Upstream Oil & Gas Insurance: Complete Guide for E&P Operations

What is Upstream Oil & Gas Insurance?

Upstream oil and gas insurance provides specialized coverage for the exploration and production (E&P) sector of the petroleum industry. This includes all activities from initial exploration through drilling, development, and production of oil and natural gas.

The "upstream" segment represents the first stage of the oil and gas value chain, distinguished from:

• Midstream: Transportation, storage, and processing
• Downstream: Refining, distribution, and retail

Upstream operations involve unique and severe hazards including blowouts, explosions, fires, and environmental contamination. Standard property and casualty policies are inadequate for these exposures, requiring specialized energy insurance programs.

The Energy Insurance Market

Upstream insurance is provided by specialized energy insurers:

• Lloyd's of London: The leading market for complex energy risks
• Houston market: Significant US capacity
• Bermuda: Major excess and reinsurance capacity
• Singapore/Dubai: Regional energy hubs

Who Needs Upstream Coverage?

Operators

The operator—the company responsible for day-to-day operations—typically arranges and maintains the primary insurance program:

• Major oil companies (IOCs)
• National oil companies (NOCs)
• Independent E&P companies

Non-Operating Working Interest Owners

Partners who own a share of the project but don't operate:

• May be covered under operator's policy
• May need separate coverage for their interest
• Should verify additional insured status

Drilling Contractors

• Rig owners and operators
• Typically maintain own hull/P&I coverage for rigs
• May have contractual insurance requirements

Service Companies

• Well service and workover contractors
• Seismic and survey companies
• Engineering and consulting firms
• Supply and support vessel operators

Physical Damage Coverage

Physical damage coverage protects upstream assets against loss or damage:

Covered Property

• Production platforms (fixed and floating)
• Drilling rigs and equipment
• Subsea equipment and pipelines
• Processing facilities
• Wells and wellheads
• Storage tanks and terminals

Covered Perils

• Fire and explosion
• Blowout (physical damage component)
• Collision and impact
• Weather and natural catastrophes
• Earthquake and subsidence
• Mechanical breakdown

Policy Forms

Control of Well (COW) Coverage

Control of Well coverage is perhaps the most critical component of upstream insurance, addressing the costs of regaining control of a well experiencing a blowout or uncontrolled flow.

What COW Covers

• Well control costs: Expenses to regain control
• Well re-drilling: Costs to restore the well
• Seepage and pollution: Clean-up from well control events
• Care, custody, control: Damage to property in your care

Coverage Limits

COW limits should reflect the worst-case scenario:

• Deepwater operations: $100M - $500M+
• Shallow water: $50M - $200M
• Onshore operations: $25M - $100M

Key Sublimits

• Seepage and pollution cleanup
• Third-party property damage
• Underground blowout
• Evacuation costs

Operators Extra Expense (OEE)

OEE coverage provides for additional costs incurred during drilling operations that are not physical damage:

Covered Expenses

• Re-drill costs: When a well must be abandoned and re-drilled
• Extra drilling costs: Due to unexpected conditions
• Stuck pipe and fishing: Retrieving stuck equipment
• Sidetrack drilling: Drilling around obstructions
• Directional correction: Correcting well path

Coverage Structure

• Per-well limits
• Aggregate annual limits
• Waiting periods (deductibles in time)
• Exclusions for pre-existing conditions

Difference from Physical Damage

OEE covers costs even when there is no physical damage to equipment. A stuck drill string requiring expensive fishing operations would trigger OEE but not necessarily physical damage coverage.

Liability Coverage

General Liability

• Third-party bodily injury
• Third-party property damage
• Personal and advertising injury

Pollution Liability

Pollution is one of the most significant exposures in upstream operations:

• Sudden and accidental: Typically covered under COW
• Gradual pollution: Requires environmental impairment liability (EIL)
• Third-party claims: Property damage and bodily injury from pollution
• Clean-up costs: Both on-site and off-site
• Natural resource damages: Government claims for environmental harm

Excess Liability

Umbrella and excess programs to provide adequate limits above primary:

• Major operators typically carry $1B+ in total limits
• Smaller operators should carefully assess exposure
• Joint operating agreements may specify required limits

Construction Phase Coverage

Development projects require specialized construction coverage:

Construction All Risks (CAR)

• Platform fabrication and installation
• Pipeline construction
• Subsea installation
• Hook-up and commissioning

Marine Cargo and Transit

• Equipment in transit to site
• Materials and supplies
• Subsea equipment installation

Delay in Start-Up (DSU)

Coverage for lost production revenue when project completion is delayed due to insured physical damage during construction.

Business Interruption Coverage

Protecting revenue when operations are interrupted:

Coverage Components

• Loss of production income: Revenue from oil/gas sales
• Extra expense: Costs to minimize production loss
• Contingent BI: Losses from damage to third-party facilities

Valuation Considerations

• Commodity price assumptions
• Production rates and decline curves
• Operating cost savings during shutdown
• Indemnity period selection

Waiting Periods

BI coverage typically includes waiting periods (deductibles in days):

• Offshore platforms: 30-60 days typical
• Onshore facilities: 14-30 days
• Wells: May have per-well waiting periods

Claims Considerations

Major Loss Categories

• Blowouts and well control
• Platform explosions and fires
• Hurricane and weather damage
• Pipeline failures
• Subsea equipment failures

Claims Documentation

• Daily drilling reports
• Well logs and surveys
• Equipment maintenance records
• Incident investigation reports
• Production records
• Cost documentation

Claims Handling

Energy claims require specialized expertise:

• Specialized energy loss adjusters
• Engineering consultants
• Production accountants
• Environmental consultants

Frequently Asked Questions