Overview of Energy Insurance Euan Nicholson

Aon’s 11th Energy Insurance Training Seminar

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

• Relies on weight to keep stable

• Made of steel and concrete

• Up to 300m jacket height

SPAR

• Deepwater

• Oil storage in hull

• Mooring lines connect platform to seabed

Tension Leg Platform

• Deepwater

• Tension legs permanently moored to seabed

• Hull is a buoyant structure

Conventional Platform

• 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

Design

Engineering

Project Management

Testing and Commissioning

Installation

Hook-up

Fabrication

ProcurementOffshore transits

Offshore Construction

Deepwater Repair

Deepwater Drilling Challenges

Life is Risky….