Aon’s 11 th Energy Insurance Training Seminar

1. Aon’s 11th Energy Insurance Training Seminar Property Damage – Physical Damage and Business Interruption John Swann and Kevin Knight

2. Why do companies insure their risks?

3. Production Facility Explosion

4. Hurricane

5. Offshore Blowout

6. Onshore Blowout

7. Refinery Explosion

8. Refinery Explosion

9. Pipeline Explosion

10. Insurance • The pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify Insureds for such losses. • So it is the premiums of the many paying the losses of the few.

11. Insurance Legal Principles When a company insures an individual entity, there are basic legal requirements. Several commonly cited legal principles of insurance include: • Indemnity • Insurable interest • Utmost good faith • Contribution • Subrogation • Proximate Cause

12. Insurance Insurability Risk which can be insured by private companies typically share seven common characteristics. • Large number of similar exposure units • Definite Loss • Accidental Loss • Large Loss • Affordable Premium • Calculable Loss • Limited risk of catastrophically large losses

13. Why Insure Operating risks? What drives companies to purchase insurance ? • Size of your company / its Financial Strength • Largest oil companies are bigger than any insurance Co. so often buy insurance as a purely financial transaction. • Medium / Smaller size oil companies benefit from access to capital for specified risks releasing funds for investment / access to finance.

14. Why Insure Operating risks? Risk management philosophy / Impact of loss on the business • Focus on company’s expertise not random hazard loss • Could a single insured event reduce earnings in one year or damage the company’s viability ? • Interdependency vs alternate production / revenue sources What losses are we concerned about? • Aggregate value of all losses small or large?Larger losses only that could damage our revenue / share value?

15. Why insure operating risks? Market opportunity • Is insurance cheaper than retained cost of transferable risks? • Is your insurance philosophy considered integral to business risk management or one of many tools? • A company may buy opportunistically or be a committed long term buyer and have a relationship with Insurers through hard and soft cycles

16. Key Features of Insurance Contracts • Indemnification • Deductibles / Excess / Retention • Valuation of Insured Property • Replacement Cost • Actual Cash Value (ACV) • Agreed-upon Value

17. Physical Damage - Valuation of property Traditional MethodFull replacement value - ‘like for like’ / ‘new for old’ - early years a) Building risk completed value Historic incurred costs b) Agreed value for operating ‘Off the shelf’ value inflation adjusted ‘money of the day’ c) Increased costs of repair or Maximum envisaged replacement (ICRR all risks) repair cost d) Uplifted value (All Risks) Future inflation e) Total loss only interests (TLO) Additional incurred costs well abandonment / pipe re-routing

18. Named Perils or All Risks Named Perils As the words imply underwriters will only pay claims in the event that the claim was caused by a named peril – it is the insured’s responsibility to prove that the claim was covered under a named peril. “All Risks” This is a misnomer as there is in insurance terms no way that underwriters will offer an all risks policy. These have a lot of exclusions and it is the underwriter’s responsibility to prove that a claim was caused by one of the many policy exclusions.

19. Where does Offshore end and Onshore begin? In the Insurance world, Offshore and Onshore don’t mean what they say! • Offshore - Upstream Operations: E&P Production Facilities Drilling Contractor’s Equipment Well Control / Pollution / Redrill • Onshore - Downstream Operations: Refineries Petrochemical Plants LPG Plants Terminals

20. Types of Offshore Structures

21. Definitions of structures • Fixed Platform - Rigid structure fixed in the sea bed • Compliant Tower – Platform capable of “swaying” to absorb sea forces • Sea Star – Mini tension leg platform • Floating Production Systems – Floating tank system used to take oil/gas produced by nearby wells, process it and store it until it is unloaded • Tension Leg Platform – Semi-submersible platform moored vertically to anchor points on the sea bed • Sub Sea System – Well(s) with wellhead(s) set on sea bed • Spar Platform – A very large manned single buoy mooring incorporating oil storage

22. Definitions of structures Jack up Rig Floated to location and raises itself clear of the water by “jacking” itself up its legs. Their stability / load capacity depends on strength / stability of the sea bed.

23. Definitions of structures Process/Receiving Plant -Onshore or Offshore (Semi, FPSO, Spar, TLP etc) Well -valves and well control at Christmas Tree Wellhead(single well or multi slot template) Flowline Oil/gas/condensate, water or gas injection Riser -vertical section of flowline between seabed and offshore platform Umbilical -well control and monitoring, power supply, hydraulic fluid, electric power Manifold (subsea hubs) Export Facility (Export Pipeline, Loading Buoy, etc)

24. Offshore Hazards Environmental • Storm - hurricane / sub-hurricane storm / typhoon Earthquake - TsunamiIce - Beaufort SeaSeabed Subsidence - Ekofisk Field, Norway Deliberate • War and Political Risks - Persian GulfTerrorism / environmental activistsDeliberate Damage - Torrey Canyon spill

25. Offshore Hazards Accidental • Fire / explosion - during maintenance “hot work” / gas leaks / work procedure • Piper Alpha 1988 $1.4bn • Petrobras ‘36’ 2001 $500m • Blowout • Macondo 2010 $20bn • Montara 2009 $350m • Impact - supply boats / drill rigs / helicopters • Ekofisk 2/4 W 2009 $750m • Anchor damage to sub-sea facilities • Load / discharge accidents - crane drops

26. Offshore Hazards Construction Defects • Physical damage following faulty design • Fatigue / corrosion • Mechanical breakdown • Faulty work / materials NOT covered during operating phase

27. Key Exclusions. • Windstorm (can be bought back) • Earthquake (can be bought back) • Loss, expense resulting from delay, detention or loss of use. • Wear and tear, gradual deterioration, metal fatigue, machinery breakdown, corrosion, rusting, error in design. • Liabilities to third parties. • Well(s) and / or hole(s) whilst being drilled or otherwise. • Drilling mud, cement, chemicals and fuel actually in use, and casing and tubing in the well. • Unrefined oil, gas or other crude product, except whilst in storage or in transit in pipeline. • In respect of pipelines only: subsidence, scouring, abrasive action of sea and shingle.

28. Typical Offshore gathering operation

29. Standard Offshore Forms • Offshore Rigs: London Standard Drilling Barge Form • Supply Vessels/Tankers: Institute Time Clauses Hulls or FSO’s, FPSO’s American Time Clauses • Production Units:  London Standard Platform Form • Pipelines London Standard Pipeline Form

30. Onshore hazards • Fire • Explosion • Lightning • Aircraft • Storm • Flood • Earthquake • Machinery Breakdown • Sabotage, riots, strikes, civil commotion, malicious damage… • War, terrorism

31. Insurance Considerations for Onshore Energy • High values / loss potential • No single insurer will underwrite whole risk • Brokers act for many using their leverage / expertise to help insured obtain best deal. • Complex subject matter / insuring conditions / tailored policy.

32. Physical Damage • Covers: • All Physical onshore assets, including: • Plant (Refinery, Petrochemical, LPG etc) • Pipelines • Jetty • Storage tanks • Vehicles • Unprocessed Oil and its products • Premium setting: • Insurers will apply a rate to the Total Values to reach the premium and not the Loss Limit

33. Processing and storage facility

34. Downstream - Refining, Petrochemical etc • Operating: • Physical Damage • Machinery Breakdown • Business Interruption • Third Party Liabilities • Terrorist & Political Risks

35. Extent of Cover Core non-marine cover • Physical Damage following • All Risks • Machinery Breakdown • Business Interruption following PD Can be arranged “stand alone” or as part of a wider packagedepending on • Risk profile • Client’s needs

36. Extent of Cover Loss destruction of damage must be: • Sudden and unforeseen /accidental • Physical • Resulting from insured cause/not resulting from an excluded cause

37. Physical Damage Cover • Fire, lightning, Explosion, Aircraft (Flexa) • Added Perils • Natural e.g. • Earthquake, Seismic Risks • Storm/Windstorm • Flood • Manmade e.g. • Riot/Strike/Civil Commotion • Impact • Malicious Damage • Accidental Damage • This Coverage is provided either by • Fire and Perils Insurance • All Risks Insurance

38. All Risk Coverage “All” Risks except those excluded in the Policy • Exclusion Types • Absolute • War/Nuclear • Wear and Tear • Gradual Cause • Deliberate Acts • Other Policies • Sabotage/Terrorism • Marine • Liability • Construction • Buy Backs • Natural Perils • Land Transits • Machinery Breakdown

39. Coverage Issues Incidence of natural perils • Type of plant • Inherent risks • Risk retention • Limiting coverage • Deductibles • Market availability • Natural catastrophe

40. Risk Considerations • Assumption that correct PD and BI values declared • PD values either reinstatement as new or indemnity. • Additional cost factors to be considered e.g. • Fire Fighting Expenses • Removal of Debris • Architects Fees • Expediting Expenses • Transport Costs • Testing Costs

41. Risk Considerations • Current Technology • New plants cheaper BUT most losses are repairs • Age of plant • Is the same equipment available today? • Influence of external factors • Affecting delivery time and costs (material & labour) • Contractual advantage • Ongoing agreements with manufacturers

42. Risk Considerations THE CLIENTS OPTION Risk retention strategies adopted for multiple location risks • Insuring the catastrophic loss only • Insuring first loss only. • Aggregate limits.

43. Estimated Maximum Loss • Methodology • Broker or market assessment • Including Business Interruption scenarios • Assessing normal risk as well as catastrophe • Including Machinery Breakdown • Accuracy • Known scenarios or the unexpected

44. Deductibles • The decision of the client or the will of the market depending on: • loss history • risk quality • financial advantage • ability to retain risk

45. Property - Interests not Covered • Wells or holes whilst being drilled or otherwise (see OEE) • Drill mud, cement, consumables actually in use / tubing / casing • Unrefined oil / gas in the ground • Plans / specifications / records • Employees personal effects

46. Property Exclusions • Consequential loss (see B.I.) • Inherent vice / wear & tear / gradual deterioration / Metal fatigue / machinery breakdown ( can buyback) / expansion or contraction due to temperature / corrosion / rusting & electrolytic action • Latent defect / faulty design • Electrical / mechanical derangement • Third Party Liability (see Liabilities) • War Risks / Terrorism - subject to possible terrorist buyback • Radio-active contamination

47. Should an Insured buy their own policy? Operator arranged policy vs separate partner policies • Common valuation • Common loss adjusters / surveyors • Common wording • Ensuring philosophy freedom / control of own destiny & costs • ‘Fleet’ interests / bulk purchase • Retention / deductibles

48. Coverage Issues:Property including Machinery Breakdown Cover can be provided on an indemnity or reinstatement basis:18 This means that the property at the time of loss is valued on the new value of the property, less deductions for wear and tear I.e. the actual cash value will be the basis of settlement under the policy Indemnity: This means that following an accident, the property lost will be replaced by equipment in a condition equal to but no better than its condition when new. This is the most common form of property coverage Reinstatement: Average: Whichever option of cover is chosen, the insured must pay particular attention to the sums insured under the policy and ensure that they keep pace with inflation and in respect of reinsurance policies, the increasing cost of new equipment. If the insured does not do this, he runs the risk of being under insured and, if there is an Average condition in the policy, then he will be penalised by underwriters for underinsurance and will be unable to recover the full amount of the loss.

49. Basic underwriter considerations: It has now becoming essential for all but the smallest risks to have a survey prior to underwriters provide terms. This survey will include the following information: Hardware: details of the physical assets and process involved, their age and conditions, layout and spacing Software:Management, systems of work, safety procedures, housekeeping FixedProtections: means of fire extinguishment permanently in place, fire prevention, fireproofing, fire/gas detection FireFightingdedicated fire brigades, support and back up from local fire Facilitiesservices, availability of fire extinguishing media NaturalHazards: Assessment of exposure to hazards of nature, eg. Earthquake, flood, windstorm, subsidence MaximumLoss Noting the above factors, assessment of the potentiall for lossEvaluation: and quantification for insurance purposes The Loss Record and deductible level.

50. Machinery breakdown Insurers normally require the following information • A list of key machinery items within the plant • The new replacement values of these items • A description of each item, eg. Its function, its capacity, its operating parameters, mechanical details and the name of the manufacture • A list of spares kept • The time it is anticipated that it will take to replace the item • What the effect will be on the overall plant operation of a machinery breakdown incident on each of the items • Details of Manufacturers’ guarantees in force at the commencement of operation.