to stranded gas reserves that cannot be transported to land • Liquefaction process takes place on board • Deepwater and problematic areas can be accessed • LNG takes up less space than natural gas Offshore production and drilling platforms cont. The scale of the industry Increasingly Complex risks Offshore Construction: Different Phases Engineering Testing and Commissioning Installation Procurement Offshore transits Hook-up Fabrication Design Project Management Offshore Construction Deepwater Repair Deepwater Drilling Challenges Life is Risky….