Munich Re – Control of Well Insurance

20 octobre 2021 Pierre Perrin-Monlouis

The exploration and production of hydrocarbons produces an array of hazardous risks to oil and gas companies. In addition to the obvious risk of the physical loss or damage involving production facilities, the industry has to consider many other additional exposures. These include in particular the risk of blowouts.
Such events can often be dramatic in terms of the financial loss, environmental impact, and reputational damage. Transparent and reliable risk transfer is provided by control of well insurance.

The uncontrolled escape of gas or oil from a well bore occurs when the formation pressure exceeds the hydrostatic pressure provided by the column of drilling fluid, commonly termed “drilling mud”, in the well bore, as described in the account beginning on page 8. If the well cannot be brought under control again, either by means of the surface equipment or by increasing the weight of the drilling mud, a blowout is inevitable. Such a situation is not only immensely hazardous, it can also be extremely expensive.

Blowouts can develop in very different ways. In some cases the well bore collapses below the surface and the flow ceases. Other cases may involve a situation in which the well continues to flow uncontrolled for many months, causing significant pollution and financial loss.

Control of well insurance was developed over 50 years ago in order to provide a clear and dependable risk transfer solution, but the scope of cover has changed considerably in the course of time. Indemnification initially extended only to the costs of responding to a blowout (known as control costs), consisting of costs associated with capping the well, fighting the fire, and possibly drilling a relief well.

It soon became apparent that the financial loss to the oil and gas company was much broader than this. There is the additional cost of re-drilling or restoring a well following a blowout and the possibility of liability for any pollution the blowout may cause. This matrix of potential losses that may be incurred following a blowout is reflected in the additional covers that are available from the market today.

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