Why insure a well

Loss of well control is one of the most expensive risks in the oil and gas industry. An uncontrolled blowout of oil, gas or drilling fluid requires well-control (blowout prevention) services and may be accompanied by fire, damage to equipment and environmental pollution. The costs of killing the well and redrilling can be many times the budget for work on the well. Special insurance helps compensate these costs and get back to work.

Internationally such policies are known as Control of Well or Operator's Extra Expense. Russian insurers offer similar cover as part of insurance for oil and gas operations and drilling, and large risks are usually placed in reinsurance.

Who can be the policyholder

A legal entity with an interest in the safety of wells and equipment:

  • the subsoil user — an oil and gas company;
  • the customer of drilling works;
  • the drilling contractor and subcontractors.

The beneficiary is the party that receives the insurance payment.

What can be insured

The subject of insurance is oil, gas, geothermal, water and other wells where:

  1. drilling, deepening, servicing, workover, completion or preparation for production is under way;
  2. oil, gas or other minerals are being produced;
  3. production has been temporarily suspended and the well plugged or mothballed;
  4. production has ceased after depletion of the reservoir.

Drilling and other equipment can be included in the contract — including leased equipment, if the policyholder is responsible for its safety: drill pipes and casing, bits, downhole equipment. Reasonable costs of saving the insured property are covered separately.

When a well is considered out of control

Insurance rules usually define this as a sudden flow of drilling fluid, oil, gas or water from the wellhead to the surface of the ground or the bottom of a body of water, if the flow cannot be quickly enough:

  • stopped with blowout preventers and other well-control equipment that should be on site;
  • killed by weighting up the drilling fluid or similar methods;
  • safely directed into production,

or if the well has been officially declared out of control by the competent authorities.

Control is considered regained when the flow has been stopped or can be safely stopped, interrupted work has resumed, the well has been returned to its previous condition, or the flow is safely used for production.

What the insurer covers

  • costs of regaining control of the well, including well-control services;
  • costs of fighting a fire at the insured well, as well as at neighbouring wells and on the field if the fire is linked to the blowout;
  • costs of redrilling or restoring the well — if this option is included;
  • costs of site clean-up and pollution removal — under a separate condition;
  • loss of or damage to insured equipment.

What is usually excluded

  • gradual processes — wear, corrosion, natural depletion of the reservoir;
  • intentional acts of the policyholder;
  • the value of oil and gas remaining in the reservoir or lost in the blowout, unless insured separately;
  • other exclusions listed in the specific insurer's rules.

Link with compulsory insurance

Drilling and production sites are hazardous production facilities, so their owner must insure civil liability under the OSOPO law (225-FZ, compulsory liability insurance for owners of hazardous facilities). That policy covers harm to third parties — their life, health and property — but not the company's own costs of killing the well. The policies complement each other. Liability for environmental damage and harm to third parties above the OSOPO limits can be insured voluntarily.

How to arrange a contract

  1. Fill in a questionnaire: location and type of wells, depth, stage of work, reservoir pressure, well-control equipment, contractor's experience.
  2. Provide the work plan and loss history for previous years.
  3. Agree the sum insured (usually a limit per event), the deductible and extensions.
  4. For large projects, wait for the terms to be agreed with reinsurers.

Learn more about protecting industrial companies in the commercial property insurance and OSOPO sections.